The Nordic Model - Embracing globalization and sharing risks

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5 WELFARE SERVICES: RISING COSTS AND INCREASING DEMAND The provision of services is an essential element of the welfare state. The services include, inter alia, day-care, education (ranging from primary schooling to higher education), health care, and old-age care. The Nordic welfare model has the ambition of ensuring equal access to services for all according to need. The services are therefore mainly tax-financed and the standards offered should not only amount to a bare minimum but should meet the requirements of most people. It is a major challenge to maintain the extended provision of tax-financed services in conditions of rising costs and increasing demand. We consider these issues in turn. 5.1 SERVICES BECOME MORE COSTLY – THE BAUMOL EFFECT Productivity increases rapidly in agriculture and manufacturing – but is much more difficult to raise in faceto-face services Many forms of service production are special because of the crucial role of human interactions between the provider and user. This applies in particular to child-care, old-age care, health care, and education. Whereas productivity increases are possible and significant in most types of economic activities, they are difficult to achieve in face-to-face services. New techniques allow a farmer Welfare services: rising costs and increasing demand · 83
to handle much bigger fields today, as compared to farmers in the past. Yet, the time it takes for a nurse to talk to the patient or for the staff in day-care institutions to play with the children is the same today as it was, say, 25 years ago. Time is essential for these services and they can therefore not be rationalized and productivity cannot be increased to the same extent as for traditional manufactured products. As a rule of thumb, average productivity rises by about two per cent a year due to more effective means of production or new techniques and better machines. Real wages tend to grow over time at the rate of productivity growth and material living standards increase accordingly. However, as those performing service activities are to have the same wage increase as other groups and since the productivity of this group remains broadly unchanged, it follows that the relative price of producing these services goes up. The main implication is that time/human-intensive services tend to become more expensive over time (“Baumol’s law”). The basic mechanism here is not dependent on whether the service is provided by a private or public supplier – it is the nature of the activity which is important. (This is not to deny that incentives and organizational structures, which may differ as between public and private provision, may also affect productivity, see chapter 8.) While the price of, say, mobile phones has fallen drastically due to technical advances, this has not happened for hair cuts. In the same way, it has not become cheaper to produce many public services – they are labour intensive and it is difficult to increase productivity while maintaining the same quality of the service. Rising costs will be reflected in higher prices paid by the customer or higher taxes paid by the citizen. Since the public sector is responsible for the provision of many such services, the public sector is facing a major financing challenge. Productivity rises less than in the manufacturing sector but wages as much – the relative costs of welfare services increase over time 5.2 MORE IS EXPECTED – THE WAGNER EFFECT Productivity increases and improvements in material well-being also release a demand effect. There is a tendency for the demand for services to increase when incomes rise. Once basic needs (food, At higher income levels citizens want more welfare services and services of better quality 84 · 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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Page 35 and 36: The financial deregulations in the
Page 37 and 38: horizontal axis). These indices are
Page 39 and 40: does can nowadays be seen, in a bro
Page 41 and 42: employment increases in the public
Page 43 and 44: are not at the top of the league, t
Page 45 and 46: ENDNOTES 1 Wikipedia refers to popu
Page 47 and 48: consider employment and productivit
Page 49 and 50: from the mid-1980s. Finland has gra
Page 51 and 52: % 7 6 5 4 3 2 1 0 IT expenditure, %
Page 53 and 54: As technological change is to a sig
Page 55 and 56: 3.3 SOCIAL EQUALITY Economic effici
Page 57 and 58: 0.9 0.8 0.7 Net Fin Den 0.9 Composi
Page 59 and 60: 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
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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
Page 99 and 100: globalization may contribute to bot
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 and 112: Table 6.2 The activity rate, aggreg
Page 113 and 114: Thus, responsible unions should res
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
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Table 8.1 Government expenditure by
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ure. This selection bias alone will
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that everyone gets their worth as m
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8.3 THE CASE FOR GOVERNMENT PROVIDE
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maximizing firms tend to focus exce
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than zero based budgeting) are impe
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sectors, place at or above the medi
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The demands for objectivity limit w
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assessed case by case. The importan
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c. Vouchers Vouchers are issued by
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mechanically in the political debat
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ENDNOTES 1 The private sector inclu
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The biggest hurdle to overcome for
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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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