Like most rich countries, Sweden struggled to contain fallout from the 2008–09 global financial crisis. After seeing a sharp drop in exports and GDP, Sweden’s central bank, the Riksbank, slashed interest rates from 4.75 percent to 0.25 percent to stimulate growth and spending in the small export-dependent economy. Two years later, Sweden’s economy showed signs of a promising recovery: unemployment fell, exports surged by 12 percent, GDP grew by 6 percent, and the exchange rate for Sweden’s currency, the krona, crept back up to precrisis levels.

Unlike other central banks, however, the Riksbank responded to initial gains in 2010 by tightening the reins on its Great Recession recovery, opting to raise interest rates to 2 percent by July 2011. The move slowed GDP growth, weakened the krona, and put inflation below Sweden’s 2 percent target. It also triggered an increase in unemployment felt across sectors, particularly among low-income and newer employees, suggests research by the US Federal Reserve Board’s John Coglianese, BI Norwegian Business School’s Maria Olsson, and Chicago Booth’s Christina Patterson.

“The large increases in unemployment among low-tenure, less-educated, and younger workers suggest that contractionary monetary policy shocks may exacerbate inequality in the labor market,” the researchers write. They argue that the Riksbank’s policy not only deviated from what other central banks were doing at the time but also broke from the bank’s own long-standing policy of stabilizing inflation and the economy.

The tightening was due to a political shift within the Riksbank at the time, according to the study. Some members started focusing on the problem of rising home prices and household debt, rather than inflation concerns. Lars E. O. Svensson, a member of the Riksbank board in 2010, voted against the move and criticized the decision in an analysis in which he compared the Riksbank’s recession response with that of the US Fed, which kept borrowing rates low.

Using economic metrics and administrative Swedish data sets, Coglianese, Olsson, and Patterson analyzed the policy’s impact on workers between the ages of 16 and 68 who were employed at private-sector companies for at least nine months of each year between 2006 and 2009. In Sweden, 85 percent of all workers belong to a union, so most employees had contracts with collectively bargained wages that were negotiated within sectors and, sometimes, within a company.

Unequal outcomes

When Sweden’s central bank raised interest rates in 2010–11, younger workers and those with shorter tenure, less education, and collectively bargained wages saw the largest increases in unemployment.

Overall, the researchers find, the shock led average unemployment (8.8 percent at the time of the tightening) to rise 1–2 percentage points. Three years after the rate hike, workers on average spent 3 percentage points less of the year employed. The level of labor-force participation fell by nearly 2 percentage points. Notably, Patterson says, job cuts weren’t concentrated in any one industry or in companies that are usually sensitive to rate changes—namely those that produce durable goods, are in greater debt, or are newer or smaller businesses. Those companies did see larger unemployment increases than less-rate-sensitive companies did, but the difference was smaller than expected.

Within a company, younger and less-educated workers were about 0.3 percentage points more likely than veteran workers to be unemployed. Similarly, lower-earning workers, compared with their higher-paid counterparts, were 0.5 percentage points more likely to be unemployed.

As for workers who had been with a company for fewer than six years, they were more than 1 percentage point more likely to be out of work than those who had at least 13 years tenure. Sweden follows a last-in, first-out rule, in which a company’s least-tenured workers must be laid off before similar, higher-tenure workers.

The study concludes that labor-market rigidities amplify the effects of monetary policy. Those rigidities include such policies as a minimum wage, unemployment insurance, and severance pay. In this case, sectors with more rigid union wage contracts had larger increases in unemployment, and individuals in these sectors were less likely to find new jobs and more likely than other workers to switch sectors. The rate hike had little impact on companies with less employee turnover, Patterson says, suggesting that the rise of gig workers or other broad-based changes in labor demand could also shape the effectiveness of future monetary policy.

After the shock, the Riksbank eventually reversed course and dropped the interest rate steadily over subsequent years. In response to the most recent bout of high inflation—numbers Sweden hasn’t seen since the 1990s—in April the Riksbank announced a rate increase from 0 to 0.25 percent.

As central banks around the world grapple with inflation and the potential for another recession, the study offers a window into what might happen when governments act while the economy is still recovering. The United States, for instance, could take heed, although its situation differs: US unemployment was 3.6 percent this April before the Federal Reserve hiked interest rates, inflation is above the Fed’s target (whereas it was below target in Sweden during the time period studied), and only about 10 percent of US workers belong to a union.

That said, “this type of interest rate ‘liftoff’ has become a key subject of study in the monetary policy literature as central banks around the world have experienced interest rates near or at a lower bound following recent recessions,” the researchers write. “Moreover, while the shock that we study is specific to Sweden, which is a small open economy reliant on exports, Sweden has a dynamic labor market with a large domestic manufacturing sector that makes many of the labor market insights relevant for other developed economies.”

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