Calmfors (2025) explores the implications of pattern bargaining in setting wage norms across the Nordic countries. Pattern bargaining entails a wage-setting process led by the tradables sector, traditionally manufacturing, to ensure international competitiveness.
The main idea is simple: Wage increases in the nontradables sector, not exposed to international competition, can generally be passed on to consumer prices in the nontradables sector, mitigating unemployment risks. However, wage increases in the nontradables sector affect production costs in the tradables sector because the two sectors compete for labour, and the tradables sector uses nontradables sector output as input into production. Due to international competition, wage increases in the tradables sector may lead to deteriorating cost competitiveness, shrinking exports and a poorer trade balance. If left unresolved, this imbalance could require painful adjustments in the domestic economy and labour markets, especially under a fixed exchange rate system.
The practical solution is to let the tradables sector take the lead in setting wages. Since the link between wage increases and employment outcomes is more direct in the tradables sector, this solution is expected to lead to wage moderation and high rates of employment.
Lars Calmfors offers an illuminating account of the origins of this thinking, how it has evolved over time, and how it has been formalised. In doing so, he asks two important questions. First, why is it difficult to build a convincing theoretical case for pattern bargaining led by the export sector (or alternatively, what is wrong with the practical solution presented above)? Second, what are the implications of rigid pattern bargaining in the face of structural changes?
The practical solution lacks the specific mechanisms or formal modelling to account rigorously for different interactions in the economy. Formal modelling offers the advantage of explicitly defining assumptions and enables analysts to trace the economy-wide effects. Using models allows one to specify economic fundamentals, the nature of spillovers between sectors, and the objectives of involved parties. This facilitates a comparison of equilibrium outcomes under different coordinated and uncoordinated wage-setting scenarios.
Calmfors shows that the intuition behind the practical solution does not carry over to the theoretical models. A notable distinction between practitioners’ intuition and formal modelling lies in the general equilibrium effects.
In the formal models, due to international competition, a wage increase in the tradables sector leads to a fall in tradable output and incomes. This, in turn, results in a fall in demand for nontradables and, hence, a fall in the price of nontradables and lower negotiated wages. This effect increases the purchasing power of workers in the tradables sector and makes them more aggressive in their wage demands. Conclusion: wage leadership by the tradables sector leads to lower rates of employment than uncoordinated bargaining.
Why does the pattern bargaining system led by the tradables sector enjoy such widespread support among practitioners, even though formal models provide only ambiguous support for its macroeconomic benefits? Two comments are in order here. First, the existence of the general equilibrium channels does not imply that they are properly accounted for by the parties. Changes in nominal wage rates and employment may well be more salient and quicker to materialise than the effects of changes in purchasing power. If so, one would expect them to be given more weight in the parties’ objective functions. More empirical analysis is needed to shed light on the mechanisms at work.
Second, the overall effects of wage formation institutions hinge not only on explicit institutional arrangements but also on implicit conventions. Where do the social norms come from, and how are they sustained? Calmfors conjectures that the fact that the social norms are sustained implies that deviating from them comes at a high cost. This explanation may be true, but it leaves a lot outside the model and does not provide much guidance in how to develop the institutions.
In the second part of the article, Calmfors discusses sectoral reallocation of labour. As populations age, demand for welfare services can be expected to rise, potentially necessitating labour shifts from the tradables sector to welfare services. This issue is particularly pertinent in Finland, where population ageing outpaces other Nordic countries.
The model developed to discuss this issue contains two sectors (tradables and nontradables) and homogeneous labour that can move between sectors. As everyone can work in either sector, the wage level must be the same in the sectors. When the proportion of pensioners increases in the economy, the overall demand for welfare services increases.
The analysis shows that even if such a shift improved welfare, rigid adherence to wage norms in the tradables sector might hinder labour reallocation. The reason for this is that pattern setting by the tradables sector would not allow the other sectors to bid up the wage to recruit more labour. How big a concern this is depends on the existence of mitigating factors that increase flexibility. For instance, wage flexibility at the employer or individual level could alleviate the problem.
The other intriguing question relates to external imbalances. The analysis assumes that there is a trade balance surplus in the initial equilibrium and that the changing consumption patterns will lead to a weakening of the trade balance. What about countries with trade deficits? Does the reallocation of labour need to be accompanied by tax increases (to reduce private demand and finance welfare services)? If so, that probably makes the transition even more difficult.
In Finland, the characteristics and implications of the Swedish model are subject to an ongoing debate. The article offers plenty of important ingredients for this discussion. To begin with, it seems that the overall effects of the Swedish model are governed not only by the formal rules but also by the implicit conventions or culture. Therefore, the forces that ultimately sustain the social norms need to be better understood to assess how the explicit rules would work in a different institutional setting. In the end, the long-term success of any wage formation model depends on the commitment of the parties involved.
Other details also matter. The effects of the wage formation model on average wages, productivity and employment depend on how it is implemented and how other institutions adapt to the change. For instance, the use of opening clauses and general applicability of collective agreements are also likely to have a significant effect on the relationship between the wage formation model and employment (Obstbaum and Vanhala, 2016). This adds to the complexity of transferring “best practices” across national borders.