C0809_A2

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1/15August-September 2008 Conjoncture 13

During the past 5 years, unemployment has steadily

declined in the OECD, partly as a result of labour

market reforms. This favourable development is

likely to end as the industrial world is entering a major

economic downturn. Beyond these cyclical developments,

major structural changes such as globalisation, demographicchange and climate change are posing major challenges.

Welfare reform is likely to remain at the top the agenda in all

the major economies. These reforms are often firmly contested

as they imply changes in acquired rights. However, doing

nothing is often no solution as it could create substantial

inequities between generations. In the end, everybody might

be worse off.

In particular in continental Europe, many politicians

fear that their social models will not be able to withstand

the consequences of globalisation. They consider thesocial models of the Scandinavian countries as an

alternative for the liberal Anglo-Saxon model. This interest

comes at an odd moment. In particular in Denmark and

Sweden, there is growing doubt concerning the long-term

tenability of their economic models. In both countries, the

latest parliamentary elections were actually won by the

parties that campaigned for a slimmer welfare state.

Three welfare models

A useful classification of social welfare models has

been proposed by Gsta Esping-Anderson(1). He

distinguishes three types of economic models in market

economies: the liberal-model, the conservative model,

and the social-democratic model. The liberal model is

largely based on personal responsibility, and government

intervention is limited to remedy market failures. The

social sector has mainly a safety net function. The

system has strong incentives to look for work and asubstantial part of tax transfers go to working people to

improve these incentives. Income inequality is relatively

high and employment protection rather loose. In Europe,

typical examples of this group are the United Kingdom

and Ireland.

In the social-democratic model, the government has a

much more active role by also aiming at an equalitarian

society. Government transfers play an important role inachieving a more equal income distribution and promote

labour market participation. Taxation is relatively high to

finance a generous social security system. Regular

consultations between government and the so-called

social partners, i.e. trade unions and employers

organisation are an important part of social-economic

policy. Examples of this model are the Nordic countries

and the Netherlands.

The conservative model is similar to the social-

democratic model. The main difference is in the role ofthe trade unions. Whereas in the social-democratic

model, one umbrella trade-union dominates, in the

conservative model trade-unions are organised

according to religious or political affiliations. These

organisations tend to defend above all the rights of their

adherents instead of pursuing more general social-

economic objectives as in the social-democratic model.

In this model employment protection is relatively strict

and minimum wages are high, which protect the rights of

the insiders. This group includes Austria, Belgium,France and Germany (as well as the southern European

countries to a lesser extent).

Sapir assesses the performances of the three models

by comparing their outcomes in terms of efficiency and

equity(2). The probability of escaping poverty, defined as

the percentage of the population receiving income above

the so-called poverty line, defined as 60% of the median

income after social transfers, could be considered as a

measure for equity. Admittedly, this is a rather crude. A

major objection is that it does not tell us for how longpeople are living below the poverty line and what

chances they have to improve themselves.

The Nordic model

Raymond Van der Putten

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A model is called efficient, if it provides sufficient

incentives to work. Sapir suggests for this the

employment rate. However, the use of part-time workerscould make this a misleading measure. To provide a

better measure of the utilisation of labour, we have

created an employment rate in full-time equivalents by

multiplying the employment rate by the hours actually

worked divided by the hours worked by full-time

workers.

As expected, the employment rate in full-time

equivalents is highest in the liberal model, implying that

in this model make the best use of the workforce (see

Chart 1). However, its performance in terms of equity isdisappointing. By contrast, the conservative model

performs relatively well in terms of equity. However, in

these countries, the (full-time) employment rate is

relatively low. In particular, the southern European

countries perform very badly in terms of equity. The best

result in terms of equity and efficiency are clearly

obtained in the social-democratic model.

A mixed growth performance

In this article, we will concentrate on the social

economic models in the Nordic countries(3). These

models are characterised by relatively high taxes to

finance a comprehensive welfare system (see Chart 2).

According to economic theory, high tax rates and

substantial income transfers are in general associated

with welfare losses and low incentives to look for work.

Large welfare programmes often result in substantial

deadweight losses, as citizens tend to over-useservices for which they do not pay the full price. Using a

neo-classical growth model, Edward Prescott argues that

if France were to reduce its effective tax rate on labour

income from 60 percent to the U.S. 40 percent rate, the

welfare of the French people would increase by 19 percent

in terms of lifetime consumption equivalents(4). This

conclusion could be easily extended to the Nordic

countries. Nevertheless, the Nordic countries are already

among the most prosperous in the world. Did the Nordic

countries find the recipe for expanding the welfare statewithout significant welfare losses? Is the Nordic welfare

state like a free lunch?(5).

As it turns out, the welfare state has not come as a

free lunch. Over the past four decades these countrieshave not really outperformed the other OECD countries.

(see Chart 3). This is in particular the case for Sweden.

