The threat of relocation of jobs to other countries, increased inward labour migration and increased imports of goods and services may contribute to somewhat more moderate wage growth during this upturn. It is also possible that the experience of the period 1998-2002, with high wage growth and sharp fluctuations in the krone exchange rate and interest rates, is still marking wage settlements. At the same time, the situation with an ample labour supply may also be reversing. Sickness absence is now on the increase, and the number of persons on disability benefit is still rising steadily. Other countries still provide us with a source of labour, but the supply is not sufficient to offset the considerable flows into benefit schemes when viewing the economy as a whole. As expected, it appears that wage growth will be somewhat higher in 2006 than in 2005. Historical experience shows that it is difficult for the social partners at the local and centralised levels to restrain wage growth when unemployment is low. A characteristic of the wage formation process in Norway has been that fairly long periods of moderate nominal pay increases and rising employment have culminated in a sharp rise in cost inflation – often as a result of working hour reforms – and a decline in employment. Developments in labour costs and the wage settlements in 1974 and 1975, 1986 and 1987 and in the period between 1998 and 2002 triggered a subsequent decline in output and employment.
Monetary policy must then be oriented towards bringing inflation back to target over time while avoiding wide variations in output and employment. It takes time for interest rate changes to feed through to real economic variables, and it takes even somewhat longer for the changes to have a clear impact on inflation. How long it takes to reach the inflation target – and not least – the time deemed desirable for reaching the inflation target will depend on the nature of the disturbances to which economy is exposed. It may be appropriate to differentiate between supply-side disturbances and demand-side disturbances. If the economy is marked by weak demand, with low growth and low inflation, monetary policy should quite clearly be expansionary. This will stimulate both the level of activity and push up inflation. Inflation will then move towards the target and output will move towards potential output. By the same token, if there are pressures in the economy and inflation is high, a tighter monetary stance will restrain both activity and inflationary pressures. In such situations, it may be desirable to bring inflation back to target quickly. There is no conflict of objectives. Low inflation in Norway is not the result of declining demand, activity or employment, but is rather a result of favourable developments on the supply side both in the Norwegian and international economy.