’ capacity to pay. the system of coordination came under pressure. it now appears that wages will increasingly be determined at the local level on the basis of each company ’ s profitability, its need for labour and the supply of various types of labour. the wage formation process functioned well for a long period because of the strong emphasis that was placed on overall employment. a precondition for this has been that employees do not fully use the bargaining power provided by employment protection and the social safety net. coordinated wage determination requires discipline. with a more locally based and less coordinated wage formation structure, the profitability of the individual enterprise and labour market conditions will be the main source of discipline. extensive employment protection and a tightly knit social safety net may then lead to high unemployment and a substantial rise in flows of discouraged workers into social security schemes. in the public sector, there are no absolute requirements as to profitability and efficiency. public enterprises do not go bankrupt, and in many cases the authorities cannot allow a public enterprise to discontinue operations. this is a demanding starting point for a shift to more locally determined wages. the possibility of granting local pay increases might, however, increase efficiency if there are binding nominal budget limits for these entities and clear production requirements. when a higher share of wages is determined at the local level and coordination is reduced, it will be even more important to promote flexibility in the labour market and the labour supply. otherwise, an increasing number of workers may be excluded from working life and unemployment may rise on a permanent basis, while the foundation for production is weakened. effective labour market programmes, supported by a sound system for education and infrastructure, can facilitate these adjustments. it is also important to assess working environment and labour market legislation with a view to fostering greater flexibility. hiring costs may be reduced and flexibility enhanced through greater scope for temporary employment and labour contracting. the throughput in universities and colleges can be improved. the financial incentives and entitlement thresholds in our social security system are also of substantial importance to employment. pensions in norway, the employment rate is among the highest in the oecd area. this reflects both high labour force participation and low unemployment. the picture becomes more mixed when average working hours are taken into account. the average is lower in norway than in other countries. the sickness absence rate is high. part - time employment is widespread. the average number of person - hours worked in the working - age population is relatively low, despite high labour force participation and

restructuring costs for companies. the higher the level of employment protection, the more an employee is perceived as a long - term investment and the more cautious the employer must be with regard to hiring. on the other hand, a high level of employment protection can motivate employers to develop skills among their employees. with a centralised and coordinated wage formation process, the social partners can take account of overall employment in wage negotiations. the scandinavian countries and austria have organised wage determination in this way. generally speaking, unemployment in these countries remained low in the 1990s and employment is high. many countries with decentralised wage determination and a low level of employment protection have also experienced high employment and low unemployment. wages are determined on the basis of each company ’ s profitability and the supply of labour. this system can be found in countries like the us, canada, the uk and switzerland. by contrast, a decentralised wage formation system that is combined with a strong bargaining position at the local level and extensive employment protection can produce unfavourable results. countries with this type of structure include france, italy and spain. in these countries unemployment is high, with substantial flows out of the labour market into various pension and social security schemes. nor have countries such as germany, belgium and finland, where employment protection is relatively extensive and wage determination only partly decentralised, achieved particularly favourable results even though the results are somewhat more mixed. extensive employment protection and a tightly knit social safety net reinforce the perception that the risk of an income loss is limited. employees can take advantage of the bargaining power these rights afford to obtain high wages without taking into account the effects on overall employment. for their part, employers may have incentives to promote exclusion through government - financed social security schemes. those who are not employed will be interested in finding employment, even at a lower wage level. however, it is not the unemployed who negotiate local wage agreements. this gives rise to a conflict of interests between the employed and the unemployed. however, local wage settlements also feature a number of positive aspects. wages are adapted to companies ’ capacity to pay, which enhances the flow of labour between industries, regions and occupations. labour market bottlenecks are eliminated. coordinated wage determination in norway had many advantages, but also limited the scope for eliminating bottlenecks or remedying imbalances across occupational groups, regions and industries. groups that were not included in the coordination, such as liberal professions and salaried employees, were able to exploit companies