How Well is the Nordic Model Functioning?

Lars CalmforsNordic Council: press lunch

28/10-2014

Background

• Study for the Nordic Council co-ordinated by ETLA in Finland: The Nordic Model – Challenged but Capable of Reform

• Not so easy to define the Nordic Model

Combinations of average living standard and equality

Employment rate, percentage of population 20-64 years old

Employment rate, percentage of females 20-64 years old

Sources of income equalisation relative to the US

Trade union density, percentage of employees

Net income replacement rate for short-term unemployed (first year), per cent

Total tax revenue, percentage of GDP

R&D expenditure, percentage of GDP

Public expenditure and education outcomes

Organisational change and new technology

GDP per employed person, 1991 = 100

Challenges for the Nordic model

1. Maintain high productivity growth - lower productivity growth during the international crisis - falling productivity in Sweden and Norway already before the crisis - international debate 2. Financing of public services - ageing population - Wagner’s law - Baumol’s disease

Challenges for the Nordic model cont.

3. Employment - technological change reduces demand for low- skilled - globalisation - non-European immigrants4. Income distribution - increasing inequality from a low level5. Adjustment capability - Finland: Nokia, steel industry, forest industry

Total 8,0

15-19 år 32,1

20-24 år 14,0

25-34 år 5,6

35-54 år 3,7

55-64 år 3,8

Education

Primary 13,4

Secondary 5,1

Tertiary 3,8

Country of origin

Outside Europe 16,0

Europe outside Sweden 8,7

Sweden 5,2

Unemployment in Sweden 2013

How can challenges be met?1. Productivity - combination of selective and general policies - subsidisation of researchers and researchers in the business sector rather than of research

per se2. Financing of public services - longer working life - retirement age should be indexed to life expectancy - earlier labour market entry for young people: graduation bonus dependent on age3. Employment - school system: focus on weak pupils - higher wages for teachers and more wage dispersion in the profession - accept larger wage differentials (education cannot solve all problems)4. Trade-off between efficiency and income distribuation objectives - wage differentials - tax system - Swedish Earned Income Tax Credit

Requirements on policy

• Improvements can be made in tax policy - property tax - equal taxation of capital income - uniform VAT• Active labour market programmes - earlier focus: weak groups - new focus employers and matching

Differences in wage and PISA results(90/10)

Källor: PISA 2014 och Eurostat Structure of Earnings Survey 2010

121008060402009896

2.20

2.00

1.80

1.60

1.40

1.20

2.20

2.00

1.80

1.60

1.40

1.20

P90/P10P50/P10P90/P50

Wage dispersion in Sweden

Percentilkvoter

Real disposable income for employed and non-employed in Sweden, respectively

The degree of trust