The Nordic Model - Embracing globalization and sharing risks

employment increases in the public sector acting as an “employer
of last resort”. While low and stable unemployment has remained
an important policy objective, the strategy and means of enhancing
the achievement of the objective have changed markedly in
the past two decades.
The Nordic labour market institutions – high unionization,
highly coordinated wage bargaining geared to wage compression,
active labour market policies, and relatively generous unemployment
benefits – can also be interpreted as reflecting the inclination
towards collective risk sharing (see, e.g., Agell (2002)).
More specifically, the institutional system, based on coordinated
negotiations between strong partners and supporting policies
by the government, may be seen as a way of offering security to
workers without some of the drawbacks of tight legislative labour
market regulation.
The above-mentioned reasons may partly explain why a big
welfare state is or has been more viable in the Nordic countries
than in many other cultural and political contexts. Nevertheless,
the policies in the Nordic countries ran increasingly into excesses
in the 1970s and 1980s. In Sweden, for instance, public spending
exceeded 60 per cent of GDP in the late 1980s, and marginal tax
rates were about 70 per cent for most full-time employees. Labour
market regulation was tight and the goal of wage policy increasingly
became “equal pay for all work”, thus undermining incentives for
skill formation and labour mobility. Monetary and fiscal policies
were accommodating to an extent that was increasingly seen as
unsustainable.
As noted in the preceding section, a number of developments
– such as financial liberalization, the deep crises, and EU
membership – triggered a reassessment of policies, paving the way
not only for further deregulation but also for a new approach to
macroeconomic policies and, to some extent, for acceptance of
more flexibility in the labour market. While the basic objectives
remained unchanged, the big budget deficits associated with the
crisis also led to a reconsideration of the public-sector and welfare-state
policies. There was some retrenchment of the public
sector with cuts in benefit levels and subsequently in tax rates. A
number of reforms were introduced with a view to improving the
Macroeconomic policies
and labour market
institutions can
also be seen as mechanisms
for collective
risk sharing
Excesses call for a reversal,
all the Nordics
undertook significant
reforms
40 · The Nordic Model