The Nordic Model - Embracing globalization and sharing risks

in the participation decision of the young and the old as well as
of women. 7 Similarly, Kleven and Kreiner (2006) emphasize the
extensive margin in their analysis of the efficiency losses associated
with high tax rates. They find the negative effects on labour
market participation (in the sense of “unemployment traps”) to
be significant for the Nordic countries. The effects are large notably
at the bottom of the productivity distribution, as a result of
generous out-of-work benefits in combination with high tax rates
on earned income.
On the other hand, labour force participation is high in the
Nordic countries in spite of their large tax wedges. This suggests
that other factors, such as labour market policies or high female
employment rates, may counter the effects of high tax rates. To
draw the conclusion that a large welfare state is incompatible with
proper incentives for work may thus be premature. In our view, an
equally plausible policy conclusion is that other means and policy
instruments have to be used to compensate for the distortions
caused by taxes. For example, a stronger “workfare” conditionality
of social security benefits could be introduced. The entitlement
to unemployment benefits can be made conditional on having
worked full time and for a sufficient number of months or years.
Also, the authorities might cancel benefits if the unemployed individual
is not willing to consider job offers in other occupations
or geographical areas.
Choices along these lines may seem politically unattractive in
the Nordic political culture. However, we believe this is the direction
that policy makers ultimately have to choose if the Nordic
combination of high taxes and high employment is to be sustained.
Indeed, such conditionality is not new in itself: there are already
links between work and benefits and these probably partly explain
the high supply of labour in the Nordic countries. However, we
believe it is essential that policy makers should focus even more
sharply on reducing the “thresholds” for work by those with a fragile
attachment to the labour market. Particular attention should be
directed to the participation decisions of the young, the elderly and
those with low incomes. In Sweden, the government has recently
introduced an earned income tax credit that reduced the marginal
tax rates for workers with very low incomes significantly, while the
Public spending on
family policies and
“workfare” conditionality
of social benefits
support high employment
High taxes conflict
with high employment
– notably if policies
cannot lower the
threshold to work for
groups with otherwise
weak labour market
attachment
108 · The Nordic Model