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Comments on
Anders Forslund:
Den svenska
jämviktsarbetslösheten
– en översikt
Bertil Holmlund
Department of Economics
Uppsala University
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Outline
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Theory
The Swedish development
Recent Swedish reforms
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Unemployment insurance
The income tax system
Other tax reforms
Conclusions
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Equilibrium unemployment theory
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Can fiscal policy affect the equilibrium
unemployment rate (NAIRU)?
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Yes, in an open economy
NAIRU depends in general on the real
exchange rate
Fiscal policy can influence the real
exchange rate
A fiscal expansion can reduce NAIRU
through a real appreciation
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Equilibrium unemployment in
an open economy
Real exch.
rate
AD
WS/PS
Employment
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A fiscal expansion in
an open economy
Real exch.
rate
AD
WS/PS
Employment
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Does the real exchange rate
matter for unemployment?
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Direct evidence: Lindblad and Sellin
(2003)
Indirect evidence: taxes and
unemployment
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The real exchange rate is part of the total
wedge between real consumer and producer
wages
A real appreciation is analogous to a tax cut
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Long run considerations
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Balanced trade?
Relevant for the very long run
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The Swedish development
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Why did NAIRU double
between 1990 and 1994?
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Institutional changes?
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Major tax reform 1991 (less progressive taxes)
Benefit cuts 1993
Coordinated wage bargaining 1991 (Rehnbergavtalet)
Hard to identify major changes in institutions
that can explain a sharp rise in NAIRU in the
early 1990s
But NAIRU probably increased from the 1960s
up to the early 1990s
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Did NAIRU fall over the 1990s?
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Benefit cuts took place
Imperfect wage-indexation of benefits
Temporary work agencies (1993)
Product market competition increased
Coordinated bargaining (Industriavtalet 1997)
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So NAIRU probably fell over the 1990s
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Recent reforms
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Less generous unemployment insurance
In-work tax credits (Jobbskatteavdrag)
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Compare benefit cuts and inwork tax credits (S)
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Income after tax when unemployed: B
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Income after tax when employed: W+S
Standard model:
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Unemployment depends on the replacement rate, b
Model with in-work tax credits, S :
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b=B/W is the replacement rate
Unemployment depends on (b – s); s=S/W
In-work tax credits and benefit cuts are
approximately equivalent
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Swedish reforms
b  B /W, s  S /W
bˆ  b  s (effective repl. rate)
bˆ  b  s  0.10  0.05  0.15
The change in the effective replacement rate has
been substantial
Should reduce equilibrium unemployment
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Effects on labor force participation
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Benefit cuts should reduce labor force
participation
In-work tax credits should increase labor
force participation
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Other tax reforms with
implications for employment
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Property taxes:
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Effects on labor supply?
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Abolishment of the wealth tax
Cuts in real estate taxes
Reduced supply on the intensive margin
In-work tax credits have income effects
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In-work tax credit 2007:
average tax rates by income
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In-work tax credit 2007:
marginal tax rates by income
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Income and substitution effects
H hours of work, W the wage, Y nonlabor income
The last term is the marginal propensity to earn
out of nonlabor income, mpe
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Compute the hours response from
exogenous tax cuts (income effects)
H
 Y 
 mpe 

H
 WH 
Y is the income increase associated with the tax
reduction
WH is annual earnings
mpe = -0.10
(Imbens et al, AER Sept. 2001)
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Hours responses to exogenous tax cuts (%)
Tax cut (1000 SEK)
Income
(1000)
10
20
30
40
50
60
70
300
-0.5
-1.0
-1.4
-1.9
-2.4
-2.9
-3.3
500
-0.4
-0.9
-1.3
-1.8
-2.2
-2.7
-3.1
700
-0.3
-0.6
-1.0
-1.3
-1.6
-1.9
-2.2
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Conclusions
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NAIRU in Sweden has increased gradually
up to the early 1990s
NAIRU has probably fallen over the 1990s
Benefit cuts and in-work tax credits have
probably reduced the NAIRU
In-work tax credits in combination with
other tax reforms have reduced work
hours
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