higher wages as compensation for expected inflation, which will have a negative effect on employment, as the scope for new recruitment will decline. monetary policy is thus unable to lastingly affect real variables such as long - term lower unemployment. but it can have a stabilising effect in the short run, particularly if inflation expectations are wellanchored so that temporary changes in inflation are not perceived as permanent. if a central bank succeeds in attaining credibility so that inflation expectations are stable, there is some scope for also taking into account developments in the real economy. the labour market : an important variable for monetary policy we thus try to conduct our monetary policy so that the inflation target is attained within a reasonable time horizon, at the same time as we emphasize that resource utilisation should approach a “ normal ” level. however, there is no generally - accepted measure for resource utilisation as there is for inflation. it is therefore necessary to use questionnaires or to try to estimate it using some statistical method. at the riksbank we use, for instance, “ gap analyses ”, where we try to relate the current situation and the forecasts for different measures of resource utilisation to the trend for the respective variable. the gap shows how far the variable is from its “ normal ” level. for instance, we use the deviation in gdp from its trend to study the gdp gap. we have two ways of measuring the gap for the labour market ; employment measured as the number of hours worked and measured as the number of persons employed. developments in the labour market thus have considerable significance for the analysis that precedes the monetary policy decision. however, all of the measures of resource utilisation we present are very uncertain, and this is why we use several different measures. 6 monetary policy decisions often concern complex deliberations. but now that the economy has undergone a period of deep crisis and it is difficult to assess what structural changes the crisis may lead to, the process becomes even more complex. one illustration of this is how one should assess future developments in the labour market. so far employment has not fallen as much as might be justified given the historical relationship between unemployment and gdp, and the large fall in gdp. this has come as a surprise to us and to other forecasters. but what conclusions should one draw with regard to the effects in the slightly longer term when the economy recovers? employment and the number of hours worked are now beginning to increase. normally, one might have expected

the number of hours worked is usually one quarter in sweden, while the time lag between gdp and employment is usually twice as long, that is, six months. a well - known relationship between economic activity and activity in the labour market was formulated by arthur okun in the early 1960s. 1 this describes a negative relationship between gdp growth and changes in unemployment, which has become known as “ okun ’ s law ”. he found, for instance, that the us economy needed to grow by at least 3 per cent to avoid an increase in unemployment. okun ’ s law can thus be interpreted as a short - term relationship that expresses the link between changes in economic activity and changes in activity in the labour market. as the relationship between growth and employment is dependent on factors such as labour market policy, productivity, social norms and demography, the relationship varies between different countries and different periods in time. okun, a. m. ( 1962 ), “ potential gnp : its measurement and significance ”, american statistical association, proceedings of the business and economics statistics section, pp. 98 – 104. a recently - published economic commentary on the riksbank ’ s website 2 estimates this relationship using swedish data. 3 the study shows that there is a relatively strong link between gdp growth and unemployment, a link that has also varied over time. the connection has increased over time and between 2004 and 2008 it was relatively high, which indicates that unemployment was more sensitive to changes in gdp during this time. however the relationship has weakened over the past year, when gdp fell heavily without unemployment rising as much as one would have expected, given the historical relationship. according to the study, a gdp growth of more than 2. 8 per cent is now needed for unemployment to decline, which can be compared with the historical average of 2. 3 per cent. at present a higher level of economic growth is thus required to change the level of unemployment compared to the average historical relationship since 1980. the time lag between gdp and unemployment also appears to have increased during the 2000s. thus, it now takes longer before the full impact of a change in growth has an effect on unemployment in sweden. what is different this time? part of the explanation for unemployment not having risen as much as one might have expected given the historical relationship could be that not all of the economy has suffered. the main fall in employment has been in the manufacturing industry, while the services sector, which is more labour intensive, has fared better