Sweden: Pay determination under the spotlight

The current system of sectoral pay determination, supplemented by local negotiations, appears to work well in Sweden. However, pressure is building up for change in order to ensure that this system can weather fluctuations in the economic cycle. The social partners have their own reasons for advocating reform but have tried and, so far, failed to negotiate any changes. It now appears likely that the Government may step in and propose legislative amendments of some kind. We review the context and the current debate.

The issues of pay determination and the framework of regulations governing industrial conflict and dispute resolution have been the focus of attention amongst the Swedish social partners for the best part of two decades. A wide range of proposals aimed at reforming regulations governing industrial action and mediation in industrial disputes have been put forward at intervals since the beginning of the 1980s, but to no avail. In recent months, however, the issue has assumed increasing importance, largely due to government impetus, with the Ministry of Labour threatening possible legislation unless the social partners can reach a negotiated agreement. Employers and unions are both keen to reform the current system to some extent. The blue-collar trade union confederation LO would like to be involved in the central determination of pay in order to pursue its strategy of solidaristic pay bargaining which it hopes would serve to reverse the widening of pay differentials which has taken place since the demise of central pay determination. For their part, the employers - in the form of the central employers' organisation SAF - would like reform in the direction of more flexibility, particularly with regard to recruitment and dismissal.

Background

Pay bargaining and the mechanisms of pay determination have always held something of a special place in the history of Swedish industrial relations. From the 1950s, bargaining was conducted within a central framework - agreed between the SAK, the LO and the white-collar trade union cartel PTK - as part of the much-vaunted "Swedish model" of economic development. Further negotiations were then conducted at sectoral and local level. However, this model began to break down in the 1980s and the central determination of pay ended with the national employers' organisation SAF's decision in the mid 1980s to withdraw formally from central negotiations. Inflation rose and wage increases kept pace with the ever-increasing prices, reaching double figures by the end of the 1980s. The wage-price spiral was brought to an end by the conclusion of the 1991 Rehnberg agreement, negotiated by the social partners but overseen by the Rehnberg Commission, set up by the Government and headed by Bertil Rehnberg, former head of the national labour market board AMS. This agreement bound the social partners to a two-year national accord stipulating low increases in both the private and the public sector. The Rehnberg agreement also placed an obligation on the social partners to devise a system of pay determination which would withstand fluctuations in the business cycle, and the debate on the possible contours of such a system has been underway ever since.

The current situation

In the meantime, however, pay in Sweden has been determined by sectoral collective agreements since the early 1990s. The favoured duration for these agreements is currently three years, with the most recent rounds concluded in 1995 and 1998. Certain sectors act as pacesetters, informally influencing the majority of the other sectors. The lead sectors are usually large export-oriented sectors, such as the metalworking industry and the paper industry. The social partners in the public sector largely base their demands and offers on the settlements which have been concluded in the private sector. In addition, under the so-called "EU norm" formula devised in February 1995 in preparation for that year's bargaining round by the Edin group of trade union economists headed by LO chief economist Po Edin, pay increases are matched to national and European inflation rates and are kept within the range of pay increases in other European countries in order to preserve the competitiveness of the Swedish economy. This was one of the guiding principles during the 1995 and 1998 bargaining rounds.

There is currently an animated debate in Sweden about the link between pay increases and unemployment. The Edin group published a report in 1997 stating that pay in Sweden had increased faster than pay in competitor European countries, a development which it maintained would have a detrimental impact upon employment. However, some commentators dispute this link, pointing to recent research undertaken by the Nordic Council of Ministers which reveals a negative connection between pay and unemployment, showing that high-unemployment regions are often low wage regions due to the weaker position of trade unions in these areas, coupled with low wage expectations.

In 1997 an agreement providing for a framework for collective bargaining was concluded by the social partners in industry. This agreement was held to have worked well during the 1998 round, contributing to the overall smooth running of that round. For an overview of this accord, see the box below. This accord followed an agreement in local government (although that deal failed to prevent a strike in 1995) and has since been emulated successfully in parts of the commerce sector in the form of an agreement between the union HTF and Swedish Commerce.

