Economic Performance and Market Work Activity in Sweden after the Crisis of the Early 1990s

Since emerging from a severe contraction in the early 1990s, the Swedish economy has accumulated a strong record of output growth, outpacing the average growth rate in the Organization for Economic Cooperation and Development (OECD) and in the European Union (EU-15). The performance of the Swedish labor market has been less impressive. By 2005, hours worked per person were still 10.5 percent below the 1990 peak and a mere 1 percent above the 1993 trough. Employment rates tell a similar story. We more fully describe Swedish developments with respect to output and market work activity in the balance of this section. We then turn to several aspects of the Swedish institutional setup that repress market work activity. Our discussion highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, and business tax policies that disfavor labor-intensive industries and technologies. We describe these features of the Swedish institutional setup and provide evidence of their consequences based on Swedish outcomes and international comparisons. We also identify some noteworthy policy changes since 2006 and their potential effects on market work activity in Sweden.