Structural change is needed, but has a price

Since the post-WWII, the continuous process of structural change has been the major driver of economic growth in Sweden, which manifests itself with an increasing dependence on international trade. This has resulted in major shifts in terms of the employment structure within the Swedish labour market, especially within sectors that are highly exposed to international trade. As a result, the Swedish economy has experienced a de-industrialisation in terms of employment where a significant share of the labour force is now employed within the tradable service sector. As such, the proportion of “White-collar” workers has experienced a significant increase relative to the “Blue-collar” workers.

The decline of the labour share within the manufacturing and industry sector is the result of macro-dynamics such as globalisation, automation and digitalisation. As the global economy becomes more and more globalised, the increased exposure to international competition results in a constant reshuffle within the fabric of the universe of Swedish firms. This takes the form of closures for the least productive firms, which frees resources for more productive firms to grow and expand internationally.

In summary, the continuous cycle of structural change positively affects the Swedish economy as a whole. However, it has also negative effects at the individual level for the labour force that is made redundant.

Redundant workers within manufacturing and in smaller regions most negatively affected

There is a well-established economic literature that evaluates the costs of redundancies at the individual level. Within this rich literature, the “gold standard” in terms of methods consists of comparing the earnings of the redundant workforce with a control group that consist of matched individuals based on a number of criteria such as demographic variables, education, etc.

In a number of such studies within the Swedish context, it has been shown that redundant workers from the manufacturing sector experiences larger economic losses compared to redundant workers from the tradable and non-tradable service sectors. These economic losses take the form of decreasing lifetime earnings because existing or new re-employment opportunities for manufacturing workers become available in other sectors. The size of economic loss for these individuals depends on the degree of relatedness between the manufacturing sector and the new sector of employment. The larger the degree of relatedness, the smaller the loss in terms of earnings for the individual given the fact that her accumulated human capital can be of use productively.

At the regional level, it is a well-documented finding that lifetime earnings losses for redundant workers are larger in small rural areas, where the manufacturing sector dominates the economic landscape, compared with the urban agglomerations. Additionally, it has been found that the time it takes redundant workers to recover the economic losses in urban agglomerations is much smaller compared to rural areas. Finally, we observe that these patterns differ greatly based on gender. Indeed, the patterns of the segregated Swedish labour market tend to be reproduced, if not reinforced in the context of major redundancies. Our results suggest that a large share of the female redundant workers within the manufacturing sector tend to re-enter the labour market within the women-dominated sectors, and vice-versa for their male counterparts.

The Swedish labour market institutions
function relatively well

In an international comparison study, which analysed the rate of reemployment within a year of redundancy in a number of OECD countries, Sweden comes in first with a rate of reemployment of 89 percent. A similar result is found in a study of 153 000 redundancies in Sweden during the Financial crisis 2007-2010: 88 percent manage to find new employment within one year of the redundancy. Five years after the redundancy, only 3 percent remain without employment. As such, we could conclude that the Swedish labour market institution are relatively effective in terms of assisting the redundant workforce into reemployment.

The dominant type of interventions that characterise the Swedish labour market are of the qualitative genre, which aim to preserve the individual’s productivity and reemployment prospects. The interventions are financed and managed through collective bargaining agreements between labour unions and business organisations. The latter take the form of financial assistance for skills upgrading via higher education and/or vocational training programs, coaching and/or counselling, etc.

However, a share of the redundant labour force remains outside the framework of the collective agreements. These are mainly overrepresented by young workers and non-native workers. The Swedish Public Employment Service (Arbetsförmedlingen) is the government agency that has mandate to assist the latter individuals in terms of vocational training, counselling, job-search assistance, etc. in order to find new job opportunities.

Public subsidy for job-retention schemes – Back to a permanent crisis support policy?

The decentralised structure of the labour market institutions and their management through a system of collective bargaining agreements have long been a Swedish trademark internationally. The system has been put in place as a means to minimise the frictions within the labour market that manifest themselves due to the continuous dynamic of structural change. However, recent developments in the form of introducing permanent public subsidy schemes for job-retention programs stand at odds with this objective. For the main part, these programs consists of public subsidy for firms’ labour costs in the face of economic downturns independently of the macroeconomic cycle. A major drawback of such public subsidy schemes is that they risk providing a financial pipeline for non-productive firms to survive. As such, this may result in a misallocation of resources in the economy that can hinder a much needed restructuring in the economy towards more productive use of the available resources.

Support for redundant workers’ innovative start-ups and for regions in closure phases

Despite well-functioning labour market institutions, there are areas where the system can be improved and complemented with specific interventions. One such area concerns the highly skilled redundant workers with a potential for creating innovative start-ups. The analysis we conducted shows that the system is poorly equipped to provide the necessary support for such individuals. Thus, we conclude that a serious discussion is much needed to sort out the nature of complementary interventions that need to be put in place. Another area where complementary interventions could be introduced concerns public support for local regional authorities that experience major redundancies. This could take the form of direct financial assistance as well as institutional support to improve the cooperation between the different governmental agencies and authorities.

Final thoughts and reflections on the Swedish
adjustment policy

Overall, we conclude that the Swedish labour market, with its decentralised system of collective bargaining agreements, manages relatively well the negative consequences of structural change. Hence, we do not recommend a reconfiguration where the central government takes on a bigger role in managing the active labour market policies negotiated between the labour unions, business organisations and social protection councils. In other words, we estimate that the current system that builds upon a set of interventions aimed at improving the reemployment prospects of the redundant workforce is well suited to facilitate the reallocation of resources to their most productive use.

An important dimension to take stock of when forming and implementing labour market interventions in the face of major redundancies is to guarantee that they directly target the most negatively affected individuals. As such, it follows that support for regional governments, sectors and/or firms ought to be minimal.

Currently, as the Covid-19 pandemic still rages on, a number of emergency measures have been implemented to mitigate the negative consequences of full-scale and/or partial lockdowns on the economy and prepare the ground for the post-pandemic recovery. Whereas such measures are motivated in the short-term, it should be noted that there is a risk that the latter become a feature within the system (e.g. subsidy to job-retention schemes). Hence, this can result in creating an imbalance within the current system, which will affect its effectiveness negatively in the long-term. It is therefore of the utmost importance that the pandemic-related measures are temporary measures that need to be phased out as the economy recovers.