Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s
Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market. As of 2005, hours worked per person 20-64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story. Our explanation for Sweden's weak performance with respect to market work activity highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, business tax policies that disfavor labor-intensive industries and technologies, and a variety of policies and institutional arrangements that disadvantage younger and smaller businesses. This last category includes tax policies that penalize wealth accumulation in the form of owner-operated businesses, a pension system that steers equity capital and loanable funds to large incumbent corporations, and legally mandated job-security provisions that weigh more heavily on smaller and younger businesses. We describe these features of the Swedish institutional setup and provide evidence of their consequences based largely on international comparisons.
We thank Robin Douhan, Martin Floden, Tino Sanandaji and participants in the September 2006 SNS/NBER Conference on "Reforming the Welfare State" for helpful comments, Erik Hurst for assistance with the American Time Use Survey, and Richard Rogerson for data on hours worked in a number of countries. Robin Douhan, Martin Olsson and Per Thulin provided excellent research assistance. We gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius Foundation. Needless to say, we are responsible for any remaining errors and shortcomings. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Economic Performance and Market Work Activity in Sweden After the Crisis of the Early 1990s, Steven J. Davis, Magnus Henrekson. in Reforming the Welfare State: Recovery and Beyond in Sweden, Freeman, Swedenborg, and Topel. 2010