Pay settlements are thus currently negotiated at industry level and typically provide for a set increase, plus a further amount for distribution at local level, thus engendering further local-level negotiations.

Pressures for change

However, although it is undisputed that this system appears to work well under the current circumstances and the 1998 round was held to have passed off particularly smoothly, there are a number of concerns and pressures for change from both employers and unions.

From the employers' point of view, there are five main concerns. First, there is a realisation that although the current system works well in the present labour market climate of open unemployment of 5.4%, if unemployment were to fall and levels of near full employment were to be reached, this may lead to a wage-price spiral of the kind experienced during the late 1980s. Open unemployment is defined as the number of people who have applied for work through the state employment agency and are included in a state statistics office survey of people who have been out of work for one month. General unemployment, which also includes people engaged in active labour market measures such as training schemes, is currently 9.6%,

Second, there is a perceived need to keep wage inflation under control if unemployment is to be brought down. Third, there is a view that the present legislative framework in the area of labour and social policy is an obstacle to economic growth and an increase in employment. Fourth, tax reform, in the shape of reducing taxation, is perceived to be necessary to keep skilled employees in the country and to stop companies relocating their headquarters outside Sweden in order to avoid high Swedish corporation taxes. Fifth, employers maintain that Sweden should make a commitment to join European economic and monetary union (EMU) in order to preserve the competitiveness of Swedish business.

The trade unions have their own concerns, principally comprising the view that the central social partners' organisations should be more involved in pay determination as, they maintain, this is the only way to ensure a fair distribution of awards and to guarantee that wage inflation does not return during periods of fuller employment. The LO supports this view particularly, as a central role in pay determination is a key way in which it can pursue a solidaristic policy of decreasing pay differentials and ensuring that workers are paid the same for work of equal value across industries.

The Oberg Commission report

In 1997, after a period of careful consideration of the social partners' views and concerns regarding the reform of pay determination, the Government decided to appoint a Royal Commission to review the issue and propose reforms. The Oberg Commission, headed by the expert economist, Svante Oberg, issued its report on 30 November 1998. It made a number of proposals and recommendations aimed at facilitating the conclusion of collective agreements and avoiding the incidence of industrial action.

Its main recommendation was the setting up of a new mediation authority which would have wider powers than the existing body, as follows:

  • in order to fulfil its task of promoting a "well-functioning" system of pay determination, the mediation authority would have the right to appoint a mediator without the consent of the parties to a dispute, in addition to the right to request the attendance of these parties at meetings. However, its powers would not extend as far as the right to impose a settlement;

  • the power to commission studies on pay statistics in other European countries which would then be contained in an annual report, which would also explain the economic context to pay negotiators; and

  • the task of promoting the coordination of collective bargaining, with the key aim of achieving simultaneous expiry dates for collective agreements.

    Other recommendations included:

  • increasing the notice period for strike action from the current seven days to 14 days. Mediators would also be given the power to postpone industrial action for 14 days in order to allow a "cooling off" period;

  • in order to achieve a balance of power between unions and employers, under the principle of "proportionality", industrial action should not result in significant costs for other parties which are out of proportion to those incurred by the party taking the action;

  • there should be a limit on the incidence of sympathy industrial action and the prohibition of action against family enterprises and very small enterprises, such as sole traders; and

  • a tripartite council should be established, charged with the task of promoting understanding between the social partners.

    Employers generally welcomed the proposals, seeing them as supporting employer views on limiting the right to strike. The SAF stated that the proposed changes to legislation governing industrial action would be welcome, although it expressed reservations about plans to increase the power of the mediation authority.

    Trade unions were much more explicit in their rejection of the proposals, maintaining that any changes in legislation aimed at limiting the right to strike would be unacceptable. For an overview of current provisions governing conflict and dispute resolution, see the box below.

    Talks on an alliance for economic growth

    As potential legislative changes of this kind were not acceptable to the trade unions, they began to think of alternatives. Neither trade unions nor employers were keen to see any kind of imposed framework, along the lines of the Rehnberg accord. LO therefore subsequently decided that it would be preferable to try to negotiate an agreement with employers, aimed at going some way to meet employer demands for lower taxation and increased flexibility, in return for commitments on issues championed by trade unions, such as increased investment in training.

