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During the past 5 years, unemployment has steadily
declined in the OECD, partly as a result of labour
market reforms. This favourable development is
likely to end as the industrial world is entering a major
economic downturn. Beyond these cyclical developments,
major structural changes such as globalisation, demographicchange and climate change are posing major challenges.
Welfare reform is likely to remain at the top the agenda in all
the major economies. These reforms are often firmly contested
as they imply changes in acquired rights. However, doing
nothing is often no solution as it could create substantial
inequities between generations. In the end, everybody might
be worse off.
In particular in continental Europe, many politicians
fear that their social models will not be able to withstand
the consequences of globalisation. They consider thesocial models of the Scandinavian countries as an
alternative for the liberal Anglo-Saxon model. This interest
comes at an odd moment. In particular in Denmark and
Sweden, there is growing doubt concerning the long-term
tenability of their economic models. In both countries, the
latest parliamentary elections were actually won by the
parties that campaigned for a slimmer welfare state.
Three welfare models
A useful classification of social welfare models has
been proposed by Gsta Esping-Anderson(1). He
distinguishes three types of economic models in market
economies: the liberal-model, the conservative model,
and the social-democratic model. The liberal model is
largely based on personal responsibility, and government
intervention is limited to remedy market failures. The
social sector has mainly a safety net function. The
system has strong incentives to look for work and asubstantial part of tax transfers go to working people to
improve these incentives. Income inequality is relatively
high and employment protection rather loose. In Europe,
typical examples of this group are the United Kingdom
and Ireland.
In the social-democratic model, the government has a
much more active role by also aiming at an equalitarian
society. Government transfers play an important role inachieving a more equal income distribution and promote
labour market participation. Taxation is relatively high to
finance a generous social security system. Regular
consultations between government and the so-called
social partners, i.e. trade unions and employers
organisation are an important part of social-economic
policy. Examples of this model are the Nordic countries
and the Netherlands.
The conservative model is similar to the social-
democratic model. The main difference is in the role ofthe trade unions. Whereas in the social-democratic
model, one umbrella trade-union dominates, in the
conservative model trade-unions are organised
according to religious or political affiliations. These
organisations tend to defend above all the rights of their
adherents instead of pursuing more general social-
economic objectives as in the social-democratic model.
In this model employment protection is relatively strict
and minimum wages are high, which protect the rights of
the insiders. This group includes Austria, Belgium,France and Germany (as well as the southern European
countries to a lesser extent).
Sapir assesses the performances of the three models
by comparing their outcomes in terms of efficiency and
equity(2). The probability of escaping poverty, defined as
the percentage of the population receiving income above
the so-called poverty line, defined as 60% of the median
income after social transfers, could be considered as a
measure for equity. Admittedly, this is a rather crude. A
major objection is that it does not tell us for how longpeople are living below the poverty line and what
chances they have to improve themselves.
The Nordic model
Raymond Van der Putten
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A model is called efficient, if it provides sufficient
incentives to work. Sapir suggests for this the
employment rate. However, the use of part-time workerscould make this a misleading measure. To provide a
better measure of the utilisation of labour, we have
created an employment rate in full-time equivalents by
multiplying the employment rate by the hours actually
worked divided by the hours worked by full-time
workers.
As expected, the employment rate in full-time
equivalents is highest in the liberal model, implying that
in this model make the best use of the workforce (see
Chart 1). However, its performance in terms of equity isdisappointing. By contrast, the conservative model
performs relatively well in terms of equity. However, in
these countries, the (full-time) employment rate is
relatively low. In particular, the southern European
countries perform very badly in terms of equity. The best
result in terms of equity and efficiency are clearly
obtained in the social-democratic model.
A mixed growth performance
In this article, we will concentrate on the social
economic models in the Nordic countries(3). These
models are characterised by relatively high taxes to
finance a comprehensive welfare system (see Chart 2).
According to economic theory, high tax rates and
substantial income transfers are in general associated
with welfare losses and low incentives to look for work.
Large welfare programmes often result in substantial
deadweight losses, as citizens tend to over-useservices for which they do not pay the full price. Using a
neo-classical growth model, Edward Prescott argues that
if France were to reduce its effective tax rate on labour
income from 60 percent to the U.S. 40 percent rate, the
welfare of the French people would increase by 19 percent
in terms of lifetime consumption equivalents(4). This
conclusion could be easily extended to the Nordic
countries. Nevertheless, the Nordic countries are already
among the most prosperous in the world. Did the Nordic
countries find the recipe for expanding the welfare statewithout significant welfare losses? Is the Nordic welfare
state like a free lunch?(5).
