Monday, 10 December 2012

The Norwegian Salary Bubble

We have previously written about the housing bubble that has been taking shape in Norway. But perhaps a bigger potential bubble, related to the housing bubble, is ever increasing salaries. Since 1999, the Norwegian Labour Cost Index has increased about 82.5%, or an average of about 4.7% a year (reported increase in CPI has been moderate during this period). This increase was driven partly by an increase in salaries for employees in the public sector as about one in three Norwegians work in this sector, financed by the wealth generated from oil and gas exploration (see the series of articles titled A Financial Analysis of Norway for more on this). There is however a limit to how long such an increase in salaries can continue and eventually it will make the private export sector in Norway uncompetitive (already some signs of this happening). As salaries are fairly sticky in Norway due to powerful labour unions, there is a real possibility these increases in salaries will ultimately lead to layoffs and hence higher unemployment rates. And falling house prices.


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