The model described in the previous chapter worked well in an economy where many workers were doing similar tasks, which could be measured so their work could be compared. But gradually, under political and economic pressures, the system began to split at the seams. Several factors were at work. The unions were being pulled in different directions. Workers in profitable sectors demanded higher wages, while the left sought to flatten incomes even further by boosting the wages of the lower paid, regardless of what work they did. In the winter of 1969, thousands of miners launched a two-month wildcat strike in the far north, demanding better wages and conditions, which encouraged further strikes elsewhere.
When Swedish industry was hit by the global slowdown in the mid-1970s, divisions arose between employers. Some began to seek a transition away from mass-production methods towards more flexibility, entailing the dissolution of central wage bargaining; others preferred to hold down wages through the central bargaining framework. Throughout the 1970s inflation grew, and wage rises galloped to keep up. Rising costs forced Swedish governments to devalue the currency repeatedly to save the country’s international competitiveness, further fuelling inflation and wage hikes.
Meanwhile, a proposal gained momentum that companies should place a portion of their shares under the unions’ control, which would increase over time. Employers were furious – these ‘wage-earner funds’ were seen by business as a dangerous attack on private ownership. Meidner is today remembered much more as a proponent of this radical idea than for his work on the labour market – the battle over wage-earner funds left deep scars. Fuelled by arguments such as this, the consensus between unions and business began to disintegrate.
By the early 1980s, the atmosphere of consensus and collaboration between unions and employers had been replaced by a ‘full-blown confrontation regime’, wrote Nils Elvander, one of Sweden’s foremost labour economists. The relationship that had shaped Swedish industry for 40 years was now in crisis. The engineers’ union broke away from central bargaining to strike a separate deal with employers. A few years later, the employers’ federation, SAF, closed down its central bargaining unit altogether. Meanwhile, SAF was mobilising against the unions, and in 1983 organised a demonstration of 75,000 people in Stockholm against the wage-earner funds.
Things came to a head in 1990, when the bursting of a debt bubble sparked a deep recession, bankrupting the banks and inflicting the worst economic shock Sweden had experienced since the 1930s. In three years, public debt doubled, unemployment tripled, and the government’s deficit increased ten-fold. A newspaper front page showed a picture of a newborn child with the headline: ‘Born with a debt of 150,000 Swedish krona’. The country elected its first unashamedly free-market government, determined to put an end to the years of Social Democratic excess. Newspapers and journals across the world proclaimed the end of the Swedish model. In the midst of the crisis, Meidner himself surveyed the wreckage: ‘The Swedish system, balancing private ownership and social control, has broken down.’
The early 1990s was a period when social democracy was in disarray internationally. In the minds of many, the collapse of the Soviet bloc heralded ‘the end of history’ and the triumph of liberal capitalism. Governments raced to distance themselves from what was seen as outdated ideology, replacing state ownership with privatisation while pursing tax cuts and free markets for labour and public services. This transformation was repeated in Sweden, where the Social Democrats were defeated in the polls and then returned to office, but with a programme to continue the deregulation and privatisation started by the interim Conservative government.
Sweden’s business environment started to converge with the rest of Western Europe. Electricity, telephones, railways and the post office were privatised or deregulated, while Sweden’s system of vouchers and choice in secondary education became a model for economic liberals across the world. Academics interviewed for this book talked about a demoralisation and even despair among Swedish Social Democrats at the time, who lost faith in classic centre-left policies. Successive Social Democratic governments cut back on the active labour-market policies that had helped maintain skills and ease the transition between jobs.
However, obituaries for the Swedish model were premature. Unions and employers, referred to in Sweden as the ‘social partners’, had walked away from each other. But behind the scenes, efforts were soon afoot to put Humpty Dumpty together again – despite a global context that emphasised free-market solutions to just about everything. In fact, economic necessity drove them back into each other’s arms.
Swedish business was struggling to grow. Employers were failing to curb a new wage-price spiral – in 1995, despite the highest unemployment since the 1930s, strikes broke out and the average salary increase was above the EU average, after the booming forestry industry set a high benchmark for other sectors. This was a watershed year. Major Swedish export companies, which a decade earlier had been the driving force behind destroying the system of centralised wage negotiation, now changed tack. At the same time, the government prodded union leaders to reach out to employers and put their differences aside. The focus had to be on strengthening Sweden’s competitiveness, without which there could be no wage rises in the longer term.
A leap of the imagination was required. The resulting agreement between the two sides of Swedish industry, signed in March 1997, lacked inspiration only in its title: the Industry Agreement. Almost 60 years since the famous Saltsjöbaden deal (see Chapter 2) that set the tone for three decades of industrial peace, employers and unions signed a document on ‘industrial development and wage formation’ that set out a shared vision for creating a sound economy that could deliver rising living standards. A virtuous circle could be restarted that delivered real-terms wage rises without fuelling inflation or unemployment, while strengthening the competitive position of Swedish industry by developing workers’ competence and skills.
In contrast with Saltsjöbaden, widely seen by the outside world as a cornerstone of the Swedish model after the War, the Industry Agreement has no such reputation – and indeed is largely unheard of beyond Sweden. However, the agreement marks not only continuity with 1938, but its rescue and resurrection after two decades of industrial strife. It ended the confrontation regime and ushered in a new era of cooperation. The importance of personal trust built up between leaders of the two sides ‘cannot be too strongly emphasised,’ Elvander wrote. ‘The foundations of mutual personal trust are the same in both cases: the inevitable antagonisms are not swept under the carpet nor unnecessarily blown up out of proportion; areas of common interest are identified, cultivated and widened.’
Meanwhile, the government established an agency, the National Mediation Office, to keep the agreement on the rails. The Mediation Office is a body unique to Sweden; its task is to find solutions that avoid conflict, but within strict limits set by the needs of the country’s export-oriented sectors. This new flowering of collaboration means that, 20 years after the ink dried on the agreement, wage norms are set centrally for 90 per cent of the labour market.
The tensions between employers and unions that built up in the 1970s and broke out into a bare-knuckle fight in the 1980s marked an ‘extreme crisis’ in the Swedish labour market model, says Anders Weihe, chief negotiator for the engineering employers’ federation, who has been at the heart of discussions with the unions since 1998. Looking back, he says: ‘Did we put Humpty Dumpty back together again? More or less. Our core issue was international competitiveness.’
He continues: ‘Collective bargaining is a very effective instrument – if you have knowledgeable people who are not overloaded with ideology, you can create a system where wage formation works.’
This picture described by Weihe could scarcely be more different from the situation prevailing today in the United States, where bargaining between employers and unions is a relatively marginal activity. In my home country, the United Kingdom, there was a fundamental shift in the 1980s away from centralised bargaining arrangements, as Margaret Thatcher led a series of confrontations with the unions. I will leave it to the reader to decide whether these circumstances have benefited either country.