As it turns out, the welfare state has not come as a
free lunch. Over the past four decades these countrieshave not really outperformed the other OECD countries.
(see Chart 3). This is in particular the case for Sweden.
In 1970, the country was the fourth richest OECD
member state (after Switzerland, Luxembourg and the
United States) with GDP per capita 27% above the
OECD average. By 2006, it had fallen to the 12th place
and its income advantage had shrunken to 10%. The
Danish economy performed slightly better, but has also
experienced a decline in its relative position(6). From this
perspective, it seems that the Scandinavian model doesnot seem to have much to offer to the other European
economies.
August-September 2008 Conjoncture 14
Equity versus efficiency
Chart 1 Source: Eurostat, calculations BNP Paribas
75
80
85
90
95
35 40 45 50 55Employment rate (in full-time equivalents)
Probabilityofescaping
poverty
GER FRA
ITA
FIN
SWE DEN
UKSP
SWEDENFRANORFINITAUKSPAGERUSJAP
60
50
40
30
20
10
0
Source: OECDChart 2
Government revenue as % of GDP (2005)
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High employment rate but low hoursworked
Another characteristic of the Nordic countries is the
relatively flat income distribution after taxes and socialtransfers (see Chart 4, page 16). However, as the overall
tax burden is high, marginal tax rates for the average
income earners are relatively steep (see Table 1, page
16). In Denmark, the average income earner is already
facing the highest marginal tax rate of 63%.
This could easily have a detrimental effect on labour
market participation. Nevertheless, the employment
rates in these countries are among the highest in the
OECD (see Chart 5, page 16). This is one of the puzzling
aspects of the Nordic model, for which the solution canbe found in the tax-benefit system. One of the reasons
for the high taxes is the financing of measures to promote
August-September 2008 Conjoncture 15
Box 1 Nordic countries - diversities and similarities
The Nordic countries encompass the three Scandinavian countries Norway, Denmark, and Sweden Iceland andFinland, plus their associated territories which include the Faeroe Islands, Greenland (both associated with Denmark) andland (Finland). Their official cooperation is channelled through the Nordic council.
The logic behind this cooperation is that the region shares much of a common history. As a result, their political, economic,and social institutions are rather similar. The Nordic countries are among the richest in the world. In terms of GDP per head,they are all above the OECD average. The countries have well functioning market economies. Except for Iceland, they are allin the top-10 of the Global Competitiveness Index(7). They have very high tax burdens, related to their comprehensive socialsecurity system.
Despite these similarities, the Nordic countries have known different economic, social, and political developments. TheDanish manufacturing sector is characterised by small and medium-sized industries with a strong specialisation in the agro-industry. By contrast, the Swedish industrial landscape is dominated by large multinational corporations, operating in transport
and electronics. Traditionally, Finland was also specialised in timber and paper and pulp industry. However, over the lastdecade, the country has become an important producer of electronics and other high-tech products. Industries in Norway andIceland are heavily dependent on natural resources.
These differences have also influenced the way of policy making. Denmark has a long tradition of coalition governmentsand consensual politics. By contrast, as a result of the stronger industrialisation, politics in Sweden has been more polarised,with the Social Democratic Party playing a leading role. Only four general elections (1976, 1979, 1991 and 2006) have giventhe centre-right bloc enough seats in Parliament to form a government.
Up to 1981, Norwegian politics were also dominated by the Social Democrats. However, after 1981, the situation hasbecome more like in Denmark, as governments alternated between minority coalitions led by Labour or centre-right parties.At the moment, almost all Nordic countries are led by centre-right coalitions. Only in Iceland, a broad coalition has been formedbetween the conservative Independence Party and the Social-Democrats.
Concerning international economic co-operation, Denmark has been a member of the European Union since 1973,
whereas Sweden and Finland followed their example in 1995. As members of the European Free Trade Association, Norwayand Iceland are part of the European Area, which allows them to join the European Single Market without being member ofthe European Union(8). Only Finland has adopted the euro, whereas Denmark secured an opt-out of the single currency afterthe reaction of the Maastricht treaty in the 1992 referendum.
0500959085807570
150
140
130
120
110
100
90
80
(OECD=100)
Source: OECDChart 3
Denmark
Sweden
US
Eurozone
GDP per capita
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labour market participation. In particular, the generous
childcare benefits provide substantial incentives for
female participation. With the exception of France, the
Nordic countries are the only European countries that
offer some form of publicly provided childcare for children
below 3. In addition, these countries have very generousparental leave benefits(9). However, these benefits are
conditional on labour market participation. In addition, the
individual declaration of income taxes has considerably
reduced the marginal tax rates on earnings of a second
breadwinner in the family. With the exception of Iceland,
the tax rate for the second family earner does not differ
significantly from that of the first income earner.
