Matthew Yglesias on Denmark and Sweden

What really accounts for Sweden's steady employment numbers, and Denmark's drop?

Christof Stache/AP/File
In this Oct., 2008 file photo Frank-Juergen Weise, CEO of the German Labor Office, follows a news conference in the labor office in Nuremberg.The unemployment rate in Germany, Europe's biggest economy, declined to 8.5 percent in March. Sweden has maintained a strong labor market, with number of formally employed persons roughly unchanged compared to a year ago.

This is an old one (though only today discovered by me) , but Leftist blogger Matthew Yglesias, tries to explain away the labor market facts of Sweden and Denmark that I discussed in March (with Casey Mulligan as middle man).

The argument advanced by Yglesias was that this was due to Sweden having a floating (or at the time actually sinking) exchange rate, while Denmark pursued a fixed exchange rate policy (relative to the euro).

But if Yglesias had bothered to read my post more carefully, he would have noticed that I noted that the drop in GDP in Denmark and Sweden was roughly similar (slightly smaller in Denmark, in fact), so hypothetical "stimulative" effects from a weaker currency can't explain the Danish-Swedish divergence.

By contrast, improved incentives for low income workers in Sweden through reduced taxes and unemployment- and sick leave benefits can explain this since it will theoretically increase employment more than output. And since the newly employed after all did produce something, it can be inferred that the drop in Swedish GDP would have been even greater without the improvement in incentives.

Even so, it can be conceded that the weaker Swedish currency could to a lesser extent explain this since it generated higher inflation which in turn given a certain level of nominal wages reduced real wages. But given the small difference in inflation that was probably only a minor factor, and at any rate it shouldn't be a factor which leftists should embrace since they normally abhor wage cuts.

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