transfer of production and employment between firms and industries report no. 25 to the storting ( the parliament ), 1974. may occur through higher domestic cost pressures ” … and further … “ how strong the pressures will be, depends in particular on how strongly norwegian business and industry is involved in petroleum activities and the scale of revenues that are spent domestically ”. the risk of “ dutch disease ” 2 has been a common reference in the discussion on petroleum revenue spending. dutch disease occurs when spending is so high that the basis for exposed industries is eroded and fluctuations in economic activity are amplified. changes in industry structure involve costs in that invested capital may remain idle and labour resources may be used less efficiently in periods. it may take time and be difficult to re - establish the use of these resources. restructuring costs would probably be so substantial that the government should take them into account. an economist 3 in norges bank has found, using a stylised model, that in order to minimise restructuring costs over time, petroleum revenue spending should be limited in such a way that a constant share of imports can be financed by petroleum revenues for an indefinite period. furthermore, he found that spending one per cent of total petroleum wealth per year would achieve this. petroleum wealth comprises here both financial wealth accumulated in the petroleum fund and the value of oil and gas under the seabed. the rule implies that petroleum revenue spending would not affect the real exchange rate. this work focused on minimising restructuring costs, and did not analyse the issue on the basis of a more general welfare function. moreover, the flexibility of the economy to adapt to a shifting economic environment may change over time. increased flexibility and efficiency in labour, capital and goods markets may reduce the need to take restructuring costs into consideration. i will come back to our current fiscal rule for petroleum revenue spending shortly. the need for some sort of rule in fiscal policy aimed at restraining petroleum revenue spending should become clear when we look at our experience over the last 30 to 40 years. the government began at an early stage to budget on the basis of future strong growth in petroleum revenues. the result was that we spent a large share of our petroleum income in the 1970s and 1980s. welfare schemes were expanded significantly. the real exchange rate appreciated, and manufacturing industry was scaled back. frequent devaluations from 1976 were unable in the long term to prevent a decline in the manufacturing sector. on the contrary, they proved to be selfreinforcing. the absence of a

utilisation can lead to higher wage growth and thereby higher inflation. a tight labour market will thus imply higher interest rates. norway has substantial petroleum wealth, but our most important resource is labour. a smoothly functioning labour market is therefore important to our welfare. although it is difficult to quantify in exact terms the contribution of labour to value added, there is no doubt that even a small increase in the “ return ” on labour could generate considerable gains. labour market legislation must be formulated to provide incentives to work. in norway, a relatively large share of the population is now economically active, after lagging behind our neighbouring countries up to the 1990s. it should be noted that, even though labour force participation is high and unemployment is low, the average employee in norway works far fewer hours per year than employees in the other nordic countries. this gap seems to have widened through the 1990s and up to today. the standard working year is short in norway, and norway also has a higher percentage of part - time employees than other countries. the opportunity to work part - time has for a long time made it easier for women and young workers to enter the labour market. there are considerable outflows from the labour market into various social security schemes. sickness absence is high, and the share of the working - age population on rehabilitation schemes or receiving disability pensions is rising. many workers choose to take early retirement under the afp scheme ( contractual early retirement ) when they reach the age of 62, and this number will probably increase in the years ahead. in norway, close to 600 000 persons of working age receive social security benefits or pensions. this is equivalent to 25 per cent of the labour force. a disturbing aspect is that disability is increasing among young people. we know from experience that this group tends to remain outside the labour force for parts or all of their lives. in the second quarter, sickness absence stood at 6. 5 per cent of contractual person - days, although there are substantial occupational and geographical variations. in rogaland, sickness absence is 1. 4 percentage points lower than the national average. if sickness absence in the rest of the country falls as low as in rogaland, nearly 30 000 additional person - years would be available for productive activity. reduced sickness absence and reduced outflows into social security schemes – particularly among young people – would result in substantial economic gains. economic developments the norwegian economy is in a period of strong expansion after a marked upturn since summer 2003. the upturn