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as 0. 4 percentage points higher per year during 2003 - 2008 if the government ’ s target to halve sick leave is achieved. this means that the number of hours worked will increase by 0. 8 instead of 0. 4 per cent a year. public finances would then be improved by sek 45 billion, which could be used for reforms - or for repayments on the central government debt and thus create increased scope for future borrowing. if immigrants participated in the working force to the same extent as swedes, it would provide a further contribution to the number of hours worked of 0. 1 percentage points a year. monetary policy and wage formation the labour supply thus comprises a problem both in the long term and closer to hand. if this cannot be resolved through structural measures that increase the labour supply - e. g. through less sick leave being taken, increased working hours per employee or by labour force immigration - the riksbank may be forced to subdue demand in the economy by raising the interest rate. the labour market ’ s ability to manage wage formation will be tested as early as next year, when actual growth is supposed to be in line with potential growth. of course, we do not believe that resource utilisation will put any great pressure on prices and wages so soon, but as economic activity strengthens, greater demands will be made on social partners to show restraint. the municipal workers ’ union ’ s demand for relative wage changes could also entail a problem in terms of potential contagion effects. wage costs are expected to increase this year by just over 4. 5 per cent, which is higher than the swedish economy can manage in a longer perspective. if the social partners do not succeed in accommodating the municipal workers ’ union ’ s wage demands, there is a risk of increased inflation. another challenge for wage formation is the government ’ s employment target, which entails 80 per cent of the working population having a job. achieving this requires reforms to increase the labour supply. moderate wage demands could hasten the adaptation to the higher rate of employment. the explanation for this is that in a small, open economy like sweden, the profit share of the value added is determined by international conditions and the prevailing production technology. in the short term, the labour market situation and negotiating strength can affect the relative profit shares and wage shares in the economy, but in the long term a high rate of wage increase will only lead to lower employment and production without affecting real wages and profit