In the Nordic countries, measures to stimulate theparticipation of women have been stretched to the limit at
the costs of the tax regime for the primary breadwinners.
USITASPAUKJAPGERFRANORFINSWEDEN
40
35
30
25
20
15
10
5
0
Source: OECDChart 4
A relatively flat income distribution(Gini coefficient, 2000)
DENNORSWEUKUSJAPFINGERSPAFRAITA
80
70
60
50
40
30
20
10
0
Source: OECDChart 5
A high employment rate(2007, % working-age population)
Average and marginal tax rates (1)
Average tax rateSingle
No childrenOne earner couplewithout children
One earner couplewith two children
Top marginaltax rate
Threshold(multiple AW)
Nordic countriesDenmark 41.0 35.8 29.3 63.0 1Finland 30.1 30.1 22.9 56.1 1.9Norway 29.9 27.1 21.5 47.8 1.5
Sweden 27.6 27.6 19.8 56.5 1.4Continental countriesFrance 27.8 23.8 17.5 49.8 2.8Germany 42.8 33.3 23.9 47.5 5.9Italy 28.5 25.6 12.5 50.7 3.5Spain 20.4 16.6 12.4 43.0 2.6English-speakingcountries Australia 23.4 20.5 10.0 46.5 2.6Canada 23.3 18.9 10.6 46.4 2.9United Kingdom 27.0 27.0 20.6 41.0 1.2United States 24.5 19.9 11.8 42.7 8.7
Table 1 Source: OECD
(1) All-in tax rate including employeessocial security contributions taking into account standard tax credits and allowancesAW = average worker
The Gini coefficient measures the income inequality in a country. A lownumber indicates a high degree of income equality.
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The tax wedge on the latter is relatively high by
international comparison (see Chart 6). This has
stimulated primary breadwinners to make less hours
doing paid work (see Chart 7). Instead, they tend to
devote more time on home work. By contrast, women in
the Nordic countries tend to be less active at home than
those in other OECD countries (see Table 2). Althoughthese differences may be partly attributed to cultural
differences, they have become more pronounced by
economic incentives.
The disappearance of the skill premium
The flat income distribution suggests that skill
premiums are relatively weak in the Nordic countries, in
particular compared to the English speaking countries.Domeij and Ljungqvist estimate that the average skill
premium in the US increased by around 8-10 percent
between 1970 and 1990. During the same period, the
Swedish skill premium fell by more than 30%, and only
recovered by 10 percentage points in 2002(10).
Edin and Topel explain the low returns from schooling
by non-market conform wage setting(11). During the
1970s, trade unions pursued egalitarian objectives in
their wage bargaining policies in centralised wage
negations. In this way, they achieved high compensationfor low-wage workers in exchange for relatively low
wages for skilled labour. However, their explanation is
unlikely to hold for the whole period. Indeed, after 1983,
wage bargaining moved increasingly to an industry and
company level, partly because employers argued that the
underpaying of skilled workers hindered recruiting.
Domeij and Ljungqvist argue that the decline in the
Swedish skill premium can be explained by differentiating
between the private and the public sector. In theiropinion, the decline in the skill premium was related to
the rapid expansion of the Swedish public sector, which
involved the disproportionately hiring of unskilled
workers. In this way, the ratio of skilled to unskilled
workers available to the private sector was increased,
which lowered the relative wage for skilled workers. One
could also argue that the Swedish government became
August-September 2008 Conjoncture 17
DENGERSWEFINNORUKFRAITAUSJAPSPA
40
35
30
25
20
15
10
5
0
Source: OECDChart 6
Total tax wedge (2007)
JAPUSUKSPAFINITASWEDENFRANORGER
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
Source: OECDChart 7
Average annual hours worked by employees (2007)
Home work by gender (Sweden = 100)
Male Female
Denmark 85.7 89.7
Norway 90.5 100
Sweden 100 100
US 81 103.4
Finland 85.7 103.4
UK 85.7 110.3
Germany 90.5 113.8
France 85.7 120.7
Table 2Source: K.S. Ragan, 2005, Fiscal Policy and the Family: Explaining
Labour Supply in a Model with Household Production, mimeo,University of Chicago.
Two-earner married couple, one at 100% of average earnings and theother at 67% with two children.
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the employer of last resort(12). In a similar way, the
disappearance of low skilled workers into the public
sector, long-term unemployment, disability or earlyretirement programmes might explain the compression of
the skill premium in other European countries.
