Journal of Public Economics 127 (2015) 1–2
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Journal of Public Economics
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Editorial
The Nordic model
A pat child has many names: The Swedes call it the Swedish model,
the Danes and the Norwegians the Scandinavian model, and the Fins the
Nordic model. It is the same thing, the society model of the small open
economies in Northern Europe.
What is it? In terms of institutions the Nordic model consists of
encompassing labor market organizations, routine consultations
between the government and organized interests groups, and a large
welfare state. In terms of policies it consists of wage leveling through
coordinated wage bargaining, a governmental commitment to full
employment, and the provision of basic goods for all citizens as a right
of citizenship. In terms of economic behavior it combines capitalist
dynamics with worker security, blending market behavior with public
provisions.
This special issue of the Journal of Public Economics is about the
model, its foundations, achievements and problems.1 At the outset it
should be observed that Denmark, Finland, Norway and Sweden all
seem to violate what prominent scholars within the economic s profes-
sion have long viewed as necessary requirements for an economy to
prosper. These Nordic countries seem to have too high taxes, too strong
labor market organizations, too generous welfare states, too small wage
differentials for the good of the economy. Yet, what many economists
see as a recipe for serious economic trouble seems in the Nordic
countries to be consistent with high growth, low unemployment, low
inequality, and a fairly efficient allocation of resources.
To this picture, however, we must add that the Nordic model
provides protection without protectionism. In fact, it is built up by
what should be characterized as free-trade institutions, distributing
the gains from trade to citizens who constitute a wider majority of the
population than those who otherwise would benefit from free trade.
The welfare state represents one free-trade pillar. It provides a
collectively paid insurance against the risks associated with fluctuations
and structural change induced by international competition. In addition,
the welfare state socializes human capital investments in education and
health that also improve performance in international markets. The
system of wage determination represents another free-trade pillar.
Wages are taken out of market competition and placed in a system of
collective decisions, where unions and employers in export oriented
sectors set the pace for the average wage increases for the entire
economy. A basic goal is to remain competitive in the world economy.
Protection without protectionism is part of the reason why the
Nordic countries for decades have done remarkably well when it
comes to achieving the social goals of equality and workers security
without obvious macroeconomic costs in terms of inefficiency and
1 A more narrow approach that neglects institutional complementar-
The papers are based on contributions to a conference organized in Oslo in September
2012 by ESOP (Equality Social Organization and Performance) in cooperation with UCFS
(Uppsala Center for Fiscal Studies).
http://dx.doi.org/10.1016/j.jpubeco.2015.04.007
0047-2727/© 2015 Published by Elsevier B.V.
stagnation. On the contrary, economic growth in the Nordic countries
has been on par with the US, but without the wide social disparities of
the American society.
Several of the contributions address these issues in more debt. The
first, “Leaders and followers: perspectives on the Nordic model and
the economics of innovation” by Joseph Stiglitz, emphasizes how the
Nordic model may be better for innovation than the American model.
This claim, countering the views of the skeptics, indicates that if the
US adopted at least some of the institutional arrangements that are
associated with the Nordic model, innovation would be higher and
societal welfare would be improved even more. The article is an exercise
in comparative economic systems. It suggests that the Nordic model
may have created a virtuous circle: a political regime that supports
policies that facilitate innovation and ensures that the benefits of the
resulting growth are widely shared.
The second paper, “the Scandinavian model — an interpretation” by
Erling Barth, Karl Moene and Fredrik Willumsen, focuses also on the
positive endogenous dynamics of the model. It emphasizes the consis-
tency between different parts of the model and how wage compression
induces creative destruction. The claim is that the Nordic model can be
understood as a political and economic equilibrium of collective
bargaining, capitalist dynamics, and social protection. It resolves to
some extent the conflict between pay and performance, where the
combination of local and central wage setting implies a compressed
wage distribution and efficiency at the work place. Both fuel capitalist
investment and a generous welfare spending giving rise to shared
prosperity and higher average incomes than other feasible alternatives.
The lesson from these two articles is not necessarily that there is a
universally positive relationship between social equality and good
economic performance, but rather that under some institutional
arrangements, equality and prosperity can work together and be mutu-
ally beneficial. Under other institutional arrangements this may not be
the case.
The article “Nordic exceptionalism? Social democratic egalitarianism
in world-historic perspective”, by Mattia Fochesato and Samuel Bowles,
extends this perspective even further. The authors use archeological,
ethnographic, and historical data to ask in what respects are the Nordic
economies exceptionally egalitarian when compared to the vast range
of economic systems that humans have experienced. They claim that
the Nordic economies are not exceptional in the degree of equality in
material wealth or human capital, but more in the limited relevance of
differences in wealth on the distribution of living standards and greater
inter-generation social and economic mobility. Their approach is
institutional and behavioral with an evolutionary perspective.
ities and social spill-overs does not capture such mechanisms and can
easily lead to a misinterpretation of the Nordic experience. The same
2 Editorial
goes for the motives for cooperation, discussed in the contribution by
John Roemer entitled “Kantian optimization: a microfoundation for
cooperative behavior”. It explores a possible foundation for how the
successful welfare states in the Nordic countries had their genesis in
solidarity. Although the article is basically an exploration of essential
features of cooperative behavior, it speaks to why we do not necessarily
need to invoke altruism among the citizens of Nordic societies to
explain the generous welfare state. Rather the homogeneity of the
Nordic societies may have been the source of their recognition of
common interests, making it easier to organize welfare states where
citizens were ethnically and linguistically similar and raising the
support for welfare spending to redress inequality.
