Lars Calmfors’ article provides an insightful and valuable survey of wage-setting practices in the Nordic countries. From a macroeconomic perspective, Denmark, Norway, and Sweden exhibit striking similarities in their wage-setting mechanisms. These countries follow a pattern bargaining model, where the manufacturing sector establishes a norm for wage growth across the broader economy. Peak organisations – particularly on the employers’ side – play a crucial role in upholding this norm. While institutional arrangements vary across countries, including in terms of government involvement, these differences appear to have had only a limited impact on macroeconomic outcomes. In Finland, the wage-setting system is less firmly anchored in pattern bargaining, and trade unions in the public sector oppose the wage norm.
Calmfors highlights that wage-setting in the Nordic countries has aimed to maintain strong international competitiveness. The wage developments since the early 2000s, along with the substantial trade balance surpluses in Denmark, Norway, and Sweden, suggest that this approach has indeed ensured strong competitiveness.
Pattern bargaining in the Nordic countries can be viewed as a mechanism for internalising negative externalities in wage-setting that helps prevent excessive sectoral wage pressure from triggering adverse macroeconomic outcomes. Calmfors raises the question of whether, for this reason, pattern bargaining could be considered a form of centralised wage-setting in disguise. However, he also notes that the labour market parties deliberately dismantled the institutional framework of the centralised system, which serves as a strong argument for treating pattern bargaining as distinct from the centralised form. That said, the article is less explicit about the key differences between the two systems.
Based on Norwegian experiences, one key advantage of pattern bargaining compared to centralised wage setting is that pattern bargaining allows greater flexibility in relative wages within sectors. In the public commissions on wage-setting that I have chaired, there has always been a consensus among the labour market parties that the wage norm applies to the overall wage growth within a sector. However, the distribution of wages – i.e., the relative wages of different groups of workers within the sector – should be determined within each sector, allowing for flexibility at the local level as well. The merits of local flexibility are consistent with empirical evidence in OECD (2018), suggesting that countries with organised, decentralised, and coordinated collective bargaining – such as Denmark, Norway, and Sweden – tend to experience higher productivity growth than those with more centralised wage-setting systems.
One of the central discussions in the article is whether there are compelling reasons for the traded/manufacturing sector to serve as the dominant wage leader. Calmfors argues that, from a theoretical standpoint, the key factor is the pattern bargaining system itself, while the specific sector leading the wage-setting is less significant. For countries with inflation targeting, such as Norway and Sweden, this conclusion appears well supported by the theoretical literature reviewed in the article.
In my view, the leading role of the manufacturing sector reflects, in part, institutional and organisational structures. Employer organisations in manufacturing have both the incentive and the capability to ensure that wage growth aligns with international competitiveness and inflation targets. These organisations also have the strength, expertise, and leverage – through high coverage by collective bargaining agreements – to enforce wage moderation. In contrast, organisations in the nontradables sector tend to be smaller and weaker, with lower coverage, making it more challenging for them to take on a wage-leading role.
Abstracting from institutional and organisational factors, one could argue that, in small open economies, the role of wage leader should ideally be assigned to “footloose” industries (Rødseth, 2000). Footloose firms produce traded goods without being dependent on local inputs other than labour. Thus, they can relocate freely across countries, as they are not tied to a specific location by physical, technological, or economic constraints. If the wage level becomes too high, such companies will eventually move their operations elsewhere. To ensure balanced trade in the long run, the wage level must be consistent with maintaining a sufficiently large number of footloose firms. In contrast, firms in the nontradables sector and those in the tradables sector benefiting from valuable natural resources may remain viable even at higher wage levels than in other countries, although they, too, would suffer from the negative effects of excessive wage growth.
The distinction between footloose and resource-dependent tradables industries is perhaps particularly relevant in Norway, where periods of high oil prices have led to concern about high wage growth in firms benefitting from profitable supply contracts in the oil sector.
The second key issue in Calmfors’ article concerns the potential impact of the current wage-setting system on labour allocation. He argues that ageing populations will necessitate a shift of labour towards the public and nontradables sectors, but that pattern bargaining – anchored in the ability to pay within the tradables sector – may hinder this reallocation. If the norm-setting process allowed for greater flexibility in relative wages, it could facilitate labour shifts in response to changing demands. Calmfors reiterates his earlier proposal that deviations from the wage norm – either upward or downward – should be permitted in cases of significant labour market imbalance.
The effects of the wage-setting system on labour allocation are highly relevant, and Calmfors’ analysis of this issue, both in this paper and in earlier contributions, is valuable. The extent to which relative wages can be adjusted within a system of strong, norm-based pattern bargaining is a complex and contentious issue that may be difficult for labour market parties to handle. Independent theoretical and empirical research can help provide a broader understanding of the trade-offs involved.
The remit of Holden IV utvalget (2023) – a public commission comprising representatives from labour market parties, two ministries, and independent experts – included discussing challenges to wage formation caused by changes in future demand for labour due to an ageing population. The commission found that labour allocation across industries in Norway has changed significantly since 1970 without any clear pattern of higher wage growth in expanding industries. This reflects that labour allocation is influenced by factors beyond wages, such as the capacity of the education system, working conditions, and overall labour demand. However, the large increase in employment in the healthcare sector was facilitated by the higher numbers of women entering the labour market in the 1970s and 1980s and sustaining further growth in this sector may prove more challenging.
The Holden IV utvalget argued that a situation with strong labour market pressure and changes in relative wages could lead to an “everyone against everyone” dynamic in the labour market, which may result in high price growth, greater wage disparities, and weaker long-term development – outcomes that would be detrimental to the vast majority. At the same time, the commission also acknowledged that if a sector were to experience a sustained and significant labour shortage, despite extensive policy measures, the situation would not be sustainable. Wage formation must be sufficiently flexible to support an efficient allocation of labour, ensure quality in welfare services, and enable necessary structural changes.
In my view, the labour market parties’ conclusion that wage formation must remain sufficiently flexible to support an efficient allocation of labour should, to a large extent, address Calmfors’ concern about relative wages. While interpretations of this principle may vary in practice, it provides public sector employers with the scope to raise wages for some groups when necessary to attract labour. However, tight budgets in the public sector are likely to limit the potential for extra wage increases.