This could explain why the public sector is relatively
large in all the Scandinavian countries (see Table 3). The
relative high level of public expenditure close to 50% of
GDP is not only related to the substantial income
transfers but also to the high number of people working
in the public sector and associated activities(13). In
Norway, Sweden and Denmark, around 40% of
employees are working in the public sector comparedwith just over 30% in France and Germany. A study by
Afonso, Schuknects and Tanzi shows that, in terms of
inputs, the Swedish public service is the most inefficient
in the OECD, followed by Finland and Denmark(14).
According to their calculations, the Swedish authorities
could decrease their expenditure by 43% to obtain the
same output(15). The average input inefficiency in the EU
is 27%. By maintaining public expenditure at the current
level, the output performance is 18% below what could
be achieved if productivity were as high as that of themost efficient countries Luxembourg, Netherlands and
the United States.
A flexible labour market
The common factor in the Scandinavian countries isthe important role that trade unions and employers
organisations are playing an important role in shaping
social-economic policies. In the three Scandinavian
countries, most trade unions are members of the umbrella
organisation LO(16). The trade union membership rate,
also referred to as the unionisation rate, is close to 80%
(see Chart 8). This is largely explained by the fact that the
Public sector performance
Total government expenditure(as % of GDP) (2007)
Public sector employee(as % of total) (2006) (1)
Public sector efficiency(2000) (2)
Nordic countriesDenmark 51.2 38.1 0.95Finland 48.9 34.2 1.01Norway 51.5* 40.0 1.09Sweden 54.3 40.3 0.82Continental countriesFrance 52.7 33.9 0.83Germany 45.4 30.8 0.97Italy 48.8 28.0 0.80Spain 38.6 24.0 1.06English-speaking countries Australia 34.9 - Canada 39.3 28.6 1.04
United Kingdom 44.7 35.8 1.06United States 36.6 - 1.26
Table 3 Source : OECD(1) Employees working in public administration, education, health and social work and other community activities.(2) A. Afonso, L. Schuknecht, and V. Tanzi, 2003, Public Sector Efficiency: an International Comparison, ECB Working Paper 242.(*) Mainland GDP.
SWEFINDENNORITAUKGERJAPSPAUSFRA
80
70
60
50
40
30
20
10
0
Source: OECDChart 8
High unionisation rate (2001)
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unemployment insurance is a voluntary insurance carried
out by the trade unions. However, the trade unions
unemployment insurance is also open for non-unionmembers. LOs dominant position and the high degree of
unionisation imply that the LO is less focused on
defending the rights of only the employees, but also takes
into account the macroeconomic consequences for those
who are outside the labour market.
Despite the strong presence of the trade unions in
Denmark, legal employment protection is one of the
lowest in the OECD. In Denmark, the notice period
is only 1 month, independent of the job tenure (see
Chart 9). Given the generous unemployment benefits(see below), one could say that the Danish has given
greater priority to income security than to job security.
Nevertheless, it is not true that Danish workers are at the
mercy of their employer. The strong presence of trade
unions in the enterprises forms implicit or explicit a
guarantee against unfair dismissals. In the absence of
any legal protection against dismissals, the Danish
Employers Confederation and the trade-union LO have
agreed on a general rule that employees must not
dismissed arbitrarily, and that employees that have beenin the company for more than 9 months are entitled to an
explanation for their dismissal. The flexibility device is
mainly used in severe downturns or for temporary layoffs,
to adapt the workforce better to output fluctuations.
Actually, many unemployment spells terminate by a
return to the former employer.
Job volatility is relatively high in the Scandinavian
countries. Around one fifth of Danish employees is less
than a year in a job, compared with only 12% in both
France and Germany. At just above 8 years, the lengthof job tenure in Denmark is the lowest in the OECD (see
Chart 10). However, it this could be attributed also to
other factors such as the industry structure with
relatively many small firms(17). In fact, the average job
tenure in the other Scandinavian countries with much
stricter EPL is only marginally longer. Moreover, the high
level of productivity and the substantial amount of
expenditure on training are supportive evidence of the
attachment of the workforce to the firm. Indeed, around
30% of employees is more than 10 years in the same job, compared with more than 40% in most of
continental Europe.
Unemployment and poverty trap
The Scandinavian countries are often envied for theirremarkable labour market performance. In July 2008, the
Danish unemployment rate stood at only 2.3%, compared
with 6.8% for the EU. Also Norway, Finland and Sweden
have unemployment rates below the EU average.
The relatively low level of unemployment is largely
due to the very low level of long-term unemployment (see
Chart 11, page 20).
