More Bad News for Riksbank: Biggest Union Boss Hates Inflation

  • Wage drift to fall short as bank underestimates flexibility
  • LO says would be surprised if there were big changes to wages

Sweden’s biggest union isn’t about to help the central bank save the credibility of its inflation target.

According to the Swedish Trade Union Confederation, or LO, the record-wave of immigrants and an influx of labor from abroad will hold back salary gains despite an economy that’s firing on all cylinders.

“I’d be very surprised if there was a big change in the wage levels we’ve seen in the past years,” LO President Karl-Petter Thorwaldsson said in an interview last week in Stockholm. “I hope we don’t get wage inflation.”

That’s bad news for the Riksbank, which is counting on accelerating wage gains to help lift inflation that has held way below its 2 percent target for more than half a decade. Thorwaldsson is even opposed to a more expansive fiscal policy, which also would help the struggling central bank.

LO, which represents almost a third of all Swedish workers, has big clout in the the country’s collective wage negotiations since it represents three of the five unions whose deals set the benchmark for all other workers. For two decades, employees in construction and retail have accepted pay increases similar to those negotiated by workers at big industrial exporters. 

The system is designed to keep the Swedish economy competitive. And at least for the central bank, it’s working a little too well. 

Low nominal wage gains are now helping keep a lid on inflation despite the central bank cutting rates deep below zero and unleashing a bond buying program since early last year. Underlying price gains have averaged 1.2 percent in the eighth years since the eruption of the global financial crisis.

But the central bank, led by Governor Stefan Ingves, is now saying that the booming economy and a shortage of workers will serve to drive up inflation. It sees wage increases of 3.2 percent next year and 3.5 percent in 2018, up from just 2.4 percent last year.

Not Realistic

Nordea Bank, the largest Nordic lender, says wages would have to rise by at least 4 percent to 4.5 percent for the Riksbank to deliver on its forecast that it will reach its inflation target by the middle of 2018.

Thorwaldsson said those types of wage gains aren’t realistic. He predicts wage drift -- the additional pay workers get on top of centrally negotiated salary increases -- will now continue to fall short of historical gains.
The Riksbank is “underestimating that there is a flexibility in the system,” Thorwaldsson said. 

Labor shortages in construction and transport may now not lead to as big a pay drift since the gaps are now being filled by more workers from other European countries, which have lower salaries, he said. Fewer sectors also do wage revisions throughout the year, he said.

“It seems like wage drift is falling, and for us that’s very good as wage drift is a super difficult part of wage formation,” he said. “It often leads to compensation in other sectors.”

World Champions

Recent history shows that the Riksbank has a habit of being too optimistic on inflation. A study released this week by the bank’s own economist showed it was the second-worst among 10 institutions in predicting headline inflation from 2007 to 2015. It only ranked sixth in anticipating its own repo rate.

Thorwaldsson’s fears of excessive wage gains come from his experience in the 1980s, when high inflation eroded real wages. A shift since to an inflation target and a new framework for wage formation has led to real wage gains.

In the past 20 years, “the real wage for an LO worker in Sweden has increased by 60 percent,” Thorwaldsson said. “I now travel around the world and meet people who haven’t had a raise in 30 years. We’re world champions in wage formation, why would we destroy that just because the Riksbank wants help with inflation?”

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