MNI INTERVIEW2: Riksbank Ohlsson: Wage Growth Seen Further Out

--Rising Economic Activity Leading To Increased Labour Supply 

--Pay Growth Still Lagging Econ Growth

-Part 2 of MNI Interview With Riksbank Dep Gov Ohlsson

By David Robinson

     LONDON (MNI) - Strong economic growth in Sweden could allow firms to boost

profits with wage growth lagging behind, with reduction in monetary (stimulus??)

justifiable despite the absence of accelerating earnings, Riksbank Deputy

Governor Henry Ohlsson said in an interview with MNI. 

     "Many people assume you first have wages increases and this will affect

inflation but the reverse causation is possible," Ohlsson said.

     He set out a distinctive view of developments in the Swedish labour market

and how policy can and should respond when activity indicators are running hot

but earnings growth not picking up pace.

     "Think of high activity making it possible for firms to increase their

prices and this will leave room for wage increases. And then in the second step

you will have the wage increases," he added.

     In the current economic environment in Sweden Ohlsson said that he thought

that the causality from prices to wages is more likely."

     Ohlsson voted to raise the repo rate by 25 basis points, to -0.25%, at the

most recent policy meeting. 

     --NAIRU NO-NO

     In his view policy making should not be determined by where the jobless

rate is, or is heading, in relation to policymaker's estimation of a theoretical

concept -- the equilibrium, or non-inflationary, jobless rate.

     "I don't find constructs like equilibrium unemployment rates very useful in

policy-making," he said.

     With Swedish economy activity running hot, sooner or later firms will have

room for wage increases. The outlook for unemployment and employment, however,

is clouded by the increased flexibility and elasticity of labour supply, with a

mix of improved domestic labour market participation and inward migration

helping to meet demand.

     Ohlsson said that some previously discouraged workers have entered the

labour market as employment demand has risen and a growing number of people of

retirement age are continuing to work.

     "More than 4% of our labour force is older than 65 years. And it is

increasing .. People retire in Sweden and then they continue to work. And some

even retire and then return to the labour market after a couple of years of

being retired," he said.

     Add in that Sweden is well placed geographically, and as a member of the

European Union, to pull in migrant labour and the question of how much domestic

labour supply remains becomes a less significant question for policymakers.

     "We are close to the Baltic countries, we are close to Poland, it is just a

ferry over the Baltic. We have many temporary migrants working here," Ohlsson

said.

     --SKILL SHORTAGES

     A blot on the rosy picture of improved labour supply is that Swedish

companies are increasingly struggling with skill shortages. One explanation

Ohlsson offered in a recent speech was that there has been growing demand among

employers for cutting edge expertise and that people with these skills are hard

to find and hard to recruit and retain.

     While this should lead to upward pay pressure in some sectors even here the

picture is not straightforward -- with headline pay not the only way of trying

to attract and keep staff.

     The Riksbank's May business survey found that "companies are hesitating to

raise wages to attract the skills they need" and instead looking at "other ways

of attracting new skills" such as "increased wage benefits, increased

possibilities for flexible working hours and increased career possibilities."

     All of which highlights why wage acceleration may come later in the day,

after employers have exhausted other options.

     In Ohlsson's view, the Riksbank is justified in easing back on monetary

policy stimulus now, rather than waiting for the wage saga to unfold. 

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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