Monetary policy cannot influence employment in the long term; it can only make it vary around an average level that is determined by other factors. Keeping inflation low and stable is therefore the Riksbank’s best contribution to creating good conditions for favourable economic developments in Sweden.
Average employment is determined by structural factors
When a person becomes unemployed it may take time to find a new job. If many people are looking for jobs, the average unemployment will be high. But if the labour market functions efficiently, it will simplify the matching process between job vacancies and job seekers. Employment will then be higher on average.
Average employment is also affected by how wage formation works. If the trade unions negotiate too high wage increases, companies’ production costs rise. Companies must then increase their prices, which reduces demand for their products. To meet the lower demand, companies are forced to cut down on staff. Employment will then be lower.
Average unemployment and employment are thus determined by structural factors such as the efficiency of the matching in the labour market and wage formation. To influence average employment or unemployment it is therefore necessary to use other measures than monetary policy; for instance investments that improve the way the labour market functions. This is what is known as structural policy and lies within the Government’s field of responsibility.
Monetary policy can influence how employment varies…
By changing the repo rate the Riksbank affects aggregate demand in the economy. A lower repo rate leads to an increase in demand. To meet rising demand companies may choose between raising their prices and increasing their production. In the short term it may be costly to raise prices too much. Companies therefore choose to raise their prices gradually and to partially meet the rising demand by increasing production. This means that the companies need to employ more staff. Employment then increases. But as prices rise, production returns to its original level. The companies then have to get rid of the staff they have recently employed. Monetary policy thus has no lasting effect on employment; the only thing that happens is that prices rise.
... but all variations are not due to monetary policy
Monetary policy can thus only affect how employment varies around its trend level. But it is far from just the interest rate that affects companies’ behaviour. Sometimes companies may not employ more staff even when the interest rate has been cut; instead they increase production using the staff they already have. Then productivity rises, which also affects the variations in employment. Monetary policy is thus only one of many factors that influence the variations in employment and unemployment.
Average unemployment and employment are thus determined by structural factors such as the efficiency of the matching in the labour market and wage formation.