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EXPLAINED: Why Sweden’s unions are asking for a four percent real pay cut

The Swedish Trade Union Confederation in November set its starting bid in the coming salary bargaining round so low that it is effectively asking for a four percent real pay cut for its members. We explain why it is willing to do this.

EXPLAINED: Why Sweden's unions are asking for a four percent real pay cut
The headquarters of the Swedish Trade Union Confederation at Norra Bantorget in Stockholm. Photo: Janerik Henriksson/TT

What’s happening? 

Next month, Sweden’s unions will start salary talks with employers as the 2023 collective bargaining round kicks off. Ahead of the negotiations, representatives of the 14 unions that are members of the Swedish Trade Union Confederation (LO) met in November at its Stockholm headquarters to agree on “the mark”, or märket, the percentage pay rise demand which will set the base for negotiations with employers. 

On November 19th, 13 of the 14 unions agreed to propose a mark of 4.4 percent, something Thomas Carlén, one of the LO economists who did the research that fed into the agreement, told The Local represents a significant real pay cut. 

“Our forecast is that the inflation rate will be very high next year, but it will also decrease from its peak in the first quarter, but on a yearly basis, this will probably lead to real wage decreases of about 5 percent, or 4 percent.” 

As well as the 4.4 percent increase, the unions also agreed to push for extra support for those earning less than 27,100 kronor a month. 

So why aren’t unions asking for compensation to match current high inflation rates? 

Unions are holding back partly to avoid fueling a so-called wage-price spiral, where nominal wage increases are eaten up by price rises, leaving real wages stagnant. 

“If we get wage-driven inflation, it’s going to be those on the absolutely lowest salaries who end up being the losers,” Susanna Gideonsson, LO’s President, told Swedish news agency TT at the end of December. 

She pointed to the situation in the 1970s and 1980s when Sweden’s unions fought for inflation-busting pay rises only to end up generating ever higher inflation. 

“We have tried to go that way and we have lost as a result of it,” she told TT. “Those who earn the least take the biggest hit. This is about getting real, long-term pay increases.”  


What system does the Swedish Trade Union Confederation use to set wages? 

According to Carlén, after the high inflation of the 1970s and 1980s, LO brought in a new system in 1997, which sets the “mark” for negotiations with reference to  the Swedish Central Bank’s inflation target of 2 percent, rather than with reference to the actual level of price rises in the economy.  

“We have this model, as we love to say in Sweden,” he said.  “And in this model we normally calculate the room for wage increases as the inflation target, plus productivity growth, and that will be maybe three and a half percent.”

The unions also benchmark wages in Sweden against those in competitor countries, keeping a particularly close eye on wage developments in Germany, to make sure that Swedish exporters remain competitive. 

Between 2010 and 2020, when monthly consumer price inflation in Sweden was frequently under 1 percent and rarely rose above 2 percent, this model provided most workers in the country with more generous pay rises than their counterparts in many other European countries. 

“That’s what we’ve been doing for 25 years and it was a good thing for the trade unions when the actual inflation rate was almost always lower than the target,” Carlén told The Local. “The business sector always said ‘no, you shouldn’t use the inflation target, you need to calculate the actual inflation rate, which was sometimes 1 percent of 1.5 percent.”

Because the unions insisted on using the inflation target then, they now want to defend the model by continuing to do so even if it means a few years of declining real wages. 

“We have decided to continue doing it this time, even if it is not the most beneficial thing for our members this time, since this model has been quite successful for 25 years,” Carlén said. “We have had higher real wage increases in Sweden than in most other countries since 1997, so we think that this model works.” 

If the unions shifted to using the real inflation rate this time around, he added, they would “risk this model for the future”. 

So what happens next? 

Industrial employers, who the unions in November agreed be the first to enter salary negotiations, at the end of December proposed a pay rise of just 2 percent, together with a one-off payment to employees of 3,000 kronor, far less than LO’s mark. Sit-down talks between industrial unions and employees will begin properly next month, with a view to setting the final agreed “mark” in April. 

