A rise in labour costs of more than 5 per cent will only be consistent with the inflation target if the krone continues to appreciate. In our projections for the Norwegian economy in the next two years, we expect 5 per cent wage growth. As long as wages increase this much, the business sector’s competitiveness will decline, thus contributing to a reduction in employment in goods-producing industries. When manufacturing and other industries exposed to competition are scaled back to the extent that there is room for a larger service sector, competitiveness will once again stabilise. In the long run, wages must be compatible with the value added that is generated by workers, i.e. labour productivity. Over time, the increase in real wages is therefore determined by developments in labour productivity. 2  BIS Review 20/2002  In mainland Norway, annual productivity growth has averaged 1½ - 2 per cent over the last 20 years. If this continues to be the case, an average increase in labour costs of around 4 - 4½ per cent in the long term will be consistent with the inflation target. The guidelines for economic policy may affect the krone exchange rate in two ways. On the one hand, increased use of petroleum revenues may lead to a deterioration of the business sector’s competitiveness. With low and stable inflation, this may at times be reflected in a strong krone. On the other hand, our inflation target is slightly higher than our trading partners’ inflation targets.
In my view the reasons include the increased role of services in the economy, the importance of labor costs in such an economy, the reduced share of oil consumption relative to GDP, and as I mentioned earlier the improved conduct of monetary policy versus the 1960s and 1970s.5 Figure 10 shows that the service sector has grown from a little over 60 percent of private sector employment in 1970 to a little over 80 percent in 2010. As the economy has come to emphasize services versus manufacturing, it may be that commodities (and thus their prices) have become somewhat less important to the production of goods and services. And goods prices are more volatile than services prices, and more likely to be priced like commodities. Figure 11 shows the per capita consumption of oil declining in the United States. Conservation measures by consumers and businesses have made the economy less dependent on oil than in the 1970s. While oil remains a very important commodity, the trend towards reducing dependence on oil provides greater insulation from oil-induced supply shocks. Figure 12 shows the U.S. share of world oil consumption (in blue) ticking down, but also clearly shows (in red) the steady climb in the share consumed by three of the so-called emerging-market economies – China, India, and Brazil. Figure 13 shows the growth in oil consumption in those three countries, in the upper three lines. Both charts depict quite strikingly the heightened demand for oil emanating from emerging markets.