In 1970, the country was the fourth richest OECD

member state (after Switzerland, Luxembourg and the

United States) with GDP per capita 27% above the

OECD average. By 2006, it had fallen to the 12th place

and its income advantage had shrunken to 10%. The

Danish economy performed slightly better, but has also

experienced a decline in its relative position(6). From this

perspective, it seems that the Scandinavian model doesnot seem to have much to offer to the other European

economies.

August-September 2008 Conjoncture 14

Equity versus efficiency

Chart 1 Source: Eurostat, calculations BNP Paribas

75

80

85

90

95

35 40 45 50 55Employment rate (in full-time equivalents)

Probabilityofescaping

poverty

GER FRA

ITA

FIN

SWE DEN

UKSP

SWEDENFRANORFINITAUKSPAGERUSJAP

60

50

40

30

20

10

0

Source: OECDChart 2

Government revenue as % of GDP (2005)

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High employment rate but low hoursworked

Another characteristic of the Nordic countries is the

relatively flat income distribution after taxes and socialtransfers (see Chart 4, page 16). However, as the overall

tax burden is high, marginal tax rates for the average

income earners are relatively steep (see Table 1, page

16). In Denmark, the average income earner is already

facing the highest marginal tax rate of 63%.

This could easily have a detrimental effect on labour

market participation. Nevertheless, the employment

rates in these countries are among the highest in the

OECD (see Chart 5, page 16). This is one of the puzzling

aspects of the Nordic model, for which the solution canbe found in the tax-benefit system. One of the reasons

for the high taxes is the financing of measures to promote


Box 1 Nordic countries - diversities and similarities

The Nordic countries encompass the three Scandinavian countries Norway, Denmark, and Sweden Iceland andFinland, plus their associated territories which include the Faeroe Islands, Greenland (both associated with Denmark) andland (Finland). Their official cooperation is channelled through the Nordic council.

The logic behind this cooperation is that the region shares much of a common history. As a result, their political, economic,and social institutions are rather similar. The Nordic countries are among the richest in the world. In terms of GDP per head,they are all above the OECD average. The countries have well functioning market economies. Except for Iceland, they are allin the top-10 of the Global Competitiveness Index(7). They have very high tax burdens, related to their comprehensive socialsecurity system.

Despite these similarities, the Nordic countries have known different economic, social, and political developments. TheDanish manufacturing sector is characterised by small and medium-sized industries with a strong specialisation in the agro-industry. By contrast, the Swedish industrial landscape is dominated by large multinational corporations, operating in transport

and electronics. Traditionally, Finland was also specialised in timber and paper and pulp industry. However, over the lastdecade, the country has become an important producer of electronics and other high-tech products. Industries in Norway andIceland are heavily dependent on natural resources.

These differences have also influenced the way of policy making. Denmark has a long tradition of coalition governmentsand consensual politics. By contrast, as a result of the stronger industrialisation, politics in Sweden has been more polarised,with the Social Democratic Party playing a leading role. Only four general elections (1976, 1979, 1991 and 2006) have giventhe centre-right bloc enough seats in Parliament to form a government.

Up to 1981, Norwegian politics were also dominated by the Social Democrats. However, after 1981, the situation hasbecome more like in Denmark, as governments alternated between minority coalitions led by Labour or centre-right parties.At the moment, almost all Nordic countries are led by centre-right coalitions. Only in Iceland, a broad coalition has been formedbetween the conservative Independence Party and the Social-Democrats.

Concerning international economic co-operation, Denmark has been a member of the European Union since 1973,

whereas Sweden and Finland followed their example in 1995. As members of the European Free Trade Association, Norwayand Iceland are part of the European Area, which allows them to join the European Single Market without being member ofthe European Union(8). Only Finland has adopted the euro, whereas Denmark secured an opt-out of the single currency afterthe reaction of the Maastricht treaty in the 1992 referendum.

0500959085807570

150

140

130

120

110

100

90

80

(OECD=100)

Source: OECDChart 3

Denmark

Sweden

US

Eurozone

GDP per capita

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labour market participation. In particular, the generous

childcare benefits provide substantial incentives for

female participation. With the exception of France, the

Nordic countries are the only European countries that

offer some form of publicly provided childcare for children

below 3. In addition, these countries have very generousparental leave benefits(9). However, these benefits are

conditional on labour market participation. In addition, the

individual declaration of income taxes has considerably

reduced the marginal tax rates on earnings of a second

breadwinner in the family. With the exception of Iceland,

the tax rate for the second family earner does not differ

significantly from that of the first income earner.

In the Nordic countries, measures to stimulate theparticipation of women have been stretched to the limit at

the costs of the tax regime for the primary breadwinners.

