Barbro Wickman-Parak: Monetary policy and unemployment – a constantly topical debate Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, to the Swedish Trade Union Confederation (LO), Stockholm, 24 January 2012. *  *  *  I would like to thank Maria Sjödin and Magnus Wiberg, at the Monetary Policy Department of the Riksbank, for their help with writing this speech. High unemployment implies the failure of the welfare state. In Sweden, unemployment increased strongly in conjunction with the crisis of the 1990s, following which it has never fallen below 6 per cent. In this situation, it is important to use every means to improve conditions on the labour market and also to debate the role that could be played by monetary policy in the fight against unemployment. But it is equally important that this debate is realistic. From time to time, we have to remind ourselves that the possibilities monetary policy has in this area have their limits. This is primarily a matter of influencing the more short-term area of unemployment, which depends on economic activity, via effects on total demand in the economy. The area of unemployment that also exists in balanced economic cycles is harder to deal with. This unemployment is usually called long-term unemployment or equilibrium unemployment. The degree of equilibrium unemployment is highly dependent on how well the labour market is functioning, which is affected by policy areas other than monetary policy.
Calculating equilibrium unemployment after the fact is difficult and requires a number of assumptions. Serious attempts have been made, but as shown, they have had varying results. At the same time, monetary policy is forward-looking and is thus guided by forecasts of economic development. However, assessing the level of equilibrium unemployment in several years is even more complicated. And, as I mentioned earlier, even if we could know what the level of equilibrium unemployment would be further ahead, this would give us no guidance for monetary policy in the here and now. The economy is regularly subjected to structural changes affecting equilibrium unemployment. And we have limited knowledge of how the adjustment from one equilibrium rate to another occurs, or how long it takes. This means that using equilibrium unemployment in practical monetary policy is not uncomplicated. It is therefore important to closely monitor all of the statistics that reflect conditions on the labour market, which we already do. Monetary policy can primarily affect unemployment in the short term, via aggregate demand. Here I can mention that several debaters have previously claimed that an incorrect balance in monetary policy has made a significant contribution to the negative developments in the labour market. Naturally, we should not conduct a monetary policy that leads to demand being unnecessarily low and to unemployment becoming higher than it would have been because we single-mindedly react to the risk of inflation rising.