On the verge of re-entry: readjustment of labour and the optimal policy towards a postpetroleum Norwegian economy

Abstract

Abstract This thesis examines the petroleum effect in the Norwegian sectoral composition of labour and the consequential effect for a forthcoming re-entry process to a post-petroleum economy. The objective of the thesis is to suggest an optimal policy-mix based on the Norwegian framework of monetary policy, fiscal policy and income policy to minimize the restructuring costs associated with the re-entry process. By use of a comparative sector specific employment analysis, the thesis disentangles the petroleum driven sectoral adjustment of labour. This is conducted by comparing historic and present Norwegian sectoral labour composition to the remaining Scandinavia. At first sight, there is few evidence of an intra-sectoral movement of labour from the Norwegian mainland economy towards the Petroleum Sector. However, the intra-sectoral analysis shows evidence of increasing petroleum-related activities in the mainland economy after the millennium. Yet, the properties of the Norwegian Fiscal Rule ensure sustainable intergenerational redistribution of the petroleum wealth. This implies a modest inter-sectoral readjustment of labour towards a new equilibrium rather than a reversal of the effects following decreasing petroleum activities. The government should conduct economic policy to ease the re-entry. Expansionary monetary policy will be the main response. A lower key policy rate will imply increased cost-competitiveness, which will be beneficial for restructuring and ensure readjustment of labour towards exportable technology and capital intensive industries. This will be central due to the current high share of GDP from petroleum. Monetary policy and automatic stabilizers in the Norwegian economy will be important in limiting the repercussions and further deepening of the recession. Fiscal policy is suggested limited due to uncertainties related to the new Norwegian trend development and potential obstruction of the needed structural shift. Further, long-run considerations and the aim to prolong the positive impulses from the petroleum wealth in the Norwegian economy limits fiscal policy-response.