USITASPAUKJAPGERFRANORFINSWEDEN

40

35

30

25

20

15

10

5

0

Source: OECDChart 4

A relatively flat income distribution(Gini coefficient, 2000)

DENNORSWEUKUSJAPFINGERSPAFRAITA

80

70

60

50

40

30

20

10

0

Source: OECDChart 5

A high employment rate(2007, % working-age population)

Average and marginal tax rates (1)

Average tax rateSingle

No childrenOne earner couplewithout children

One earner couplewith two children

Top marginaltax rate

Threshold(multiple AW)

Nordic countriesDenmark 41.0 35.8 29.3 63.0 1Finland 30.1 30.1 22.9 56.1 1.9Norway 29.9 27.1 21.5 47.8 1.5

Sweden 27.6 27.6 19.8 56.5 1.4Continental countriesFrance 27.8 23.8 17.5 49.8 2.8Germany 42.8 33.3 23.9 47.5 5.9Italy 28.5 25.6 12.5 50.7 3.5Spain 20.4 16.6 12.4 43.0 2.6English-speakingcountries Australia 23.4 20.5 10.0 46.5 2.6Canada 23.3 18.9 10.6 46.4 2.9United Kingdom 27.0 27.0 20.6 41.0 1.2United States 24.5 19.9 11.8 42.7 8.7

Table 1 Source: OECD

(1) All-in tax rate including employeessocial security contributions taking into account standard tax credits and allowancesAW = average worker

The Gini coefficient measures the income inequality in a country. A lownumber indicates a high degree of income equality.

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The tax wedge on the latter is relatively high by

international comparison (see Chart 6). This has

stimulated primary breadwinners to make less hours

doing paid work (see Chart 7). Instead, they tend to

devote more time on home work. By contrast, women in

the Nordic countries tend to be less active at home than

those in other OECD countries (see Table 2). Althoughthese differences may be partly attributed to cultural

differences, they have become more pronounced by

economic incentives.

The disappearance of the skill premium

The flat income distribution suggests that skill

premiums are relatively weak in the Nordic countries, in

particular compared to the English speaking countries.Domeij and Ljungqvist estimate that the average skill

premium in the US increased by around 8-10 percent

between 1970 and 1990. During the same period, the

Swedish skill premium fell by more than 30%, and only

recovered by 10 percentage points in 2002(10).

Edin and Topel explain the low returns from schooling

by non-market conform wage setting(11). During the

1970s, trade unions pursued egalitarian objectives in

their wage bargaining policies in centralised wage

negations. In this way, they achieved high compensationfor low-wage workers in exchange for relatively low

wages for skilled labour. However, their explanation is

unlikely to hold for the whole period. Indeed, after 1983,

wage bargaining moved increasingly to an industry and

company level, partly because employers argued that the

underpaying of skilled workers hindered recruiting.

Domeij and Ljungqvist argue that the decline in the

Swedish skill premium can be explained by differentiating

between the private and the public sector. In theiropinion, the decline in the skill premium was related to

the rapid expansion of the Swedish public sector, which

involved the disproportionately hiring of unskilled

workers. In this way, the ratio of skilled to unskilled

workers available to the private sector was increased,

which lowered the relative wage for skilled workers. One

could also argue that the Swedish government became


DENGERSWEFINNORUKFRAITAUSJAPSPA

40

35

30

25

20

15

10

5

0

Source: OECDChart 6

Total tax wedge (2007)

JAPUSUKSPAFINITASWEDENFRANORGER

1900

1800

1700

1600

1500

1400

1300

1200

1100

1000

Source: OECDChart 7

Average annual hours worked by employees (2007)

Home work by gender (Sweden = 100)

Male Female

Denmark 85.7 89.7

Norway 90.5 100

Sweden 100 100

US 81 103.4

Finland 85.7 103.4

UK 85.7 110.3

Germany 90.5 113.8

France 85.7 120.7

Table 2Source: K.S. Ragan, 2005, Fiscal Policy and the Family: Explaining

Labour Supply in a Model with Household Production, mimeo,University of Chicago.

Two-earner married couple, one at 100% of average earnings and theother at 67% with two children.

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the employer of last resort(12). In a similar way, the

disappearance of low skilled workers into the public

sector, long-term unemployment, disability or earlyretirement programmes might explain the compression of

the skill premium in other European countries.

This could explain why the public sector is relatively

large in all the Scandinavian countries (see Table 3). The

relative high level of public expenditure close to 50% of

GDP is not only related to the substantial income

transfers but also to the high number of people working

in the public sector and associated activities(13). In

Norway, Sweden and Denmark, around 40% of

employees are working in the public sector comparedwith just over 30% in France and Germany. A study by

Afonso, Schuknects and Tanzi shows that, in terms of

inputs, the Swedish public service is the most inefficient

in the OECD, followed by Finland and Denmark(14).

According to their calculations, the Swedish authorities

could decrease their expenditure by 43% to obtain the

same output(15). The average input inefficiency in the EU

is 27%. By maintaining public expenditure at the current

level, the output performance is 18% below what could

be achieved if productivity were as high as that of themost efficient countries Luxembourg, Netherlands and

the United States.