    LO therefore proposed that an "alliance for economic growth" be negotiated between employers and unions at central level. Talks were opened between the LO, the white-collar trade union confederation TCO, the academic trade union confederation SACO and the central employers' organisation SAF at the end of 1998. The parties tried to agree on recommendations regarding a broad range of issues, including employment legislation, taxation, training and general competency, and the possibility of Sweden joining EMU. LO was prepared to support employer demands for reductions in payroll taxes and to back early Swedish entry into EMU in the hope of securing some form of role in a centralised framework capacity in the next bargaining round. However, employers remained opposed to any form of centralised framework coordination of pay bargaining, with the SAF stating that it did not have a mandate from its members to participate in any kind of pay determination at central level. In addition, the TCO stated that its member unions would not be willing to give it any role in centralised pay determination.

    The "alliance for economic growth" talks were therefore broken off just before Christmas 1998, largely because no agreement could be reached on the issue of a central framework for pay determination, although the parties did manage to identify what they saw as the main problems currently facing the Swedish economy.

    The trade unions maintained that it was SAF which effectively halted the negotiations by presenting proposals which it saw as final. The unions insisted that they wanted to continue the talks and were aided in this ambition by the Labour Minister Mona Sahlin, who subsequently asked Mr Oberg and former Prime Minister Ingvar Carlsson to mediate between the parties, with the hope of reaching an agreement. However, this approach did not achieve the desired results - a report issued in March 1999 showed substantial and continuing differences between unions and employers on most of the areas discussed, including the issue of mediation in the case of industrial disputes.

    What happens next?

    It would appear that all the avenues for a negotiated amendment to the current pay determination and dispute resolution framework have been exhausted. Commentators note that all attempts to build a central element into the current system were probably doomed to failure from the outset, as the SAF was always unlikely to get a mandate from its members. Similarly, white-collar unions would not be happy to allow the TCO to act centrally.

    LO, seeing that a negotiated solution is now unlikely, maintains that there should be no legislative amendments to the current system. It holds that framework agreements such as the 1997 industry deal, and other such deals in local and central government and parts of the commerce sector, are the way forward and similar accords should be negotiated in the remaining sectors of the economy. LO also notes that the problems associated with full employment are at present theoretical and believes that the existing institutions are flexible enough to adapt to such a situation, should it occur.

    However, employers still hold a different view, maintaining that legislation needs to be changed in order to give employers more freedom to recruit and dismiss workers and keep pay growth under control.

    The Government has repeatedly threatened the social partners with legislation if they fail to reach agreement. In the latest development, Ms Sahlin has announced the possibility of legislation prohibiting strike action against small, family-owned enterprises. She has stated that a Bill is being prepared which would stop trade unions picketing small companies as a means of persuading them to sign collective agreements. This tactic has recently been deployed successfully by trade unions in the hotel and restaurant sector. However, commentators are noting that as most trade unions have already signed agreements prohibiting this kind of industrial action, this may be read as a largely symbolic gesture to appease employers.

    The Green Party also recently tabled a parliamentary motion aimed at relaxing the seniority rules governing termination of contract in small companies. The proposal was accepted recently by parliament (by a majority of one vote), but it is thought unlikely that the Government will propose a Bill on this issue before the end of next year.

    Ms Sahlin is thought to be drawing up a wider legislative programme based on the Oberg Commission's recommendations and is still under considerable pressure from employers to limit the right to strike, relax existing security of employment legislation - which governs areas such as termination of contract - cut income and corporation tax and make a decision to take Sweden into EMU. These are all measures which employers insist are vital in order to achieve economic growth and increase employment.

    Ms Sahlin is likely to present her proposals to parliament this autumn, although while some changes to the present mediation system are expected, they are widely anticipated to be minor. The role of the mediation office is expected to be strengthened somewhat and the timetable governing collective bargaining and notice to take industrial action is expected to be amended in order to bring it into line with that of the 1997 framework accord in industry. However, certain proposals are likely to be dropped, such as the proportionality principle in the case of strikes and lockouts.

