In fact, it has been estimated that one half of the dramatic increase in European unemployment from the golden days of full employment in the 1960s to the high and persistent unemployment levels of the mid-1990s can be explained by institutional factors (Nickell et al., 2002). Which “institutions” are particularly relevant? Let me mention three of them: first and foremost, employment protection legislation. Second, tax-benefit-systems, which determine the so-called tax wedge between workers’ gross and net incomes, the transfers to the unemployed, and the tax burden on the employed. Third, wage bargaining structures and procedures and the role of trade unions. Let us consider employment protection legislation. Workers can be protected against unemployment in various ways: either by strict regulations against layoffs, or through unemployment benefits, or a combination of both. The two are interrelated: in theory, employment protection legislation need not be very restrictive if an unemployed worker can rely on generous benefits, and vice versa. What does the empirical evidence tell us? Generous protection of “insiders”, i.e. those who have a job, seems to have a negative impact on overall employment, since it affects the probability of employment of the “outsiders”, especially women, the young and the long-term unemployed.3 The validity of this proposition is illustrated in Chart 6 on the basis of the evidence from European countries. The lower job turnover and hiring also increases both the duration of unemployment and the proportion of long-term unemployed.
Today, however, I would like to focus on another discussion, one that I feel is at least as vital and, at the moment, perhaps even more relevant. This concerns whether the conditions for monetary policy have changed so much in recent years that central banks will be forced to abandon, or at any rate considerably modify, the inflation-targeting policy that has been the dominant monetary policy regime of recent decades. I would like to thank Mikael Apel for help with the text of this speech, Emelie Theobald for help with the slides and Claes Berg, Charlotta Edler, Rebecka Hallerby, Stefan Ingves, Cecilia Skingsley, Marianne Sterner, Ulf Söderström and Anders Vredin for useful suggestions. ∗  1 [20]  International debate on whether inflation targeting has become outdated On one side of the discussion are economists and observers who argue that the inflation process now is so different from before that it is very difficult, perhaps even impossible, for central banks to conduct traditional inflation targeting, at any rate with the targets of around 2 per cent prevailing today. More specifically, they argue that inflation faces such strong ‘headwinds’ in the form, for example, of globalisation and digitalisation that it is doubtful whether central banks can steer inflation in any meaningful way. Instead, it is argued, monetary policy should be focused on dampening financial cycles and maintaining financial stability. 1 On the other side are most central banks, who argue that rumours of inflation targeting’s imminent demise are significantly exaggerated.