A flexible labour market

The common factor in the Scandinavian countries isthe important role that trade unions and employers

organisations are playing an important role in shaping

social-economic policies. In the three Scandinavian

countries, most trade unions are members of the umbrella

organisation LO(16). The trade union membership rate,

also referred to as the unionisation rate, is close to 80%

(see Chart 8). This is largely explained by the fact that the

Public sector performance

Total government expenditure(as % of GDP) (2007)

Public sector employee(as % of total) (2006) (1)

Public sector efficiency(2000) (2)

Nordic countriesDenmark 51.2 38.1 0.95Finland 48.9 34.2 1.01Norway 51.5* 40.0 1.09Sweden 54.3 40.3 0.82Continental countriesFrance 52.7 33.9 0.83Germany 45.4 30.8 0.97Italy 48.8 28.0 0.80Spain 38.6 24.0 1.06English-speaking countries Australia 34.9 - Canada 39.3 28.6 1.04

United Kingdom 44.7 35.8 1.06United States 36.6 - 1.26

Table 3 Source : OECD(1) Employees working in public administration, education, health and social work and other community activities.(2) A. Afonso, L. Schuknecht, and V. Tanzi, 2003, Public Sector Efficiency: an International Comparison, ECB Working Paper 242.(*) Mainland GDP.

SWEFINDENNORITAUKGERJAPSPAUSFRA

80

70

60

50

40

30

20

10

0

Source: OECDChart 8

High unionisation rate (2001)

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unemployment insurance is a voluntary insurance carried

out by the trade unions. However, the trade unions

unemployment insurance is also open for non-unionmembers. LOs dominant position and the high degree of

unionisation imply that the LO is less focused on

defending the rights of only the employees, but also takes

into account the macroeconomic consequences for those

who are outside the labour market.

Despite the strong presence of the trade unions in

Denmark, legal employment protection is one of the

lowest in the OECD. In Denmark, the notice period

is only 1 month, independent of the job tenure (see

Chart 9). Given the generous unemployment benefits(see below), one could say that the Danish has given

greater priority to income security than to job security.

Nevertheless, it is not true that Danish workers are at the

mercy of their employer. The strong presence of trade

unions in the enterprises forms implicit or explicit a

guarantee against unfair dismissals. In the absence of

any legal protection against dismissals, the Danish

Employers Confederation and the trade-union LO have

agreed on a general rule that employees must not

dismissed arbitrarily, and that employees that have beenin the company for more than 9 months are entitled to an

explanation for their dismissal. The flexibility device is

mainly used in severe downturns or for temporary layoffs,

to adapt the workforce better to output fluctuations.

Actually, many unemployment spells terminate by a

return to the former employer.

Job volatility is relatively high in the Scandinavian

countries. Around one fifth of Danish employees is less

than a year in a job, compared with only 12% in both

France and Germany. At just above 8 years, the lengthof job tenure in Denmark is the lowest in the OECD (see

Chart 10). However, it this could be attributed also to

other factors such as the industry structure with

relatively many small firms(17). In fact, the average job

tenure in the other Scandinavian countries with much

stricter EPL is only marginally longer. Moreover, the high

level of productivity and the substantial amount of

expenditure on training are supportive evidence of the

attachment of the workforce to the firm. Indeed, around

30% of employees is more than 10 years in the same job, compared with more than 40% in most of

continental Europe.

Unemployment and poverty trap

The Scandinavian countries are often envied for theirremarkable labour market performance. In July 2008, the

Danish unemployment rate stood at only 2.3%, compared

with 6.8% for the EU. Also Norway, Finland and Sweden

have unemployment rates below the EU average.

The relatively low level of unemployment is largely

due to the very low level of long-term unemployment (see

Chart 11, page 20).

Some have questioned the official unemployment

data. The management consulting firm McKinsey

estimates that the real unemployment rate was between15% and 17% in 2004, about three times as high as the

official rate of 5.4%.They arrive at this number by adding

SPAFRASWENORGERITAFINDENJAPUKUS

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Source: OECDChart 9

High values point to a high degreeof employment protection legislation

Strictness of employment protection legislation(2003)

ITAFRAGERSWEFINSPANORUKDEN

14

12

10

8

6

4

2

0

year

Source: OECDChart 10

Average job tenure (2007)

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to the official data, discouraged workers, part-time

workers who are looking for full time jobs, and all those

at working age and receiving an income replacementbenefit or are employed in special government programs.

This estimate might be an overestimation. By applying

the same methodology to the US, Schmitt finds an

unemployment rate of 15.2%(18).

In the Nordic countries, low unemployment rates go

hand in hand with high benefit levels, in particular for

people at the lower end of the income spectrum (see

Table 4). Once becoming unemployed, low income

earners can receive relatively high benefits for a long

period. The net replacement rate of a single familyworker earning 67% of the wage of an average

production worker (APW) is 82% in Sweden and even

87% in Denmark compared with 75% in France and

around 60% in Germany and the UK. After 5 years,

Danish jobseekers still receive 82% of their former salary,

while their Swedish counterparts receive almost 70%.