Some have questioned the official unemployment
data. The management consulting firm McKinsey
estimates that the real unemployment rate was between15% and 17% in 2004, about three times as high as the
official rate of 5.4%.They arrive at this number by adding
SPAFRASWENORGERITAFINDENJAPUKUS
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: OECDChart 9
High values point to a high degreeof employment protection legislation
Strictness of employment protection legislation(2003)
ITAFRAGERSWEFINSPANORUKDEN
14
12
10
8
6
4
2
0
year
Source: OECDChart 10
Average job tenure (2007)
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to the official data, discouraged workers, part-time
workers who are looking for full time jobs, and all those
at working age and receiving an income replacementbenefit or are employed in special government programs.
This estimate might be an overestimation. By applying
the same methodology to the US, Schmitt finds an
unemployment rate of 15.2%(18).
In the Nordic countries, low unemployment rates go
hand in hand with high benefit levels, in particular for
people at the lower end of the income spectrum (see
Table 4). Once becoming unemployed, low income
earners can receive relatively high benefits for a long
period. The net replacement rate of a single familyworker earning 67% of the wage of an average
production worker (APW) is 82% in Sweden and even
87% in Denmark compared with 75% in France and
around 60% in Germany and the UK. After 5 years,
Danish jobseekers still receive 82% of their former salary,
while their Swedish counterparts receive almost 70%.
Over the same time span, the net replacement rate in
Germany and France has fallen back to 45% and 48%
respectively. For higher income earners, the replacement
rates are more in line with those in other OECDcountries. These results suggest that a generous welfare
system can coincide with good labour market outcomes.
It is mainly for this reason that continental European
countries have become interested in the Nordic model.
In the Scandinavian countries, low income earners
have little financial incentives to look for work. To
stimulate the return of benefit receivers into activity,
these countries rely on very comprehensive active
labour market policies (ALMP). Participation in these
programmes is obligatory, in Denmark after six months forunemployed under 30 and over 60, and nine months for
all others. In Sweden, unemployed will be enrolled in a
programme within 28 months. In both countries,
participants do not qualify anymore for an extension of
their insurance period. In Denmark and Sweden, around
0.5% of the labour force is participating in these
programmes. This is relatively high compared to the
unemployment rate in these countries. Moreover, the
costs of these programmes are elevated compared to
other OECD countries. Both Denmark and Sweden spendmore than 1% of GDP on ALMP compared with around
0.5% on average in the European Union (see Chart 12).
Opinions are divided on the usefulness of these kinds
of programmes. There is always the danger that theycrowd out existing jobs and might lead to unfair
competition not only between companies but also
between different kinds of workers. In the Danish case,
one could ask if the start of these programmes within
6 month of unemployment for people under 30 is not
too early. It could be argued that many of the participants
would have found a job without help. In fact, participation
could actually slow down the job search. On the other
hand, the programmes might stimulate the unemployed
to accept a job before enrolling into these schemes. Inthis way, the ALMP have a similar function as benefit
sanctions.
August-September 2008 Conjoncture 20
GERFRASPAFINSWEITAUKUSDENJAPNOR
109
8
7
6
5
4
3
2
1
0
% labour force
Source: OECDChart 11
Long and short-term unemployment (2007)
Short-term unemployment (1 year)
DEN*SWEFRAFINGERSPANORITAUKJAPUS
5.0
4.5
4.0
3.5
3.0
2.52.0
1.5
1.0
0.5
0.0
Source: OECDChart 12
(early retirement + unemployment benefits)
*2004
Public spending on active labour market policiesas % of GDP (2006)
Active measuresPassive measures
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An alternative would be to intensify job search
assistance, as is done in the UK. Between November
2005 and March 2006, the Danish Labour Market
Authority carried out a controlled experiment in thecounties Storstrm and South Jutland, by dividing the
registered unemployed in two groups, depending on their
date of birth(19). One group received an intensified
sequence of monitoring, counselling, job search
assistance, and participation in ALMP. The control group
followed the normal rules. By intensifying the contacts
between the unemployed and the public employment
service, the median unemployment duration of the
treatment group was reduced to 11.5 weeks compared
with 14 weeks for the control group.In a study on the Swedish unemployment duration,
Richardson and van den Berg conclude that the
individual transition rate from unemployment to
employment is substantially raised as a result of the
individuals participation in a vocational training
course(20). However, when the time spent in the program
is taken into account, the net effect on unemployment
duration is about zero. They recommend shortening the
training courses and prolonging the job search
assistance after the completion of the course. Moreover,the training programs could become more effective by a
better selection of potential candidates.
Happy Globalisation
The Nordic countries belong to the most open
economies in the OECD (see Chart 13). In particularSweden has a relatively large manufacturing sector,
including some very successful multinational groups
such as Electrolux, Ericsson, and Volvo. In 2003 (latest
available data in OECD STAN database), manufacturing
contributed directly 22% to total value added, with the
sub-sectors machinery and equipment plus wood and
paper production making up about half of it.
