Working Paper: NBER ID: w12768
Authors: Steven J. Davis; Magnus Henrekson
Abstract: Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market. As of 2005, hours worked per person 20-64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story. Our explanation for Sweden's weak performance with respect to market work activity highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, business tax policies that disfavor labor-intensive industries and technologies, and a variety of policies and institutional arrangements that disadvantage younger and smaller businesses. This last category includes tax policies that penalize wealth accumulation in the form of owner-operated businesses, a pension system that steers equity capital and loanable funds to large incumbent corporations, and legally mandated job-security provisions that weigh more heavily on smaller and younger businesses. We describe these features of the Swedish institutional setup and provide evidence of their consequences based largely on international comparisons.
Keywords: No keywords provided
JEL Codes: D13; H30; J20; L52; O52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High tax rates on labor income and consumption expenditures (H31) | Labor supply (J22) |
| High tax rates on labor income and consumption expenditures (H31) | Market work activity (G10) |
| Wage-setting arrangements that compress relative wages (J31) | Labor supply (J22) |
| Wage-setting arrangements that compress relative wages (J31) | Misallocation of labor (J29) |
| Business tax policies that disfavor labor-intensive industries (H32) | Employment levels (J23) |
| Combination of high tax rates, wage-setting arrangements, and business tax policies (H32) | Employment rates (J68) |
| Institutional arrangements (D02) | Labor market performance (J48) |
| Institutional arrangements (D02) | Inefficiencies in allocation of labor and capital (D61) |