Over the same time span, the net replacement rate in

Germany and France has fallen back to 45% and 48%

respectively. For higher income earners, the replacement

rates are more in line with those in other OECDcountries. These results suggest that a generous welfare

system can coincide with good labour market outcomes.

It is mainly for this reason that continental European

countries have become interested in the Nordic model.

In the Scandinavian countries, low income earners

have little financial incentives to look for work. To

stimulate the return of benefit receivers into activity,

these countries rely on very comprehensive active

labour market policies (ALMP). Participation in these

programmes is obligatory, in Denmark after six months forunemployed under 30 and over 60, and nine months for

all others. In Sweden, unemployed will be enrolled in a

programme within 28 months. In both countries,

participants do not qualify anymore for an extension of

their insurance period. In Denmark and Sweden, around

0.5% of the labour force is participating in these

programmes. This is relatively high compared to the

unemployment rate in these countries. Moreover, the

costs of these programmes are elevated compared to

other OECD countries. Both Denmark and Sweden spendmore than 1% of GDP on ALMP compared with around

0.5% on average in the European Union (see Chart 12).

Opinions are divided on the usefulness of these kinds

of programmes. There is always the danger that theycrowd out existing jobs and might lead to unfair

competition not only between companies but also

between different kinds of workers. In the Danish case,

one could ask if the start of these programmes within

6 month of unemployment for people under 30 is not

too early. It could be argued that many of the participants

would have found a job without help. In fact, participation

could actually slow down the job search. On the other

hand, the programmes might stimulate the unemployed

to accept a job before enrolling into these schemes. Inthis way, the ALMP have a similar function as benefit

sanctions.


GERFRASPAFINSWEITAUKUSDENJAPNOR

109

8

7

6

5

4

3

2

1

0

% labour force


Long and short-term unemployment (2007)

Short-term unemployment (1 year)

DEN*SWEFRAFINGERSPANORITAUKJAPUS

5.0

4.5

4.0

3.5

3.0

2.52.0

1.5

1.0

0.5

0.0


(early retirement + unemployment benefits)

*2004

Public spending on active labour market policiesas % of GDP (2006)

Active measuresPassive measures

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An alternative would be to intensify job search

assistance, as is done in the UK. Between November

2005 and March 2006, the Danish Labour Market

Authority carried out a controlled experiment in thecounties Storstrm and South Jutland, by dividing the

registered unemployed in two groups, depending on their

date of birth(19). One group received an intensified

sequence of monitoring, counselling, job search

assistance, and participation in ALMP. The control group

followed the normal rules. By intensifying the contacts

between the unemployed and the public employment

service, the median unemployment duration of the

treatment group was reduced to 11.5 weeks compared

with 14 weeks for the control group.In a study on the Swedish unemployment duration,

Richardson and van den Berg conclude that the

individual transition rate from unemployment to

employment is substantially raised as a result of the

individuals participation in a vocational training

course(20). However, when the time spent in the program

is taken into account, the net effect on unemployment

duration is about zero. They recommend shortening the

training courses and prolonging the job search

assistance after the completion of the course. Moreover,the training programs could become more effective by a

better selection of potential candidates.

Happy Globalisation

The Nordic countries belong to the most open

economies in the OECD (see Chart 13). In particularSweden has a relatively large manufacturing sector,

including some very successful multinational groups

such as Electrolux, Ericsson, and Volvo. In 2003 (latest

available data in OECD STAN database), manufacturing

contributed directly 22% to total value added, with the

sub-sectors machinery and equipment plus wood and

paper production making up about half of it.

Net replacement rates (one-earner married couple, 2 children)

67% of salary APW 100% of salary APWInitial After 5 years Initial After 5 years

Nordic countriesDenmark 91 92 75 77Finland 85 91 76 77Norway 74 99 70 73Sweden 89 95 69 70Continental countriesFrance 83 78 67 54Germany 78 79 73 62Italy 64 0 70 0Spain 77 49 75 35English-speakingcountries Australia 77 77 65

Canada 71 71 78 62United Kingdom 70 79 60 67United States 49 48 56 40

Table 4 Source : OECDAPW = Average Production Worker

Exports as % of GDP in 2005

Chart 13 Source: OECD

0 20 40 60 80 100

United States

Japan

United Kingdom

Spain

France

Italy

Finland

Norway

Germany

Denmark

Sweden

Netherlands

Belgium

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As in the rest of the industrialised world, the relative

importance of manufacturing sector in the Nordic

countries has steadily diminished. This is partly due to

the development of the services sector. Moreover, during

the past decade, enterprises have increasingly offshored

their activities to low wage countries in East Asia and

since the disappearance of the Iron Curtain, also to

central and eastern Europe. The average hourly wage

costs in the ten EU accession countries are around5 euros compared with 25 euros in Sweden. Swedish

companies especially invested in Poland and the Baltic

Republics. The proximity of these areas made it possible

for the smaller and part of their production.

