Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s

49 Pages Posted: 10 Aug 2007 Last revised: 3 May 2019

See all articles by Steven J. Davis

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER)

Magnus Henrekson

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2007

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: Business taxation, Industry structure, Swedish economic performance, Tax effects, Time allocation, Wage-setting institutions, Work activity

JEL Classification: L52, J20, H30, D13, O52

Suggested Citation

Davis, Steven J. and Henrekson, Magnus, Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s (August 1, 2007). IFN Working Paper No. 687. Available at SSRN: https://ssrn.com/abstract=1005330 or http://dx.doi.org/10.2139/ssrn.1005330

Steven J. Davis

University of Chicago ( email )

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Magnus Henrekson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

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