mean that, when the economy shows an upswing, the riksbank will be forced to conduct a tighter monetary policy to prevent tension arising between supply and demand on the labour market. wage costs have great significance as total wage costs comprise almost 70 per cent of the total value added in the economy, developments in wage costs have decisive significance for the development of costs and prices. making an assessment of future developments in wage costs is therefore a natural and central element in the riksbank's analysis of inflation prospects. if there is an overly rapid increase in wage costs, companies may be forced to raise their prices significantly and this would result in inflation exceeding the target level. this would require tightening monetary policy, i. e. raising the repo rate. although this would bring inflation back to the target level, it would be at the cost of an increase in unemployment. in the long term, however, developments in unemployment are essentially dependent on how well the labour market and wage formation function. monetary policy has affected the wage formation process ; the uncertainty over future price developments has declined thanks to inflation targeting. wage - earners no longer need worry that their pay rises will be eaten up by overly rapid price increases. at the same time, employers find it easier to determine the size of the scope for wage increases. it also appears as though what is usually termed " monetary illusion " may have disappeared. the labour market organisations appear today to focus to a greater extent on real wage cost increases. the strong confidence in the inflation target has meant that these organisations'inflation expectations have been at a level of around 2 per cent since 1996. the changed conditions for wage formation have probably also contributed to the two most recent bargaining rounds being characterised by a high degree of cooperation between the labour market organisations. at the same time, there appears to be support among wage - earner organisations for the manufacturing industry to lead the way in collective wage agreement through what is known as the industrial agreement. altogether these changes have entailed an increase in nominal wages of an average of 4 per cent a year over the past decade, which can be compared with an average figure of 8 per cent a year during the 1980s. developments in wage costs over the coming years when we make our wage forecasts at the riksbank, we base them on a total assessment of collective wage agreements, demand pressure in the labour market, productivity, profit margins, inflation expectations and taxes, to mention just a few factors. this autumn will see the beginning

of wage bargaining rounds for more than 2 million employees and the outcome will have crucial importance for the development of inflation and thus monetary policy. the assessment in the december inflation report was that the swedish economy would show a recovery towards the end of the year, following a relatively mild downturn in economic activity. we envisioned a still relatively strong labour market. however, employment was expected to fall slightly to begin with, before slowly showing an upturn once again. the strained economic situation among a number of municipalities and county councils meant that we assessed it to be difficult for the swedish municipal workers'union to achieve any further far - reaching wage increases for its members. it was estimated that, all in all, the demand situation would have a subduing effect on wage demands and we thus did not expect to see any major contagion effects in the 2004 wage bargaining rounds from the early termination of the municipal workers'union's wage agreement. we did not find reason to make any fundamental changes to these assessments at the beginning of february, when we had our most recent monetary policy meeting. wages comprise only part of the total costs for labour among companies ; on top of these come costs for negotiated and legislated employer contributions, various types of fringe benefits and shorter working hours. as it is the total wage cost that is important to inflationary pressure, it is also necessary to make an estimate of all of these factors. the assessment in the inflation report was that the wage costs for the economy as a whole would increase by just under 5 per cent this year and just over 4 per cent next year. it was also assumed in the forecast that productivity growth would recover after a decline in 2001 and approach the more normal, trend level. however, it was also observed in the report that there was a risk that wage cost increases in coming years could be higher than this figure of 4 - 5 per cent. at our meeting in february we saw no reason to make any appreciable change to this assessment. the newly - received statistics on wages and prices have not reinforced the upside risk. the national accounts for the third quarter of 2002 and the revisions for earlier quarters made by statistics sweden indicate that productivity growth last year may have been slightly higher than we anticipated. in addition, the outcome in the short - term wage statistics showed lower increases than expected in the central government sector. however, the local bargaining rounds are not yet complete and retrospective revisions will be made, so the statistics should still be interpreted with caution.