Sweden: Wage setting outside collective agreements

A new study examines Sweden's wage formation process and how different types of collective agreement affect it. It concludes that wage formation in practice is often less localised than collective agreements allow for and that the norm-setting ‘cost mark’ set by the industrial sector is still important for determining the level of wage increases.

Background

The Swedish collective bargaining system is very pervasive, with 85% of the private sector labour force covered by collective agreements. These collective agreements regulate wage setting for different sectors and occupations in varying ways. However, in general the so-called 'cost mark' set by the social partners in the industrial sector is used as a norm for the level of annual wage revisions in the labour market.

Research objective

A book-length study on wage formation in practice (Karlson et al, 2014) by researchers at the Ratio Institute, an academic organisation with ties to the Confederation of Swedish Enterprise (Svenskt Näringsliv), attempts to describe the wage formation process in the Swedish economy by posing four questions:

  1. How does wage formation work in practice in different companies and sectors?
  2. How do different types of collective agreements affect wage formation?
  3. How do different forms of wage formation affect wage setting?
  4. What consequences does this have on corporate ability to develop?

In answering these questions, the researchers seek to test their underlying hypothesis that local wage setting and strategic wage setting have a positive effect on corporate development.

Throughout the book, the authors' terminology defines wage formation as the process and structure that shapes wage setting, while wage setting refers to the actual setting of wages. Hence, if wages are formally set in a workplace but strongly affected by macro forces, wage setting is local but wage formation centralised. Strategic wage setting refers to the use of wage setting to promote corporate development, for example, as a tool to recruit, retain or develop a competent workforce.

Methodology

The study involved a case study approach and a quantitative macro analysis. The case studies cover 27 Swedish private sector companies. The authors conducted 80 semi-structured interviews with union representatives and wage-setting managers in these companies which were selected to be roughly representative of the Swedish economy and to illustrate important specific or general trends in the economy and labour market.

The quantitative macro analysis examines the effect of different types of wage formation on corporate profitability and productivity in 2010. It uses a quantile regression analysis based on company data from Swedish Statistics (SCB) and collective agreement data from Swedish Enterprise.

Findings from the case studies

The case studies show that the cost mark is important for wage formation both in sectors with centralised wage setting and sectors with decentralised wage setting. A majority of the enterprises in the case studies use the cost mark as a ceiling for aggregate wage increases, while some used it as a floor.

To some degree the cost mark is also 'norm-setting' since it creates an expectation among the workforce that wages should increase annually even among those with 'numberless agreements' (that is, centrally agreed collective agreements with no provisions on wage increases) or with no individual guaranteed increase (that is, centrally agreed collective agreements with an agreement on the general wage increase, but where individual pay is set by local bargaining). See the EurWORK article, Trend toward collective agreements with no fixed pay increase, for more information on this topic.

The analysis concluded that local wage setting does not necessarily lead to local wage formation. Often an employer found it more practical to implement a generalised pace of wage growth, even though the agreement may have allowed for differentiation. There were two main reasons for this pattern. Some employers found that more egalitarian wage increases promoted a productive sense of fairness among the workforce, especially given norm-setting and the expectation that wages should increase for everyone each year. Other employers found that the cost of implementing a transparent and fair mechanism for wage differentiation involved transaction costs larger than the derived benefit. This was especially the case with agreements that included a guaranteed minimum increase for each employee, alongside a pool of money to be distributed individually. As a result of the tendency towards centralised wage formation even when wage setting was formally local, companies had a limited ability or willingness to use strategic wage setting as a tool for corporate development.

For a local, differentiated wage formation to work, the study found it was crucial that the employees considered differentiated wages to be fair. The authors identified two different attitudes towards fairness: egalitarian and proportional fairness. They found that for employees to accept the concept of proportional fairness (where each should be paid to reflect their productivity), it is important that the wage-setting process is considered fair.

Important factors for this sense of procedural fairness are that the process is transparent, is based on clear criteria and that the wage-setting process is anchored in performance appraisals with employees. A less transparent wage-setting procedure, however, is likely to strengthen a more egalitarian attitude towards fairness.

The authors further found that, since collective agreements in Sweden largely shape wage formation through the annual wage revisions, many companies instead prefer to use pay levels for newly hired employees and career ladders for strategic wage setting. Companies reward workers in a way that circumvents the often inflexible annual wage revisions described above by hiring new employees at different rates based on their background characteristics and by creating career ladders with clear pay jumps (for example, senior and junior positions). This practice was more common among white-collar than blue-collar workers, since blue-collar collective agreements often set entry-level wages and sometimes also standard wages for specific positions, and hence have a greater influence on these aspects of wage setting. Another way to use strategic wage setting that avoided the annual revisions was by using bonuses or profit sharing schemes, rewarded either individually or collectively.

In summary, the case studies revealed that:

  • wage formation in Sweden tends be less local than strategic wage setting and strongly influenced by the cost mark;
  • wage formation is more local among white-collar workers than blue-collar workers.

It is also more common to use variable pay levels when hiring new employees, and career ladders and bonuses to differentiate wages for white-collar workers. As a result, strategic wage setting is used more among white-collar than blue-collar workers. The study also found that a sense of procedural fairness and transparency is important for strategic and local wage setting to be effective.

Results of the quantitative analysis

The quantitative analysis generally found a negative correlation between profitability and a centralised wage formation, but this correlation disappeared when sector was controlled for. There was also no statistically significant correlation between wage formation and productivity.

The authors therefore concluded that, based on the statistical analysis, nothing definite can be said about the effect of centralised or decentralised wage formation on the profitability and productivity of companies.

Commentary

The shift in the Swedish labour market towards numberless and local wage-setting agreements has raised concerns that the industrial norm (the cost mark) is being replaced by a 'normless' labour market (Swedish Mediation Office, 2014). The Union of Metalworkers (IF Metall) has warned of such a development, while Swedish Enterprise has simultaneously defended both the cost mark and local wage-setting agreements.

This study provides important further knowledge about wage formation, illustrating that even with local and numberless agreements, wage formation can still be strongly influenced by the cost mark.

The preliminary results of the study were discussed in July 2014 at a social partner seminar, where the vice-chair of Swedish Enterprise cited the study as evidence that wage formation in Sweden should be modernised to allow for increased wage differentiation.

In an email to the authors of this EurWORK article in December 2014, the head of IF Metall’s policy department Erica Sjölander remarked that the study shows that there is not necessarily conflict between the cost mark and local wage setting as long as the social partners develop good processes for local wage formation.

References

Karlson, N., Lindberg, H. M., Larsson, A.-S., Stern, L. and Lundqvist, T. (2014), Lönebildning i verkligheten – Kollektivavtalens effekter på företagens lönesättning och utvecklingskraft [Wage formation in reality - Collective bargaining effects on corporate salaries and development potential], Studentlitteratur, Lund.

Swedish National Mediation Office (2014), Avtalsrörelsen och lönebildningen 2013 [Wage bargaining and wage formation in 2013], Stockholm.

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