Typically, someone who starts a new job must go through a learning curve. It takes some time to become better at a new job. This is not least the case for young people with little or no previous job experience. Therefore, the starting salary tends to be relatively low, and to grow with time. Sweden is however unique in that the starting salary is relatively high compared to that of experienced workers.
In a new report, Susanne Spector, economist at the Confederation of Swedish Enterprise, illustrates this by comparing the wages of a newly hired individual to someone who has worked in the same place for over 15 years. In the average rich EU country the more experienced worker will earn around 50 percent higher in wages. In Sweden the difference is a mere 20-percent increase.
The laws of economics work in the same way in Sweden as in other European nations. Experienced workers are typically more productive than new ones. The difference is that Swedish labour unions have long prioritized raising the entry-level wages. And so, a situation has been created where new employees are often paid more than what is motivated by the productivity of the worker.
As a response, employers become reluctant to hire new employees. Like many other commodities, when the price and demand of new jobs do not match, problems are created on the marketplace. Firstly, few entry-level jobs are created. And secondly, those that exist often go to friends or family. In fact, fully seven out of ten new recruitments into firms are obtained through personal contacts.
Demanding high entry-level wages might, at first glance, seem to be a way to encourage young people to have a good start to their careers. But the effect is the opposite, since the wage levels make entering the labour market quite difficult. The immediate effect is high youth unemployment. Most young people in Sweden do enter the labour market, but even they can suffer from the lack of entry-level jobs, since the lack of entry-level jobs slows down the transition to employment.
During recent years, a number of studies have shown that early unemployment can “scar” individuals. Even somewhat delayed entry makes it more difficult to gather the social capital needed to progress in one’s career, slowing down long-term wage growth and increasing future risks of unemployment. The scarring effects of youth unemployment have been shown to remain up to twenty years later in life.
The current practice of demanding unusually high entry-level wages favours the few young people who do not have trouble getting their first jobs, often with help from family and friends. It creates significant disadvantages to the majority whose labour-market introduction is slowed down and, of course, to the employers who hire fewer new people than they would otherwise like to.
Normalizing entry-level wages to mirror those of other rich EU states could mean significant improvements for the Swedish labor market, benefiting most in the long term. In a country with no formal minimum wages, it is up to employer organizations and labor unions to negotiate a common solution.
Nima Sanandaji, a Swedish writer of Kurdish origin, has written numerous books and reports about policy issues in Sweden. He is a regular contributor to The Local.