WILL PERMANENT MASS UNEMPLOYMENT REMAIN I N SWEDEN

The purpose of this article is to discuss if Sweden is now on the verg e of establishing permanent mass unemployment on a scale similar to mo st other Western European countries. Mechanisms in the various welfare systems which previously encouraged labour force participation have r ecently weakened. Among low productivity people and people with little human capital the risk for permanently lowered participation rates is greatest. The reservation wage is to a large extent determined by the level of income security offered by the welfare systems. The reservat ion wage are in many cases above the lowest wages in the labour market . The 1991 tax reform did not reduce the marginal effects for low-inco me earners, and in some cases they were even increased, which restrain s employment opportunities for this group even further. The comparativ ely high unemployment rate in Sweden was a self reinforcing process, w hich presupposed a low level of unemployment. This process may rapidly be reversed in groups where the unemployment rate is high. In order t o prevent mass unemployment the two most important measures are: (i) a reduction of the reservation wage, and (ii) a lowering of the total m arginal tax wedge on labour income.