Sweden has weathered the economic crisis better than most but falling school results, an inflexible labour market, and slow integration of immigrants remain a worry, the OECD said.
“A highly skilled workforce is crucial to sustain competitiveness and contain the rise in income inequality,” according to the report.
A “dramatic deterioration” in Pisa survey school scores for 15-year-olds was a particular cause for concern.
Poor school results were linked to “low attractiveness of the teaching profession, deficiencies in teacher education and a lack of support for struggling students”, according to the report.
The group recommends making teaching more attractive through monetary incentives, clearer career paths and better teacher training.
Sweden should also do more to help “struggling students, including immigrants, through early intervention and target resources based on socio-economic background," it said.
The country would also be well advised to give immigrants more incentives and support to learn Swedish, the report said.
The OECD also pointed to a lack of flexibility in the jobs market as a barrier that “hampers access to jobs for young people with low qualifications and immigrants, although temporary contracts are a stepping stone into the labour market.”
In getting to grips with stubbornly high unemployment, Sweden should “reduce the gap in employment protection between permanent and temporary contracts and increase flexibility in entry level wages”.
Sweden did however also come in for praise as one of “few countries where output is now well above its level before the 2008 global financial and economic crisis”.
The OECD was broadly satisfied with Sweden’s monetary policy but said the country should “consider phasing out mortgage interest deductibility”.
Sweden could also improve growth by simplifying regulatory procedures for licences and permits, the report said.
The country should also streamline land-use planning and give municipalities more incentives to release land, said the OECD.
As well as improving roads and rail, the OECD said Sweden should lower financing constraints for innovation and research.
The OECD’s outlook for Sweden is sunnier than the government’s, with the group expecting GDP growth of 2.9 percent this year and three percent next year.
Unemployment is expected to fall to 7.5 percent this year and 7.3 percent in 2016.
The OECD forecasts an inflation rate of 0.5 percent this year, rising to 1.5 percent next year.