The outcome of the negotiations in manufacturing industry set the ceiling for wage growth in sheltered industries. In recent years this model has been challenged. Since 1998, wage growth in Norway has been on the rise and markedly higher than that of our trading partners. High pay increases also for groups whose wages are determined through individual agreements indicate that the labour market has been tight. However, the rise in salaries for white-collar workers may also reflect weak cost control in enterprises and public entities following a long period of economic expansion. We have gained costly experience from previous developments of this type. Both in the mid-1970s and the mid-1980s, the Norwegian business cycle diverged from that of trading partners. In the period 1975-1978 and 1982-1988, wage growth was markedly higher than wage growth among trading partners. As a result, competitiveness deteriorated sharply in internationally exposed industries, which in both cases led to a cyclical downturn with low real wage growth and high unemployment, also in sheltered industries. This is a mechanism that will occur again. Public sector employees also have to pay for the imbalances. Real wage growth for teachers and health sector employees was negative both at the end of the 1970s and the end of the 1980s. Around the mid-1990s these groups also benefited from stable economic growth with low inflation. Annual real wage growth averaged around 3 per cent between 1996 and 1998.
Growth in compensation per employee fell slightly in the last quarter of 2018 from 2.5% to 2.2%, but remains just above its long-term average. Unit labour cost growth rose to 2.4% in the same period, partly driven by a fall in productivity growth reflecting the resilience of employment growth to the economic slowdown. The key question – and one currently being asked in many advanced economies – is why these labour cost pressures are not already being reflected in rising prices. Underlying inflation has moved broadly sideways over the last year, repeatedly falling short of expectations and staying below the levels recorded before 2008. Academic literature based on US data has responded by casting doubt on the link between labour costs and inflation, in particular at shorter horizons. Studies find no conclusive results on whether, empirically, labour costs tend to precede or follow prices. 10 This has led to a debate as to whether “cost-push” models from wages to prices can still accurately describe the inflation process. There are certainly a number of forces at work today that make forecasting inflation more complex, not least the effects of globalisation and digitalisation. Yet research by ECB staff finds that, unlike in the United States, the structural conditions for pass-through from wages to prices remain in place in the euro area.