    Key points of the 1997 "negotiating agreement for industry"

    This framework accord was signed on 17 March 1997 by a total of eight industry sector trade unions representing the following industries: civil engineering; chemicals; clerical occupations; food; metalworking; paper; and forestry. The deal was also signed by a range of 12 sectoral employers' organisations. It is reported to cover a total of 800,000 employees, accounting for around one fifth of the Swedish workforce. It sets out a framework within which bargaining should be conducted, aided by an independent mediator, and provides for the establishment of: a joint industrial committee charged with the task of monitoring the application of agreements; and an advisory economic council made up of four independent economists.

    The timetable for negotiations is as follows:

  • three months before the expiry of a collective agreement, bargaining will open with the aim of concluding a new agreement. At this stage, employers and unions will set out initial demands and offers;

  • one month before the expiry of the existing agreement, employers will submit a final offer, which must be either accepted or rejected by trade unions;

  • if the offer is rejected, negotiations subsequently break down and industrial action is notified, an independent mediator - who has been appointed before the start of the negotiations - has the power to order a cooling-off period of a maximum of two weeks;

  • during this cooling-off period, the mediator may try to facilitate a negotiated solution between the two parties. During these negotiations, the mediator has the power to oblige both parties to develop and substantiate their demands and offers. He or she may also refer to the above-mentioned advisory committee as to the practicability of demands and offers;

  • if no solution can be found, the matter may be referred by the mediator to an arbitrator, provided that both parties agree (this provision has so far not been tested); and

  • finally, if all efforts to find a negotiated solution fail, the parties are then free to resort to industrial action, following the expiry of the existing collective agreement.

    This deal underwent its first test in the 1998 bargaining round, during which the majority of industries negotiated new three-year collective agreements. This round passed off extremely smoothly in the private sector particularly, and the deal was hailed as a success.

    This accord was preceded by an agreement in local government and has since been emulated in the commerce sector. Trade unions now maintain that this kind of negotiated framework is the way forward in ensuring peaceful bargaining rounds and keeping a lid on pay growth.

    Conflict and dispute resolution in Sweden - current provisions

    Industrial action and dispute resolution is regulated by the 1976 Co-determination Act (Medbestämmandelagen).

    The right to engage in industrial action in the case of both public and private sector employers and employees is set out in the Swedish Constitution. The law permits all kinds of industrial action as long as it is not a criminal action. Thus employees may engage in a wide range of industrial actions, including strikes, boycotts, blockades, overtime bans, go-slows and work-to-rules. They may also engage in sympathy strikes in the private sector and in the public sector if the action is in support of other public sector workers. Similarly, employers may engage in lock-outs.

    The law does however place a restriction on the circumstances in which industrial action may be taken, essentially prohibiting such action over matters covered by a valid collective agreement. Thus, the law distinguishes between two types of industrial conflict:

  • conflicts of right (over the interpretation of matters contained in a collective agreement); and

  • conflicts of interest (over matters which are not regulated by a collective agreement).

    In the case of a dispute involving industrial action by either party over a conflict of interest, the following procedure must be adhered to:

  • written notice of plans to take industrial action must be given to the other party and to the state conciliator seven days in advance of the planned action (there is no requirement for a ballot or similar procedure to take place);

  • if there appears to be a risk of a major dispute or either of the parties request it, the state conciliator may appoint a mediator in order to facilitate a settlement. However, the parties are under no obligation to postpone their planned industrial action and the mediator has limited powers only - he or she has no power to impose a settlement, although the parties must attend hearings when requested to do so; and

  • if the dispute is deemed to affect the national interest, there is statutory provision for parliament to legislate to end the dispute, although this measure is considered very much to be a measure of last resort and has been used only twice since 1945, in what were considered to be essential services.

    In disputes concerning a conflict of right, industrial action is not lawful as the parties to a collective agreement are bound by a peace clause while that agreement is in force. These conflicts are usually solved by means of negotiation, following procedures set out by collective agreements, although there is provision for cases to be referred to the Labour Court, which will issue a final decision.