The Nordic Model - Embracing globalization and sharing risks

High taxes and many
public policies tilt the
decisions of individuals
and unions away
from hours worked
and in favour of more
leisure – without due
regard to the economy-wide
consequences
Policy makers should
encourage more work
rather than more
leisure
There is a case for
centralization or coordination
of labour
market decisions on
overall working hours
of) sustainability, in particular when the demographic structure
becomes less advantageous.
Many institutions and policies in the Nordic countries distort
the work-leisure choice of their citizens. There is a relatively
good level of social security, protection of the environment, and
a well-developed urban infrastructure. Also, there are generous
government subsidies for, inter alia, public transport, housing, arts
and culture. These public goods or heavily subsidized services are
combined with high taxes on income from work, which tilts the
choice of individuals in favour of (untaxed) leisure. The large scope
of collective action and public goods means that life in the Nordic
societies can be relatively “pleasant” even when the individual’s
market income is low. This is not just a by-product of the Nordic
policy package but reflects the very aim of social and other policies:
extensive provision of public goods and social security are
the means of insuring citizens against risks and avoiding extreme
poverty.
In short, individuals are induced to work less than is desirable
from a wider (societal) perspective. As taxes and some of the other
causes of the distortions cannot be done away with, policy makers
should use other instruments to compensate for these distortions
(or to “distort” the labour supply choices of individuals in the opposite
direction). Also, it should hardly be part of Nordic policy
to subsidize programmes encouraging leisure-intensive careers for
individuals that have already enjoyed a publicly subsidized education.
Thus, policy makers should abolish unnecessary disincentives
to work, such as “free years” or other schemes that discourage
working. 11
Another aspect of this externality has to do with collective
agreements on shorter working hours. It is sometimes quite attractive
for unions and employers in particular industries to agree on
shorter working hours instead of higher wages and salaries. That
may seem like a good idea for both the union and its counterpart.
However, it should be appreciated that the agreement on shorter
working hours has consequences for other workers, who go on
working longer hours and pay more taxes to finance services consumed
by all (the “common pool” problem).
The labour market: enough workers working enough? · 111