The offshoring of part of the labour-intensive production

process and the expansion of skill-intensive activities such

as research & development, or downstream processes,

such as marketing and after sales services, is observed in

many other countries. They supply the world with a large

range of products, of which an increasing part is producedelsewhere. According to Sinn (2006) they have become

bazaar economies(21). The Swedish and Finnish

manufacturing sectors have the highest R&D intensity in the

world (see Chart 14). As a result of the unbundling of the

production process, the import penetration in the

manufacturing sector has considerably increased, although

in Sweden less than in most other countries (see Table 5).

Despite these developments, the decline in the share

of manufacturing activity in Sweden has been limited

(Chart 15). This could surprise as Swedish entrepreneurshave been confronted with much sharper increases in

wage costs than in most other OECD countries. However,

by offshoring labour intensive activities or outsourcing

them to foreign suppliers, productivity growth has been

among the highest (Chart 16). As a result, Swedish unit

labour costs are one third below their 1992 level.

There is insufficient information on the employment

effects of offshoring and outsourcing. According to the

Swedish Institute for Growth Policy Studies ITPS,

Swedish groups with subsidiaries abroad have reduced

their Swedish staff over time, while increasing theirforeign staff. In 2005, these groups employ 1million

people abroad, or two-third of their total workforces.

However, as the majority of the Swedish subsidiaries are


USUKFRAITAJAPSWEGER

30

25

20

15

10

5

0


Share of manufacturing in value added

1985-19892000-2003

Import penetration

yearImport

penetrationChange

Spain 1995 272003 36 9

Germany 1995 30

2003 39 9UK 1995 39

2003 48 9France 1995 31

2003 36 6US 1995 18

2003 24 6Sweden 1995 41

2002 46 5Italy 1995 25

2003 30 5

Table 5Source: OECD

Import penetration is defined as imports devidedby total domestic demand

ITAUKFRAGERDENUSJAPFINSWE

16

14

12

10

8

6

4

2

0

in % of value added


R&D intensity of the manufacturing sector (2003)

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in Europe(61%) and the US (28%), it is unlikely that this

development is largely motivated by expanding market

share, rather than by seeking cost reductions. On theother hand, the percentage of Swedish employees in

foreign-owned companies has also rapidly increased and

is now just under 25%.It is likely that offshoring has in

particular reduced the amount of work for less skilled

workers. Indeed, there has been a clear upward trend in

the wage bill share of workers with tertiary education and

a downward trend in the wage-bill share of workers with

lower secondary education(22). However, this trend is also

due to the increase in the relative supply of workers with

tertiary education and the increased use of computers.Since the EU enlargement in 2004, firms in the Nordic

countries have been confronted with increased

competition from, in particular, the neighbouring Baltic

Republics and Poland. Increased immigration from these

countries has helped to ease bottlenecks in the labour

market and dampen wage demands. Between May 2003

and June 2007, the Nordic countries issued about 75

000 work permits for migrants from the new EU member

states, of which about 50% issued by Norway.

Major problems have appeared in the import of servicesfrom these countries, i.e. for posted workers and self-

employed offering temporary services, mainly in the

construction sector. The problem is in the implementation of

the Posted Worker Directive, which requires firms to observe

a nucleus of mandatory rules for minimum protection. In the

Nordic countries, labour market regulations are often

negotiated between trade unions and employers. In

Denmark and Sweden, the social partners have always

strongly opposed state interference in this area. As a result,

foreign supplier can either enter a collective agreement with

the trade union in the host country or apply the collective

agreement of its home country. Recently, the EuropeanCourt of Justice decided that industrial actions to force

foreign suppliers to enter a collective agreement with trade

union were illegal (see Box 2).


060504030201009998979695949392

280260

240

220

200

180

160

140

120

100

1992=100

Source: US Bureau of Labor StatisticsChart 16

Labour productivity in the manufacturing sector

SwedenUSFranceGermanyUK

Box 2: The Laval case

In May 2004, the Latvian construction company Laval un Partneri posted workers on Swedish building sites run by itssubsidiary L&P Baltic Bygg AB. The Swedish construction trade union demanded that these workers would be paid inaccordance to the Swedish collective agreement. The Latvian firm refused this, arguing that it had entered into an agreementwith the Latvian building sector trade union. Workers would receive almost twice the pay that was customary in Latvia, inaddition to board, lodging and transport.

Following the breakdown of the negotiations, the Swedish construction trade union, initiated a blockade of the building site.The action was later joined by the Swedish Electricians Union. As a result of the action, Baltic Bygg filed for bankruptcy in2005, and the posted workers returned to Latvia.