Net replacement rates (one-earner married couple, 2 children)
67% of salary APW 100% of salary APWInitial After 5 years Initial After 5 years
Nordic countriesDenmark 91 92 75 77Finland 85 91 76 77Norway 74 99 70 73Sweden 89 95 69 70Continental countriesFrance 83 78 67 54Germany 78 79 73 62Italy 64 0 70 0Spain 77 49 75 35English-speakingcountries Australia 77 77 65
Canada 71 71 78 62United Kingdom 70 79 60 67United States 49 48 56 40
Table 4 Source : OECDAPW = Average Production Worker
Exports as % of GDP in 2005
Chart 13 Source: OECD
0 20 40 60 80 100
United States
Japan
United Kingdom
Spain
France
Italy
Finland
Norway
Germany
Denmark
Sweden
Netherlands
Belgium
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As in the rest of the industrialised world, the relative
importance of manufacturing sector in the Nordic
countries has steadily diminished. This is partly due to
the development of the services sector. Moreover, during
the past decade, enterprises have increasingly offshored
their activities to low wage countries in East Asia and
since the disappearance of the Iron Curtain, also to
central and eastern Europe. The average hourly wage
costs in the ten EU accession countries are around5 euros compared with 25 euros in Sweden. Swedish
companies especially invested in Poland and the Baltic
Republics. The proximity of these areas made it possible
for the smaller and part of their production.
The offshoring of part of the labour-intensive production
process and the expansion of skill-intensive activities such
as research & development, or downstream processes,
such as marketing and after sales services, is observed in
many other countries. They supply the world with a large
range of products, of which an increasing part is producedelsewhere. According to Sinn (2006) they have become
bazaar economies(21). The Swedish and Finnish
manufacturing sectors have the highest R&D intensity in the
world (see Chart 14). As a result of the unbundling of the
production process, the import penetration in the
manufacturing sector has considerably increased, although
in Sweden less than in most other countries (see Table 5).
Despite these developments, the decline in the share
of manufacturing activity in Sweden has been limited
(Chart 15). This could surprise as Swedish entrepreneurshave been confronted with much sharper increases in
wage costs than in most other OECD countries. However,
by offshoring labour intensive activities or outsourcing
them to foreign suppliers, productivity growth has been
among the highest (Chart 16). As a result, Swedish unit
labour costs are one third below their 1992 level.
There is insufficient information on the employment
effects of offshoring and outsourcing. According to the
Swedish Institute for Growth Policy Studies ITPS,
Swedish groups with subsidiaries abroad have reduced
their Swedish staff over time, while increasing theirforeign staff. In 2005, these groups employ 1million
people abroad, or two-third of their total workforces.
However, as the majority of the Swedish subsidiaries are
August-September 2008 Conjoncture 22
USUKFRAITAJAPSWEGER
30
25
20
15
10
5
0
Source: OECDChart 15
Share of manufacturing in value added
1985-19892000-2003
Import penetration
yearImport
penetrationChange
Spain 1995 272003 36 9
Germany 1995 30
2003 39 9UK 1995 39
2003 48 9France 1995 31
2003 36 6US 1995 18
2003 24 6Sweden 1995 41
2002 46 5Italy 1995 25
2003 30 5
Table 5Source: OECD
Import penetration is defined as imports devidedby total domestic demand
ITAUKFRAGERDENUSJAPFINSWE
16
14
12
10
8
6
4
2
0
in % of value added
Source: OECDChart 14
R&D intensity of the manufacturing sector (2003)
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in Europe(61%) and the US (28%), it is unlikely that this
development is largely motivated by expanding market
share, rather than by seeking cost reductions. On theother hand, the percentage of Swedish employees in
foreign-owned companies has also rapidly increased and
is now just under 25%.It is likely that offshoring has in
particular reduced the amount of work for less skilled
workers. Indeed, there has been a clear upward trend in
the wage bill share of workers with tertiary education and
a downward trend in the wage-bill share of workers with
lower secondary education(22). However, this trend is also
due to the increase in the relative supply of workers with
tertiary education and the increased use of computers.Since the EU enlargement in 2004, firms in the Nordic
countries have been confronted with increased
competition from, in particular, the neighbouring Baltic
Republics and Poland. Increased immigration from these
countries has helped to ease bottlenecks in the labour
market and dampen wage demands. Between May 2003
and June 2007, the Nordic countries issued about 75
000 work permits for migrants from the new EU member
states, of which about 50% issued by Norway.
