After World War II, the Social Democratic–led governments initiated several key policies to establish the Swedish economic system as a mixed economy. Because the Swedish Social Democratic Party was founded and supported by the Trade Union Federation, its most important objective was a high rate of employment. So, the government was an active user of traditional Keynesian fiscal and monetary policies to stimulate economic growth and low rates of unemployment.
But to achieve high levels of employment, the Swedish governments went far beyond standard Keynesian demand management. The Swedish government pursued active labor market policies. These policies were designed to stimulate and support employment, especially when private market demand might be diminishing. Labor market polices included providing government subsidies to private employers to retain workers that might have otherwise been let go.
Because Swedish workers and employers were so well organized, a feature of the Swedish labor market was consensus bargaining and comprehensive labor agreements on wages and working conditions—that every worker gets and thinks is fair. This was especially important due to the dependence of the Swedish economy on exports.
One of the primary findings of labor market research in the realm of efficiency wage theory is that workers will work effectively, and well, if they think they’re being treated fairly. Swedish workers are paid well, so it’s essential that they should also be very productive, if their products are to remain competitive on the world market.
Source citation: Professor Edward F. Stuart, Northeastern Illinois University
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