Unemployment rises

Following a long period of low unemployment in Norway, the number of people out of work started growing in late 2002, and the unemployment rate is expected to have risen from 3.6% in 2001 to 3.9% in 2002, and is predicted to hit 5% in 2004. The main reasons are low growth in the world economy and a decline in the competitiveness of Norwegian industry. The rising unemployment has contributed to renewed debate on incomes policy and interest rates.

In late 2002, unemployment began to rise in Norway after a long period when it stood at low levels. The rising trend in unemployment results from low growth in the global economy and a decline in the competitiveness of domestic industries vis-à-vis Norway’s main trading partners. The problems experienced by national manufacturing industry have raised particular concerns. These developments have led to discussion of a possible revitalisation of incomes policy cooperation and generated debate about the present interest rate policy of the Bank of Norway (Norges Bank).

Increasing unemployment

Both the Directorate of Labour (Arbeidsdirektoratet) and Statistics Norway (Statistisk Sentralbyrå, SSB) have drawn attention to the fact that unemployment is on the increase in Norway. In October 2002, the number of registered unemployed people reached 77,000, which constituted a growth of approximately 21% compared with the same month in 2001. Figures from SSB’s Labour Force Survey (AKU) confirm that unemployment is rising. Both the registered unemployment rate as well as unemployment measured by the AKU have increased by 1.1 percentage points from 1998 when they were at their lowest. The unemployment rate has increased among both men and women, but remains higher among men.

Unemployment is expected to increase further. The latest estimates from SSB suggest that the unemployment rate will increase from 3.6% in 2001 to 3.9% in 2002, and will continue to increase to 5% in 2004. The Directorate of Labour estimates that the number of registered unemployed people will increase from an annual average of 75,000 completely unemployed in 2002 to 87,000 in 2003, and states that one must go as far back as the early 1990s to find an increase in the unemployment rate equal to that occurring at present.

Unemployment is rising in most branches and occupations. As in many other countries, redundancies have taken place in a number of companies in the information and communications technology (ICT) and telecommunications sectors, as well as in consultancies. The Norwegian operations of Bravida, an installation service provider partly owned by the Norwegian telecoms company Telenor, provide the most dramatic example of this. At Bravida, the equivalent of 1,000 jobs have been lost during 2002, of which 300 have resulted from 'natural wastage', with the remainder accounted for by voluntary measures and severance packages. More job cuts are expected in other parts of Telenor. A number of the larger consultancies and ICT sector companies are also cutting their workforces. The problems faced by these sectors have contributed to the fact that the increase in unemployment is greater in the region of the capital, Oslo, than anywhere else in Norway.

Norwegian manufacturing industry is also facing the prospect of increasing unemployment. This sector, which is most vulnerable to international competition, is struggling with the effects of a high rate of wage growth, a strong Norwegian krona, which undermines the competitiveness of export industry, and weak international economic growth. So far, the effects of these developments have not led to significant increases in unemployment among manufacturing industry workers. However, the Directorate of Labour points to the fact that there has been a significant drop in the number of registered vacancies in this sector and, coupled with the increased number of redundant workers, there are signs that manufacturing unemployment will increase in the years to come. Furthermore, SSB states that the financial situation and profitability of manufacturing industries will deteriorate in 2003, which will lead to further redundancies.

The Norwegian labour market has long been marked by labour shortages, in particular in branches such as building and construction, and health and social services. The proportion of the working population employed in the public sector has also been increasing for many years. Now the labour market pressure in these parts of the economy is beginning to ease, and unemployment is increasing among occupations previously characterised by a strong demand for labour. One important explanation for this is that many municipalities are struggling with financial difficulties. However, despite the increase in unemployment, some parts of the labour market are still tight, in particular among occupations such as state-registered and -enrolled nurses.