Major problems have appeared in the import of servicesfrom these countries, i.e. for posted workers and self-
employed offering temporary services, mainly in the
construction sector. The problem is in the implementation of
the Posted Worker Directive, which requires firms to observe
a nucleus of mandatory rules for minimum protection. In the
Nordic countries, labour market regulations are often
negotiated between trade unions and employers. In
Denmark and Sweden, the social partners have always
strongly opposed state interference in this area. As a result,
foreign supplier can either enter a collective agreement with
the trade union in the host country or apply the collective
agreement of its home country. Recently, the EuropeanCourt of Justice decided that industrial actions to force
foreign suppliers to enter a collective agreement with trade
union were illegal (see Box 2).
August-September 2008 Conjoncture 23
060504030201009998979695949392
280260
240
220
200
180
160
140
120
100
1992=100
Source: US Bureau of Labor StatisticsChart 16
Labour productivity in the manufacturing sector
SwedenUSFranceGermanyUK
Box 2: The Laval case
In May 2004, the Latvian construction company Laval un Partneri posted workers on Swedish building sites run by itssubsidiary L&P Baltic Bygg AB. The Swedish construction trade union demanded that these workers would be paid inaccordance to the Swedish collective agreement. The Latvian firm refused this, arguing that it had entered into an agreementwith the Latvian building sector trade union. Workers would receive almost twice the pay that was customary in Latvia, inaddition to board, lodging and transport.
Following the breakdown of the negotiations, the Swedish construction trade union, initiated a blockade of the building site.The action was later joined by the Swedish Electricians Union. As a result of the action, Baltic Bygg filed for bankruptcy in2005, and the posted workers returned to Latvia.
Laval asked the Swedish Labour Court to declare the blockade illegal, as it would violate the European Posting WorkersDirective. The Labour Court rejected this demand, but decided to request a statement from the European Court of Justice,which delivered its verdict in December 2007. The Court declared that trade unions had the right to take collective action toprotect workers of the host State against social dumping. However, in the specific case, the action was not justified as thetrade unions had asked for pay rates in line with the average market level of pay in the Stockholm region, whereas theDirective on posted workers only requires firms to observe a nucleus of mandatory rules for minimum protection. In Sweden,no legal minimum wage exists. The labour market is largely regulated by collective agreements negotiated between tradeunions and employers organisations. The Court argued that the trade unions demand could not replace the lack of a minimumwage provision in Swedish labour law. In addition, the Court stated that the Swedish labour laws failed to take into account
that the Latvian workers were also bound to the collective agreements in their home country.The Swedish government has announced that amendments to its labour legislation might be necessary to avoid future
problems. A government report will be published by mid December 2008.
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Nordic lessons
The Nordic countries have a good record in terms ofreduction of poverty reduction, labour market participation
and the return the unemployed to the regular labour
market. On the other hand, the costs of the model are
very high. Government expenditure (in % of GDP) is
among the highest in the OECD. This has undoubtedly
led to substantial welfare losses. As marginal income tax
rates are high, employees work on average much less
than in the rest of the OECD. At the latest elections, both
the Danish and the Swedish have already expressed their
preference for a slimmer welfare state, without affectingthe fundamentals of their social models. A lower tax
burden might stimulate workers to increase their number
of hours worked. In this way, the Nordic countries could
improve their welfare substantially.
In all the Nordic countries, the regular dialogues
between the trade unions and employers organisations
play an important role in the shaping of social economic
policies. Recently, the labour market model has come
under double pressure. In the first place, to remain
competitive, companies have been offshoring labourintensive activities. The trade unions have not opposed
this development. On the contrary, they have understood
that this in combination with the upgrading of skills of the
domestic workforce is essential for the survival of the
manufacturing sector. In addition, technical developments
have increased the scope for outsourcing and offshoring.
In the services sector, all work that is suitable for electronic
delivery can in principle be offshored. This could lead to
the loss of service jobs to foreign competitors. At the same
time, Nordic services firms should also be able to profitfrom this development by exporting their products.
The second threat is coming from the free movement
of services and the posting of workers in the European
market. As the Laval case showed, the Nordic traditions
of negotiated agreements between employers and trade-
unions have clashed with European legislation, which is
based on the continental tradition of the legal extension
of collective agreements and minimum standards. The
adoption of more European style minimum labour
standards seems inevitable. The experiences in Norwayand Finland show that it is probably less than a threat
than most actors fear at the moment.
The good performance of the Nordic models in
comparison to some of the continental models has raised
the question what the European countries can learn. It isgood to underline first that the Nordic models are
outcomes of a historical process. When the Danish social
partners concluded their first agreement in 1899, they did
not have a blueprint of a social model in mind. For this
reason, elements of these models are difficult to
implement in isolation. The Nordic countries are also
relatively small and have rather homogeneous
populations. That could also be an element that explains
the functioning of their models.
