Why Was Unemployment so Low in Postwar Sweden? An Analysis with New Unemployment Data by Manufacturing Industry, 1935-1948

Sweden is often cited as one of the starkest examples of a country where corporatist policy structures and centralized wage bargaining produced remarkable economic and social outcomes in the postwar golden years. Not surprisingly, previous explanations for Sweden’s full employment period have emphasized this set of labor market institutions which was in place from the 1950s. Alternatively, temporary demand-factors in connection with the Second World War have been stressed as a cause. In this paper, I examine the development of unemployment in Sweden in the 1930s and 1940s and establish two facts: i) unemployment fell continuously from the mid-1930s until immediately after the end of the Second World War, resulting in the low levels of unemployment that would characterize the postwar period, and ii) inflation did not spiral as a result, suggesting restraint in wages over the same period. The fact that unemployment fell before the establishment of Sweden’s postwar labor market institutions suggest that they were not the cause for the full employment economy. The absence of escalating inflation likewise rules out temporary demand-factors such as Keynesian economic stimulus and military conscription. The failure of these factors to explain the change suggests instead that exogenous forces shifted the relationship between wages and unemployment during this period, lining up with similar observations for the UK. The results have implications for the literature on the determinants of unemployment, indicating that neither corporatist institutions nor expansionary fiscal policy played a role in the shift to full employment in Sweden - one of the marking examples of postwar economic success.