is now very low. the labour market is tight. unemployment has not been as low since the second half of the 1980s, and employment has risen sharply this year. wage - earners and enterprises have both fared well. cheap imported goods have resulted in a subdued rise in consumer prices and a substantial increase in wage - earners ’ real wages. high export prices have restrained the rise in real labour costs. combined with high productivity growth, this has resulted in high corporate earnings and solid growth in employment. at the same time, wage - earners share of corporate value added has been reduced, from around 75 per cent at the end of the 1980s to 70 per cent at the end of the 1990s, and now stands at below 65 per cent. solid productivity growth and high prices for export goods and deliveries to the petroleum sector have contributed to the reduction in the wage share over the past few years. the ample supply of labour has probably had a dampening effect on wage growth. increased globalisation may have provided greater opportunities for norwegian enterprises to relocate production to other countries if labour costs become too high. this probably places some restraint on wage demands among workers in sectors where enterprises have such opportunities. historically, a high wage share has tended to be accompanied by low unemployment. developments in recent years have provided the basis for strong growth in employment while the wage share has fallen. is it possible to sustain the combination of low unemployment and a low wage share? first, it partly depends on whether the positive supply - side conditions are sustained. there is probably symmetry here. should the terms of trade deteriorate, productivity growth slacken and foreign workers return to their home country, the wage share will increase, profits fall and unemployment increase. there is now a prospect of slower global growth. there are also signs that the strong growth in productivity that has been evident in other countries – for example in the us – is moderating somewhat. and we may see a similar trend in norway. second, even without a reversal, profits may fall and unemployment rise. the implications of this will depend on how far businesses, in their search for qualified labour, will go in bidding up wages. it will also depend on how wage - earners react and on their ability to adapt to change. furthermore, it must be expected that the strong krone will shave profits in some enterprises and industries at the moment, even though many have used currency hedging to safeguard their income. even though demand for labour is strong, there is

of higher inflation, which we are addressing by increasing the interest rate. consumer price inflation is still fairly low, but capacity utilisation is now at such a high level that inflation is projected to move up gradually to 2. 5 per cent. higher interest rates will contribute to a gradual decline in capacity utilisation, thereby preventing inflation from becoming too high. in the long term, monetary policy cannot influence real economic variables such as output and employment ; it can only influence nominal variables such as inflation, the nominal interest rate and the nominal exchange rate. when monetary policy serves as an anchor for inflation expectations, it allows the interplay between monetary policy and other components of the economy to function. a good result can be achieved if the social partners take the role of " leader " and the central bank the role of " follower ". wage growth can then be determined in the knowledge of the monetary policy response. flexible inflation targeting provides a fixed framework for monetary policy and gives a clear indication of how the central bank is to respond in different situations. the " leader " – the social partners – can internalise the monetary policy response and take the " follower ’ s " – norges bank ’ s – response to their actions into account. this approach is most relevant when wage setting is centralised. a number of studies2 have shown that countries with a relatively high degree of centralisation and coordination, such as norway, can achieve relatively low unemployment. when wage - setting is decentralised, monetary policy will instead influence wage growth via market mechanisms, by stabilising aggregate demand for goods, services and labour. monetary policy that is flexibly oriented towards low and stable inflation will function well whether wages are set at the central, local or individual level 2. in the initial period after the introduction of the inflation target in 2001, it appeared that the social partners had not yet internalised the response pattern ensuing from the monetary policy mandate. we are now well into a cyclical phase with very high capacity utilisation and low unemployment. in this situation, there may be a risk that wage growth will again accelerate. on the other hand, the experience gained by the social partners that large pay rises push up interest rates may have the effect of curbing pay increases. in local wage negotiations at enterprise level, competition, the supply of foreign labour and the possibility of outsourcing or relocating activities may dampen the impact. low and stable inflation should not be taken for granted. norway ’ s and other countries ’