It is in the field of labour market policies that thecontinental countries could probably learn most. If the
Continental European countries do not want to adopt the
more incentive-based policies to improve the functioning
of their labour markets, they could find inspiration in the
active labour market policies of the Nordic countries.
Lastly, the strength of the Nordic model is in its adaption
to changing circumstances, in which the negotiations
between social partners play a central role. However,
such policies only work if social partners can be
persuaded not to pursue the interest of their members byadopting anti-competition measures or strengthening the
position of those who are already in the labour market,
but keeping the interest of the whole society in mind.
August-September 2008 Conjoncture 24
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NOTES
(1) G. Esping-Andersen, 1990, The three worlds of
welfare capitalism, Princeton University Press. Someauthors have later added the Mediterranean model asseparate category. See f.e. Sapir, A. (2005),Globalisation and the Reform of European SocialModels, Bruegel Policy Brief, issue 2005/01.(2) See Sapir op. cit.(3) The term Scandinavian model is often reserved todescribe the way the Nordic countries organise andfinance their social security, health and educationsystems.
(4) E. Prescott, 2004, Why Americans work so much,Federal Reserve Bank of Minneapolis Quarterly ReviewVol. 28, No. 1.(5) P.H. Lindert, 2003, Why the welfare state looks likefree lunch, NBER Working Paper 9869.(6) Only Norway improved its position considerably byclimbing up to the 2nd place, after Luxembourg.However, this development is narrowly connected withthe finding of oil on its continental shelf.(7) The Global Competitiveness Index is constructed by
the World Economic Forum. In the 2007 ranking,Denmark, Sweden and Finland ended on the third, fourthand sixth place, respectively. Iceland came in at the 23rd
position.(8) The other members of the European Free Trade
Association are Switzerland and Liechtenstein.(9) In Sweden, parental benefit is payable for up to480 days, of which 390 days at 80% of the parentsincome. The generosity of the parental leave isdepending on how many days the woman has worked
before giving birth. This has given young women strongincentives to establish themselves firmly in the labourmarket before starting a family.(10) D. Domeij and L. Ljungqvist, (2006) Wage structureand public sector employment: Sweden versus theUnited States, 1970-2002, CEPR Discussion Paper5921.(11) Per-Anders Edin and Robert Topel, 1997, WagePolicy and Restructuring: The Swedish Labor Marketsince 1960, in The Welfare State in Transition:
Reforming the Swedish Model Richard B. Freeman,Robert Topel, and Birgitta Swedenborg, editors, (p. 155 -202), NBER published in January 1997.
(12) A. Lindbeck, 1997, The Swedish Experiment,
Journal of Economic Literature, Vol 35, no.3.(13) Defined as employees in public administration,education, health and social work and other communityactivities.(14) A. Afonso, L. Schuknecht, and V . Tanzi, 2003,Public Sector Efficiency : An International Comparison,ECB Working Paper 242.(15) Public sector output performance is calculated byusing several indicators indicators for public sectoroutcomes concerning administration, education, health
and infrastructure. These are complemented withindicators concerning the three tradition funtions forgoverment, i.e. income distribution, stabilisation andeconomic performance.(16) LO stands for Landsorganisationen i Sverige,Landsorganisationen i Danmark, andLandsorganisasjonen i Norge.(17) Torben M. Anderson and Michael Svarer, 2007,Flexicurity - labour market performance in Denmark,Economics Working Paper 2007-9, University of Aarhus.
(18) John Schmitt, 2007, Is the unemployment rate inSweden really 17 percent?, Center for Economic andPolicy Research, Issue Brief, June 2007.(19) B.K. Graversen and J.C. van Ours, 2006, How tohelp unemployed find jobs quickly: ExperimentalEvidence from a mandatory activation program, IZADiscussion Paper 2504.(20) Katherina Richardson and Gerard van der Berg,2006, Swedish labour market training and the durationof unemployment, CEPR Discussion Paper 5895.
(21) Hans-Werner Sinn, 2006, The Pathological ExportBoom and the Bazaar Effect, CESifo Working Paper1708. He studies in particular the industrialdevelopments in Germany.(22) Karolina Ekholm and Katarina Hakkala, 2008,International Production Networks in the Nordic/BalticRegion, OECD Trade Policy Working Paper 61.
August-September 2008 Conjoncture 25
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ECONOMIC RESEARCH DEPARTMENT economic-research.bnpparibas.com
Philippe dARVISENET 33 1.43.16.95.58 [email protected]
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