It also contributed to a growing central government debt. The economy was fuelled during economic upturns, which led to overheating and inflation. The Riksbank’s task was to try to defend the fixed exchange rate. The social partners were instead to contribute to low inflation by ensuring that wage increases were not too high. Soaring wage costs and poorer international competitiveness meant that the system broke down in the mid-1970s. To safeguard the objective of full employment, the krona was devalued by a total of around 40 per cent on five different occasions between 1976 and 1982. Each devaluation held unemployment down temporarily, but instead contributed to kindle the inflation fire until it was time for the next devaluation. Unemployment was also held down in that the number of employees in the public sector increased substantially. The number of persons employed in the public sector increased from 15 to 30 per cent between 1960 and 1980. In my opinion, unemployment was held down during this period using methods that were not sustainable in the long term. I consider this to be the first important aspect to bear in mind when discussing why unemployment is now much higher than it was in the 1970s and 1980s. Towards the end of the 1980s the situation became untenable. Everyone was then counting on the krona being devalued if the rate of increase in prices and wages rose too high. The driving forces for holding down prices and wages had thus disappeared.
In my opinion, it is therefore not possible to claim that an economic policy that aims for low and stable inflation would in itself lead to higher unemployment. 2  BIS Review 52/2007  Another part of the criticism is based on the assumption that it is not possible to buy lower unemployment by pushing up inflation, although there is instead apparently an assumption that if only the Riksbank would ensure that inflation remains at 2 per cent, then unemployment would stabilise around its long-term equilibrium level. In practice, however, there is no such simple relationship between inflation and unemployment. Firstly, unemployment is affected by a number of factors other than inflation, most of which have nothing to do with monetary policy, such as productivity changes, changes in regulatory systems and various shocks that regularly impact on the economy. Similarly, inflation is affected not only by developments in the labour market, but by many other factors. Empirical studies have shown that unemployment “explains” a relatively small percentage of total inflation. This means that inflation developments are largely “explained” by other factors than unemployment. Secondly, it has proved very difficult to assess what is a long-term equilibrium level for unemployment and moreover that this also varies over time. One conclusion of this is that even if the Riksbank were to always succeed in holding inflation at the target, this would be no guarantee that unemployment would be low and stable.