The Nordic Model - Embracing globalization and sharing risks

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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
Thus, responsible unions should resist shorter working hours in the name of worker solidarity. We argue below that decentralized and even individual pay bargaining is appropriate in a world of modern production techniques and globalization. Yet, working hours is an issue in which there is a strong case for coordination, and overall working hours should probably be dealt with and agreed mainly at a fairly centralized union-employer organizational level. Otherwise individual unions may have incentives to agree on shorter working hours without due regard to the social costs. As centralized or coordinated decision making is part of the Nordic labour markets setting, the framework exists to ensure that decisions on working hours take into account their wider implications. It is a noteworthy fact that the Nordics have been able to sustain a rather high supply of working hours even though their tax rates are quite high. This is illustrated in figure 6.1, which shows average working hours in the EU15 and the size of total tax wedges (including income taxes, social security contributions and indirect taxes). Not surprisingly, there appears to be a The Nordics work more hours, as an average for the total population, than would be expected given the size of the tax wedge Tax wedge 65 60 55 50 45 40 Fra Ita Bel Ger Gre Net Aut Spa Ire Swe Den All w/o Nordics R 2 = 0.62 35 USA 35 30 30 900 1000 1100 1200 1300 1400 Average hours worked in 2003* Fin UK Por 65 60 55 50 45 40 Figure 6.1 Tax wedge and hours worked in EU15 * Average hours worked by the working-aged population. Source: OECD. 112 · The Nordic Model
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The Nordic Model Embracing globaliz
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ETLA B232 ISBN 978-951-628-468-5 IS
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THE AUTHORS Torben M. Andersen is P
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CONTENTS PREFACE THE AUTHORS 1 INTR
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8.5 The future of public services -
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Globalization is primarily an oppor
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ices financed by taxes, which are h
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14, respectively, out of a total of
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are the effects of technical change
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- and, particularly, their effect o
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not contesting economic growth as t
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1.6 AN EFFECTIVE WAGE BARGAINING PR
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etter be tried in individual cases
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The scheme of the social contract c
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is worthy and realistic. But the de
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supportive interaction of openness
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The financial deregulations in the
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horizontal axis). These indices are
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does can nowadays be seen, in a bro
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employment increases in the public
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are not at the top of the league, t
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ENDNOTES 1 Wikipedia refers to popu
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consider employment and productivit
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from the mid-1980s. Finland has gra
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% 7 6 5 4 3 2 1 0 IT expenditure, %
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As technological change is to a sig
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3.3 SOCIAL EQUALITY Economic effici
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0.9 0.8 0.7 Net Fin Den 0.9 Composi
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ANNEX: GROWTH ACCOUNTING The Nordic
Page 61 and 62: sources of GDP growth in the EU15,
Page 63 and 64: 11 These decompositions have been c
Page 65 and 66: 4.1 THE WELFARE STATE AS A SOCIAL C
Page 67 and 68: The extent, coverage and quality of
Page 69 and 70: % % 80 80 60 60 40 20 0 OECD max Fi
Page 71 and 72: % 80 Total Old age % 80 60 60 40 40
Page 73 and 74: tem is seriously affected. Today, t
Page 75 and 76: Historically, however, the share of
Page 77 and 78: More children. Since the problem is
Page 79 and 80: Actually higher growth may make the
Page 81 and 82: dependency ratio driven by the baby
Page 83 and 84: 82 · The Nordic Model
Page 85 and 86: to handle much bigger fields today,
Page 87 and 88: Table 5.1 Projections of public hea
Page 89 and 90: 5.4 AN EASY FIX - BRING SERVICES BA
Page 91 and 92: Box 5.1 Growth and the welfare stat
Page 93 and 94: it implies that the long-run defici
Page 95 and 96: The level of taxation is already hi
Page 97 and 98: One may ask why this problem arises
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Page 101 and 102: able to pay to seek private solutio
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Page 105 and 106: ily policies that Nordic demographi
Page 107 and 108: absolute and relative terms than hi
Page 109 and 110: in the participation decision of th
Page 111: Table 6.2 The activity rate, aggreg
Page 115 and 116: als take part in various unemployme
Page 117 and 118: Box 6.2 What is the Danish “flexi
Page 119 and 120: ENDNOTES 1 In his history of the ec
Page 121 and 122: particularly noteworthy in a euro a
Page 123 and 124: 7.2 COORDINATION AND DECENTRALIZATI
Page 125 and 126: also depends on the business cycle.
Page 127 and 128: ut not in any dramatic way (cf. fig
Page 129 and 130: displays higher nominal rigidity th
Page 131 and 132: model stem from an age in which the
Page 133 and 134: mostly in the years 1980-2000. For
Page 135 and 136: Table 8.1 Government expenditure by
Page 137 and 138: ure. This selection bias alone will
Page 139 and 140: that everyone gets their worth as m
Page 141 and 142: 8.3 THE CASE FOR GOVERNMENT PROVIDE
Page 143 and 144: maximizing firms tend to focus exce
Page 145 and 146: than zero based budgeting) are impe
Page 147 and 148: sectors, place at or above the medi
Page 149 and 150: The demands for objectivity limit w
Page 151 and 152: assessed case by case. The importan
Page 153 and 154: c. Vouchers Vouchers are issued by
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Page 157 and 158: ENDNOTES 1 The private sector inclu
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Page 161 and 162: ment has a higher return when spent
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REFERENCES Adema, W. and Ladaique,
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Jonung, L. and Hagberg, T. (2005):
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Is there a Nordic model? What are t
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