Laval asked the Swedish Labour Court to declare the blockade illegal, as it would violate the European Posting WorkersDirective. The Labour Court rejected this demand, but decided to request a statement from the European Court of Justice,which delivered its verdict in December 2007. The Court declared that trade unions had the right to take collective action toprotect workers of the host State against social dumping. However, in the specific case, the action was not justified as thetrade unions had asked for pay rates in line with the average market level of pay in the Stockholm region, whereas theDirective on posted workers only requires firms to observe a nucleus of mandatory rules for minimum protection. In Sweden,no legal minimum wage exists. The labour market is largely regulated by collective agreements negotiated between tradeunions and employers organisations. The Court argued that the trade unions demand could not replace the lack of a minimumwage provision in Swedish labour law. In addition, the Court stated that the Swedish labour laws failed to take into account

that the Latvian workers were also bound to the collective agreements in their home country.The Swedish government has announced that amendments to its labour legislation might be necessary to avoid future

problems. A government report will be published by mid December 2008.

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Nordic lessons

The Nordic countries have a good record in terms ofreduction of poverty reduction, labour market participation

and the return the unemployed to the regular labour

market. On the other hand, the costs of the model are

very high. Government expenditure (in % of GDP) is

among the highest in the OECD. This has undoubtedly

led to substantial welfare losses. As marginal income tax

rates are high, employees work on average much less

than in the rest of the OECD. At the latest elections, both

the Danish and the Swedish have already expressed their

preference for a slimmer welfare state, without affectingthe fundamentals of their social models. A lower tax

burden might stimulate workers to increase their number

of hours worked. In this way, the Nordic countries could

improve their welfare substantially.

In all the Nordic countries, the regular dialogues

between the trade unions and employers organisations

play an important role in the shaping of social economic

policies. Recently, the labour market model has come

under double pressure. In the first place, to remain

competitive, companies have been offshoring labourintensive activities. The trade unions have not opposed

this development. On the contrary, they have understood

that this in combination with the upgrading of skills of the

domestic workforce is essential for the survival of the

manufacturing sector. In addition, technical developments

have increased the scope for outsourcing and offshoring.

In the services sector, all work that is suitable for electronic

delivery can in principle be offshored. This could lead to

the loss of service jobs to foreign competitors. At the same

time, Nordic services firms should also be able to profitfrom this development by exporting their products.

The second threat is coming from the free movement

of services and the posting of workers in the European

market. As the Laval case showed, the Nordic traditions

of negotiated agreements between employers and trade-

unions have clashed with European legislation, which is

based on the continental tradition of the legal extension

of collective agreements and minimum standards. The

adoption of more European style minimum labour

standards seems inevitable. The experiences in Norwayand Finland show that it is probably less than a threat

than most actors fear at the moment.

The good performance of the Nordic models in

comparison to some of the continental models has raised

the question what the European countries can learn. It isgood to underline first that the Nordic models are

outcomes of a historical process. When the Danish social

partners concluded their first agreement in 1899, they did

not have a blueprint of a social model in mind. For this

reason, elements of these models are difficult to

implement in isolation. The Nordic countries are also

relatively small and have rather homogeneous

populations. That could also be an element that explains

the functioning of their models.

It is in the field of labour market policies that thecontinental countries could probably learn most. If the

Continental European countries do not want to adopt the

more incentive-based policies to improve the functioning

of their labour markets, they could find inspiration in the

active labour market policies of the Nordic countries.

Lastly, the strength of the Nordic model is in its adaption

to changing circumstances, in which the negotiations

between social partners play a central role. However,

such policies only work if social partners can be

persuaded not to pursue the interest of their members byadopting anti-competition measures or strengthening the

position of those who are already in the labour market,

but keeping the interest of the whole society in mind.

[email protected]


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NOTES

(1) G. Esping-Andersen, 1990, The three worlds of

welfare capitalism, Princeton University Press. Someauthors have later added the Mediterranean model asseparate category. See f.e. Sapir, A. (2005),Globalisation and the Reform of European SocialModels, Bruegel Policy Brief, issue 2005/01.(2) See Sapir op. cit.(3) The term Scandinavian model is often reserved todescribe the way the Nordic countries organise andfinance their social security, health and educationsystems.

(4) E. Prescott, 2004, Why Americans work so much,Federal Reserve Bank of Minneapolis Quarterly ReviewVol. 28, No. 1.(5) P.H. Lindert, 2003, Why the welfare state looks likefree lunch, NBER Working Paper 9869.(6) Only Norway improved its position considerably byclimbing up to the 2nd place, after Luxembourg.However, this development is narrowly connected withthe finding of oil on its continental shelf.(7) The Global Competitiveness Index is constructed by

the World Economic Forum. In the 2007 ranking,Denmark, Sweden and Finland ended on the third, fourthand sixth place, respectively. Iceland came in at the 23rd

position.(8) The other members of the European Free Trade

Association are Switzerland and Liechtenstein.(9) In Sweden, parental benefit is payable for up to480 days, of which 390 days at 80% of the parentsincome. The generosity of the parental leave isdepending on how many days the woman has worked

before giving birth. This has given young women strongincentives to establish themselves firmly in the labourmarket before starting a family.(10) D. Domeij and L. Ljungqvist, (2006) Wage structureand public sector employment: Sweden versus theUnited States, 1970-2002, CEPR Discussion Paper5921.(11) Per-Anders Edin and Robert Topel, 1997, WagePolicy and Restructuring: The Swedish Labor Marketsince 1960, in The Welfare State in Transition:

Reforming the Swedish Model Richard B. Freeman,Robert Topel, and Birgitta Swedenborg, editors, (p. 155 -202), NBER published in January 1997.

