Several reasons may lead to the interplay between monetary and fiscal policy failing to function. Interplay functions well when the decision-making bodies are conscious of how one body’s decisions influence the decisions of the others. Unless this fact is recognised, a decision will not produce the result that was planned. The economy may move in a very undesirable direction, with high interest rates, sluggish economic growth and a deterioration in the state’s financial position. Without coordination, a good result may still be achieved if fiscal policy acts as “leader” and monetary policy as “follower”, to use expressions taken from game theory. The fiscal policy authorities can internalise the monetary policy response pattern. The central bank’s response pattern must of course be known so that the fiscal authorities can take this into account. The social partners can similarly take any monetary policy response into account when wages are being determined. The “leader” in this interplay - the social partners - can take the “follower’s” - Norges Bank’s - response into account. This view is most relevant in centralised wage formation. In decentralised wage formation, monetary policy will instead affect wage growth via market mechanisms by stabilising aggregate demand. A precondition for interplay that functions well is that monetary policy is known and remains firm. The outcome of this year’s wage settlement indicates that the social partners have not internalised the monetary policy response pattern.
Perhaps one of the stumbling blocks has been the choice of wage settlements at industry level and the large wage increases for employees outside the two largest employer/employee organisations (NHO and LO). The high wage growth awarded to groups whose wages are determined through individual agreements indicates that the labour market has been tight. The rise in salaries for white-collar workers and managers may also reflect weak cost control in enterprises and organisations following a long period of expansion. For a long time, a stable exchange rate and labour costs among our trading partners formed an anchor for wage determination. Since 1998, however, the rise in labour costs in Norway has been around 2 percentage points higher than that of our trading partners. High wage growth, combined with the global downturn and a strong krone, is having a severe impact on manufacturing. It is the combined wage growth for all groups that influences the inflation outlook. However, substantial wage increases for some groups can trigger wage spirals. Wages for salaried staff in the business sector have exhibited sharp growth. This year, it appears that wage increases will particularly be high in the public sector and in parts of the private service sector. Over time, growth in real wages must be consistent with growth in labour productivity. With an inflation target of 2½ per cent and trend growth in the economy of 2 per cent, there will be scope for annual nominal wage growth of about 4½ per cent.