The article “Labor income dynamics and the insurance from taxes,
transfers, and the family” by Richard Blundell, Michael Grabery, and
Magne Mogstad, explores how the tax and transfer system affects the
impact of permanent and transitory shocks on the life cycle of incomes.
The article provides a comprehensive dynamics for different skill
groups. Among the many findings it is particularly interesting to note
how the progressive nature of the tax-transfer system attenuates the
impacts of shocks on life-cycle inequality. An alternative to insurance
provided by the welfare state is of course insurance provided by the
family, but the presence of a generous welfare state does not imply
that insurance via family members vanishes completely. The paper
finds that the family attenuates shocks, but that this empirical effect
almost disappears once they control for the role of taxes and transfers.
From the first five contributions to the special issue it is clear that the
Nordic model has considerable gains. But what are the costs? There are
of course several potential negative aspects of the model — that to some
extent are mitigated. For instance, the size of the public sector in the
Nordic countries is among the largest in the world that may hamper
the supply and allocation of labor both in the short and long run.
Some of the negative effects may be prevented by how the public
policies are designed and complemented by additional interventions.
Yet, the Nordic model may weaken the capability of the economy to
continually respond to the ongoing changes in needs and possibilities by
reallocating resources towards their best use. In the contribution
“Taxation and the long run allocation of labor: theory and Danish
evidence” Claus Thustrup Kreiner, Jakob Roland Munch, and Hans
Jørgen Whitta-Jacobsen study the distortionary effects of taxation on
labor mobility and the long run allocation of labor across different
profitable opportunities. Clearly, labor mobility responses are funda-
mentally different from the hours-of-work responses of the basic labor
supply studies. Replacing all taxation along the intensive margin by
lump sum taxation the authors identify an efficiency gain equal to 12%
of initial income — a sizable, although not huge effect, which should
be balanced against the gains in social welfare from social insurance
and equality achieved through high marginal taxation.
The paper “Estimating labour supply elasticities based on cross-
country micro data: a bridge between micro and macro estimates?” by
Markus Jäntti, Jukka Pirttilä, and Håkan Selin also start from the premise
that the distortion from taxes may rise with the tax rate. If the high
elasticities of labor supply recently found in macroeconomic research
are relevant, the Nordic welfare states would be in big trouble. The
authors show that micro-level hours and participation elasticities are
modest for the Nordic countries, most likely because goods that are
important to labor supply are highly subsidized. Child care, is one
important example, that may counteract some of the harmful effects
of taxation on labor. Thus high tax rates may not necessarily undermine
high effort and employment levels.
The role of subsidized child care is important in this case as it stimu-
lates female participation in the work force. Public provision of child
care has also other implication which is explored in the contribution
by Tarjei Havnes and Magne Mogstad, “Is universal child care leveling
the playing field?”. The article shows that subsidized child care has
effects way beyond the labor supply of women. Havnes and Mogstad
emphasize how universal child care programs lead to redistribution
when the kids grow up. Highly subsidized child care in Norway has
had a positive impact in the lower and middle part of the earnings
distribution of exposed children as adults. Children of low income
parents gain while upper-class children actually experience a loss
in earnings. Thus the universal child care program that is typical of
the Nordic model, substantially increased intergenerational income
mobility.
But why does not the provision of welfare benefits as such reduce
more work incentives and diligence? The contribution by Ann-Sofie
Kolm and Mirco Tonin addresses how the design of social policy aims
to reduce the problem by for instance tying welfare benefits to employ-
ment. In “Benefits conditional on work and the Nordic model” Kolm and
Tonin argue that this design of policy is one of the factors behind the
success of the Nordic model. As long as benefits are conditional on
jobs it is more important to hold a job, thus lower wages will be accept-
ed, and more jobs created. In addition the incentive to acquire higher
education improves, further boosting employment in the long run.
In the Nordic countries a comprehensive welfare state is therefore
associated with high employment.
Similarly, Tobias Laun and Johanna Wallenius explore how a recent
Swedish pension reform creates large incentives for older workers to
continue working longer in their “A life cycle model of health and
retirement: the case of Swedish pension reform”. They study the effects
within a life cycle model of labor supply and retirement with an empha-
sis on disability insurance and pension claiming. Individuals choose
when to stop working or to apply for disability and pension benefits.
The new pension system i Sweden creates strong incentives for the
continued employment of senior workers.
In part because the Nordic model is considered to work fairly well
many observers worry whether it is possible to sustain it under the
new circumstances of globalization and with super powers like China
entering the world market. In “Made in China, sold in Norway: local
labor market effects of an import shock” Ragnhild Balsvik, Sissel Jensen,
and Kjell Salvanes explore to what extent higher exposure to import
competition from China threatens the Nordic model. Focusing on
the case of Norway they find some negative employment effects for
low-skilled workers. In a comparative perspective they find that
manufacturing employment in both Norway and the US has been nega-
tively affected by the Chinese export supply shock since the early 1990s,
although to a much smaller degree in Norway than in the US. In contrast
to the well documented findings for the US, the Norwegian study did
not find any negative wage effects. It confirms the perception of the
Nordic model as highly conducive to free trade and globalization.
Sören Blomquist
Karl Moene