(12) A. Lindbeck, 1997, The Swedish Experiment,

Journal of Economic Literature, Vol 35, no.3.(13) Defined as employees in public administration,education, health and social work and other communityactivities.(14) A. Afonso, L. Schuknecht, and V . Tanzi, 2003,Public Sector Efficiency : An International Comparison,ECB Working Paper 242.(15) Public sector output performance is calculated byusing several indicators indicators for public sectoroutcomes concerning administration, education, health

and infrastructure. These are complemented withindicators concerning the three tradition funtions forgoverment, i.e. income distribution, stabilisation andeconomic performance.(16) LO stands for Landsorganisationen i Sverige,Landsorganisationen i Danmark, andLandsorganisasjonen i Norge.(17) Torben M. Anderson and Michael Svarer, 2007,Flexicurity - labour market performance in Denmark,Economics Working Paper 2007-9, University of Aarhus.

(18) John Schmitt, 2007, Is the unemployment rate inSweden really 17 percent?, Center for Economic andPolicy Research, Issue Brief, June 2007.(19) B.K. Graversen and J.C. van Ours, 2006, How tohelp unemployed find jobs quickly: ExperimentalEvidence from a mandatory activation program, IZADiscussion Paper 2504.(20) Katherina Richardson and Gerard van der Berg,2006, Swedish labour market training and the durationof unemployment, CEPR Discussion Paper 5895.

(21) Hans-Werner Sinn, 2006, The Pathological ExportBoom and the Bazaar Effect, CESifo Working Paper1708. He studies in particular the industrialdevelopments in Germany.(22) Karolina Ekholm and Katarina Hakkala, 2008,International Production Networks in the Nordic/BalticRegion, OECD Trade Policy Working Paper 61.


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ECONOMIC RESEARCH DEPARTMENT economic-research.bnpparibas.com

Philippe dARVISENET 33 1.43.16.95.58 [email protected]

Chief EconomistOECD COUNTRIES

Philippe dARVISENET 33 1.43.16.95.58 [email protected]

Eric VERGNAUD 33 1.42.98.49.80 [email protected] of OECD CountriesStructural issues, Single European Financial Market

Caroline NEWHOUSE-COHEN 33 1.43.16.95.50 [email protected] economics

UNITED STATES, CANADAJean-Marc LUCAS 33 1.43.16.95.53 [email protected]

JAPAN, AUSTRALIA, NEW ZEALANDCaroline NEWHOUSE-COHEN 33 1.43.16.95.50 [email protected]

EURO ZONE, ITALY, EU ENLARGEMENTClemente De LUCIA 33.1.42.98.27.62 [email protected]

FRANCE, EURO ZONE LABOUR MARKETMathieu KAISER 33 1.55.77.71.89 [email protected]

GERMANY, AUSTRIA, SWITZERLAND,PUBLIC FINANCESFrdrique CERISIER 33 1.43.16.95.52 [email protected]

SPAIN, PORTUGAL, GREECEPhilippe Sabuco 33 1.43.16.95.54 [email protected]

UNITED KINGDOM, NORDIC COUNTRIES,BENELUX, PENSIONS, LONG TERM FORECASTSRaymond VAN DER PUTTEN 33 1.42.98.53.99 [email protected]

BANKING ECONOMICSLaurent QUIGNON 33 1.42.98.56.54 [email protected]

Cline CHOULET 33.1.57.43.02.91 [email protected]

Philippe SABUCO 33.1.43.16.95.54 [email protected]

COUNTRY RISK

Guy LONGUEVILLE 33 1.43.16.95.40 [email protected]

Franois FAURE 33 1 .42.98.79.82 [email protected] flows to emerging markets,Turkey

ASIA

Delphine CAVALIER 33.1.43.16.95.41 [email protected] PELTIER 33 1.42.98.56.27 [email protected]

LATIN AMERICASylvain BELLEFONTAINE 33 1.42.98.26.77 [email protected] PERRACINO 33 1 42 98 74 26 [email protected]

AFRICAStphane ALBY 33 1.42.98.02.04 [email protected] GUIEZE 33 1.42.98.43.86 [email protected]

EASTERN EUROPECentral Europe, Baltic countries, Balkan countriesAlexandre VINCENT 33 1.43.16.95.44 [email protected]

RUSSIA, FORMER SOVIET REPUBLICSAnna DORBEC 33 1.42.98.48.45 [email protected]

MIDDLE EAST SCORINGPascal DEVAUX 33 1.43.16.95.51 [email protected]

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