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Wage cuts uncommon in Sweden

September 19, 2002

Wage cuts are much less common in Sweden than in other countries. This is shown in a report from the IFAU in Sweden (Institute for Labour Market Policy Evaluation) "Wage Policy and Endogenous Wage Rigidity: A Representative View from the Inside" by Jonas Agell and Helge Bennmarker.

The researchers trace this lack of flexibility to a combination of institutional factors in Sweden (job protection legislation and the structure of collective agreements) and more general factors that have to do with the fact that many companies fear that wage flexibility and lowered wages would lead to a decline in work morale and a high turnover of personnel. The report is based on a questionnaire answered by 885 human resource managers.

Wage cuts uncommon
Only one percent of employees faced lowered wages during the mass unemployment of the 1990s. Wage cuts appear to have been most common in the sector for highly qualified services. This picture of wage rigidity is reinforced by the fact revealed in the study that unemployed persons only rarely try to enhance their attractiveness by underbidding those who are already employed. It is also extremely uncommon for companies to employ people who use such a strategy in looking for work.

Job protection legislation
Between 30 and 40 percent of human resource managers say that strict job protection reduces
the number of new employees; instead use is made of overtime work for existing employees, temporary jobs, and hiring from manpower firms. These effects are most noticeable among small firms in the private sector. The study also uncovers results that indicate that job protection worsens the stigma from long-term unemployment.

Efficiency wages
Companies report that it is often difficult to evaluate the work performance of their employees. Half of the companies interviewed say that employees perform less well when they are dissatisfied with their wages. This means that it can be rational to pay higher wages in order to promote work effort. Large corporations find it especially difficult to evaluate the work effort of their employees, and they also feel to a greater extent that dissatisfied employees perform less well. It is also more common in large companies to try to motivate employees by establishing career ladders or to use performance-related wages.

Women more loyal?
The report shows that human resource managers in companies with a high proportion of female employees are less afraid that underpaid employees will perform less well, and they are less inclined to establish career ladders to promote deserving employees. In local wage bargains in these firms less weight is given to external wages, and to company profits. These observations seems to indicate that women are more loyal to their employers and that they are less aggressive wage negotiators.

Labour-market training enhances attractiveness in the labour market
Previous research has found it difficult to demonstrate positive effects of participation in labour-market training, compared with being openly unemployed. Nevertheless, human relation managers feel that those who have taken part in labour-market training lose their attractiveness at a slower rate than others.

Background
The report is based on a questionnaire addressed to human resource managers at workplaces in public administration, manufacturing, simple services (hotels and restaurants), and skilled services (research and development, law firms, computer consultants, etc.). Of the 1200 managers approached, 885 responded to the questions about labour law, wage structure, productivity, assessment of job applicants, and economic theory.

Vetenskapsrådet (The Swedish Research Council)