Commentary

The growth in unemployment in Norway is seen as being closely connected to developments in the international economy, but also to problems particular to the Norwegian situation. High wage increases in the 2002 bargaining round (NO0206105F), high interest rates and a strong Norwegian currency are among the factors that are creating problems for Norwegian companies.

Most commentators are of the opinion that the 2002 wage settlement proved to be too costly in terms of Norwegian industry’s competitive standing. Preliminary estimates suggest that the nominal wage growth for 2002 was 5.4% (although not more than approximately 4% among blue-collar workers in manufacturing industries). Combined with low inflation, the implication is that the 2002 settlement generated the highest real wage growth in Norway since 1975. The Bank of Norway asserts that the wage growth rate in Norwegian manufacturing industry has on average been 2 percentage points above the wage growth rate of the country's main trading partners during the past five years. Previously, this was balanced by a weakening of the Norwegian currency vis-à-vis other currencies. In recent years, however the value of the Norwegian krona has been significantly strengthened, which contributes to the problems faced by national industry.

Both the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO) and the Confederation of Norwegian Business and Industry (Næringslivets Hovedorganisasjon, NHO) are worried about developments in manufacturing industry, which is an important reason why the social partners and government met in late 2002 (NO0209101N and NO0211103N) to deliberate the basis for the forthcoming 2003 wage settlement. The challenge is to find a model for wage formation that prevents the wage growth rate in the sheltered parts of the economy – including the public sector – exceeding the level regarded as responsible in the light of developments in the economy in general. In 2002, the wage growth level in the public sector was significantly higher than in private manufacturing industry.

The present interest rate level is also causing problems for Norwegian industry. It has contributed to the strengthening of the Norwegian currency vis-à-vis other currencies. Following a reform of monetary policy in 2001, the central Bank of Norway is now to pursue an interest rate policy based on a long-term inflation target regime of 2.5% (NO0106133N). There have been calls in many quarters for the Bank to cut interest rates, stressing the need to take into consideration other factors, such as the unemployment level and currency exchange rate. Thus in December 2002, the Bank of Norway decided, to some surprise, to reduce the interest rate by 0.5 percentage points. The decision met with mixed reactions, but was welcomed by LO and NHO, which had been among the strongest advocates of a cut.

Apprehension about the state of the economy and a lowering of interest rates were also important topics during the 2003 state budget negotiations between the minority centre-right coalition government of the Conservative Party (Høyre), the Christian Democratic Party (Kristelig Folkeparti, KRF) and the Liberal Party (Venstre) and the opposition (NO0210101N). An important goal for the government – as well as a number of opposition parties – was to conclude a budget that does not generate increased pressures in the economy (and thus contributes to a reduction in the interest rate). After several rounds of negotiations an agreement was reached with the opposition Progress Party (Fremskrittspartiet, FrP).

Most commentators believe that the budget contains the necessary rigour. However, the opposition parties to the left criticise the budget for lacking a social dimension, and point among other measures to the fact that some groups of unemployed people will see a reduction in their income as a result of a reform of certain benefit arrangements. Furthermore, the period during which employees receive unemployment benefits will be reduced from three to two years. LO in particular has reacted negatively to the fact that such measures have been initiated at a time when unemployment is rising. Another government proposal, which would have made companies bear more of the costs during redundancies, was dropped during the budget negotiations.

It should be stressed that although there is a temporary downturn in the national economy, the general picture is one of a stable and strong economy, not least due to Norway’s oil and gas revenues. The basically sound state of Norwegian economy has been confirmed by the International Monetary Fund (IMF) in its latest statement on Norway. Experts do not believe that the downturn will be as severe as in the early 1990s. Production is expected to regain momentum from 2004 onwards. Even with an expected rise in unemployment, the unemployment rate will nevertheless be low by European standards. It is worth mentioning that the employment rate is still high in Norway, with 74% of all people between the ages of 16 and 74 in the labour force (either employed or unemployed). (Kristine Nergaard, FAFO Institute of Applied Social Sciences)