Stable economic policy interacts with structural changes and IT In order to see why the Swedish economy is doing better than it has been for a very long time, we need to consider how economic policy has been realigned in the past decade and a half. Credit and currency markets have been deregulated, the tax system has been reformed, components of the system of transfers have been modified and competitive pressure has increased. All this has helped to improve the workings of our economy. Moreover, price stability is now monetary policy’s statutory objective and it has been explicitly assigned to what has become even a formally independent central bank. Low inflation is admittedly not an ultimate objective for economic policy in general. It serves instead as an instrument. All those who experienced the economic situation in Sweden in the 1970s and 1980s know that inflation can never be associated with an economic development that is lastingly favourable. That is why price stability is an integral part of any economic policy’s strategy for rising prosperity and high employment. In order to provide a stable and credible framework for the new direction of economic policy, the government budget was successfully consolidated. Difficult political considerations and decisions were involved in this process and opinions may differ about particular items or aspects of the consolidation policy; but that does not detract from the main impression of a successful outcome in the sense that economic policy’s commitment to stability was rendered credible.
To date, however, the economic upswing in Sweden suggests that the labour market is functioning better than one might expect. That in itself is a sign that the output gap has been larger than estimated earlier, so that our economy has coped for a time with higher GDP demand. It is conceivable that the crisis in the early 1990s taught firms that they can, in fact, cut costs if they need to. That may mean that their propensity to recruit now that demand for goods and services is rising is stronger than might have been feared. Moreover, various labour market measures, the willingness of the parties to improve the wage bargaining system and, not least, the real wage increases in recent years, may have strengthened the propensity to look for work as well as the possibility of finding it. Of course, this process cannot continue for ever. Sooner or later, shortage figures will show that there is simply no additional labour available. To date this year the number in employment has risen by 70,000 from the year before, which is over 50,000 persons more than the underlying increase in labour supply. Unemployment is accordingly falling and more and more persons who did not seek work actively before are now available in the labour market. While that is a good thing, the time will come - though when that will be is not certain - when the available supply of labour is smaller than the jobs  3  BIS Review 84/2000  that are vacant.