The decline of the Swedish model and the limits to active labour market policy

Abstract

The paper argues that the 1990-93 recession in Sweden offered a natural experiment to test hypotheses about Sweden's success in maintaining low unemployment in the 1980s. The paper identifies a fundamental shift in the macroeconomic policy regime in 1991 as the main cause of the subsequent detioration in employment. That shift was undertaken in part because of an exaggerated belief in the efficacy of active labour market policy (ALMP). By 1991 most of the policy instruments of the Swedish Model had already been undermined and ALMP was left with sole responsibility for maintaining employment. There so also a strong body of research finding modest positive effects on the subsequent employment experience of participants for improved placement services and assistance with job search, but the result for the other components of ALMP, such as training, are at best ambiguous. That suggests that policy in Britain in recent years has been moving in the right direction, with more emphasis on the programmes run by the Employment Service, less emphasising on training and a sceptical approach to the large scale implementation of wage subsidies. The key lesson from the experience of Sweden in the early 1990s is that an inflated view of the efficacy of ALMP can lead to the fatal neglect of other policy instruments