Once all the central agreements have been made between the unions and the employer organisations, there will then be a second stage of negotiations between unions and individual employers, at which point salary rises generally increase a little further. 

“In the local wage negotiations you usually get some wage drift, so if the mark is set at 4.4 percent, maybe the actual wage increases will be 4.8 percent or 5 percent,” Carlén explains. “If the ‘mark’ is considered to be low, some groups on the labour market, which usually are the white collar workers, might manage to get more in local wage negotiations.” 

So will there be strikes? 

Sweden’s unions have in recent decades been much less likely to take to the picket lines than those of most other countries, but that does not mean it can’t happen. 

“We usually don’t need to go on strike that often in these wage negotiation rounds,” Carlén said. “But you never know. This time is very tricky, so we can always use the strike weapon and we will if they will not meet our demands.” 

The Swedish Transport Workers’ Union was the only one of the 14 LO member unions not to back the 4.4 percent proposal, which means they may seek a higher rise for their members, increasing the risk of a conflict with transport operators. 

In addition, Gideonsson, LO’s President, is insisting that the leaders of companies, municipalities, regional health authorities and government agencies also keep their salary rises well below the inflation rate, warning that if they fail to do so, “then we can reckon with a much more difficult collective bargaining round”. 

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‘Mild recession likely’: IMF presents new report on Swedish economy

Sweden can expect a 'mild' recession this year, experts from the International Monetary Fund (IMF) have predicted, with growth projected at around -0.3 percent and inflation expected to drop to 6.5 percent in 2023.

'Mild recession likely': IMF presents new report on Swedish economy

Experts from the International Monetary Fund (IMF) wrote in the fund’s IV report on the Swedish economy that inflation in Sweden could drop to around 6.5 this year, if fiscal policy remains contractionary and wage negotiations were carried out responsibly to avoid a wage-price spiral.

Short-term, however, the IMF states that the inflation outlook “remains uncertain”.

The report further states that strong employment in Sweden is “a positive sign”, which should help to lessen the burdens on households from high debts and inflation.

It describes the Swedish housing market as “dysfunctional”, arguing that the weakening of the Swedish property market highlights the market’s “long-standing vulnerabilities”. It lists some of these vulnerabilities as “high exposure to variable interest rates, high leverage, and excessive rent control”.

It recommended that rent control measures could be “gradually eased, while providing social protection in a more efficient way”, in order to address distortions in the housing market. One way of providing this protection, it said, could be through extending housing allowance.

Swedes have one of the highest levels of consumer debt in the EU, and variable-rate mortgages are common, meaning that Swedes are more vulnerable to changes in interest rates than residents of other countries. This has also affected Swedish house prices over the past year, with property prices dropping overall by 16.8 percent since the last peak in June 2022.

The IMF suggests that some measures to stimulate growth in Sweden could include increased spending on infrastructure, education and training, green investments, and by increasing “extremely low” property taxes to allow for a reduction in high labour taxes. With property taxes standing at around 0.95 percent, Sweden has one of the lowest property tax rates in the EU, as well as the third-highest labour taxes in the bloc.

It further added that a reduction in the amount of mortgage interest eligible to be deducted from taxes (ränteavdrag) would lead to a more “dynamic” housing market and reduce household borrowing.

The IMF described Sweden’s energy support measures as “swift”, although “small compared to other European countries”. However, it stated that the energy price subsidy could have been better targeted to more vulnerable members of the population, perhaps by linking it to household income.

The report further recommended that planned fuel cuts over the next three years “impede carbon reduction efforts and increase the risk of Sweden not meeting its 2030 climate goals”, and should be phased out as fuel prices decline.

Finally, it stated that investment in education should focus on “science, engineering and vocational training” to address the skills gap in Sweden, as well as increasing the efficiency for “programs and regional services to better integrate the less educated and the foreign-born”.