Reassessing the Nordic Welfare Model
Kickoff Conference, Oslo, 24-25.Oct,2007
Globalization, Competitiveness
and Social Inequality
• Is Globalization a Threat to the Nordic
Welfare model?
• Or is the Nordic Welfare Model a Key to
Global Competitiveness?
• Jørgen Goul Andersen
•
Aalborg University
www.ccws.dk
What is the Nordic Welfare Model?
Minimum definition:
• Universalism
• High priority to services, especially child & elderly care
• Equality: Compressed wage structures, High minimum
protection, Progressive taxes
• Tax financing
• High priority to basic & lower education
What is globalization?
• Interaction
• Dependence
• Across borders, across continents
Economic, Political, Cultural Globalization
(and immigration)
Economic globalization:
• Trade
• Foreign Direct Investments
• International Capital Flows
A Few Reservations
•
•
•
•
•
•
•
•
There was a Roman empire once …
There was a globalization once: (1850) 1870-1913
Foreign trade/GDP: 1913 > 2005 (and 1960>2005) in Dk.
Globalization was reversed 1914-45
Not that much intercontinental trade
Small open economies always exposed to comptetition
Most jobs are in the shielded sector
Transportation costs could increase
But:
• Capital movements
• Dependence; competition is global
• Global explosion in education & technology
But why should that
impact on the welfare state?
Previously diffuse arguments:
- Nation state building & welfare state was linked
- Competitiveness requires less regulation, lower
taxes,etc. (≈ ”Washington Consensus”)
- Global competition lead to increased inequality.
And less state capability to do anything about it
More serious arguments
Knowledgeintensive
economy (EU)
Less room of
maneouvre in
economic
Policy?
End of full
employment
policies?
Trade off
between
equality and
employment?
Pressure on
low-skilled
workers?
Economic
Globalization
(OECD)
Tax
competition:
”Race to the
Bottom”?
-Capital taxes?
-Income taxes?
Trade-off equality –
employment?
Or trilemma: Equality – employment – balanced budget?
Strong theoretical arguments:
Imports/outsourcing = de-industrialization =unskilled surplus population
Many ”systemic errors” in Nordic Countries:
- Compressed wage structures / high minimum wages
- Small work incentives especially for low-skilled workers
(those who have fewest non-economic work incentives)
Equality –
comparative figures
High/increasing inequality
Not unavoidable
P 90 / P 10 Ratio
2000
Mid-1980s
Denmark
2.7
2.8
Sweden
2.8
2.4
Norway
2.8
3.1
Finland
3.1
2.7
Average
2.8
2.7
Netherlands
3.0
2.7
Austria
3.3
2.9
France
3.4
3.3
Germany
3.5
3.2
Italy
4.6
3.9
UK
4.2
3.6
USA
5.4
5.5
Gini-coefficients
Denmark, 25-59 years old
1994
Personal income
Taxes
P.Income after tax
Capital income
Disposable income
1996
1998
2000
2001
2002
38.7
38.3
38.3
38.5
38.6
38.3
-19.1
-18.8
-18.4
-18.7
-18.7
-18.3
19.6
19.6
19.9
19.8
19.9
20.0
0.6
0.6
2.5
3.8
4.0
4.0
18.9
19.2
20.5
21.4
21.8
22.4
Increasing inequality in general=
Mainly an effects of capital income + 99th percentile
After 2002: Taxes probably less redistributive = POLITICS
Denmark poverty
Report 23. October 2007/ Danish LO:
Increasing poverty in Denmark
Especially after 2001
Overwhelmingly function of political factors:
• MAKE WORK PAY politics
= increasing poverty, especially for families
Necessary/unavoidable?
• Empirical evidence shows small/no effects
• Denmark has the highest non-financial emploment
commitment in the world
Unemployment, by
education (25-64 years old)
1. Less
than upper
secondary
2. Upper
Secndary
3.
Tertiary
(1:3)
% employed
among loweducated
men
Denmark
7.2
4.4
4.7
1.5
71.6
Sweden
6.1
5.2
3.9
1.6
73.3
Norway
3.9
3.6
2.5
1.6
71.7
France
12.1
7.5
6.1
2.0
68.3
Belgium
10.7
6.7
3.5
3.1
61.9
Germany
18.0
10.2
5.2
3.5
61.2
UK
6.9
3.9
2.4
2.9
61.9
USA
9.9
6.1
3.4
2.9
68.9
What is the secret?
• Flexicurity? (good for Denmark)
• Public service sector: (Good) Service jobs
• Qualification effort: Denmark lost some 20 per
cent of unskilled jobs – but some 25 per cent of
unskilled workers
• High social minima: Avoiding poverty
Weaker incentives but more resources?
• High minimum wages: Efficiency requires
motivation/Job satisfaction = incentive to work?
At least the Bumblebee seems to be flying
We need to know more about why
Taxes and Globalization
Combined income taxes as per cent of
gross wage expenditures, 2004
Single person
Married, 2 children,
100% + 67 % APW
67% APW
100 % APW
167% APW
Belgium
46.9
54.2
60.3
46.0
Germany
45.4
50.7
55.7
42.7
Sweden
46.2
48.0
52.4
43.2
France
32.5
47.4
50.6
37.6
Italy
41.7
45.7
50.5
41.5
Austria
38.6
43.8
49.7
37.5
Finland
38.6
43.8
49.7
37.5
Netherlands
38.1
43.6
40.5
37.3
Denmark
39.4
41.5
49.9
36.3
Spain
33.6
38.0
41.9
34.6
Norway
33.8
36.9
43.4
31.8
UK
26.4
31.2
34.2
24.1
Ireland
15.6
23.8
35.0
14.4
USA
27.3
29.6
34.8
23.6
Income taxes
Nordic Countries
• Difficult to speak of a Nordic Model here
• Eldorado for most similar design
in studying
- effects on labour supply
- effects on migration
• (Not very promising for people hoping to
demonstrate large effects of taxes on labour
supply, it seems … but perhaps we should
include Iceland)
Globalization and
Taxes
• Corporate taxes: Some indices of race to
the bottom, but mostly by widenig tax base
• Income taxes: Somewhat lower marginal
taxes in most countries, party by widening
tax base
• Are these policy changes necessary
adaptations to globalization?
Globalisation and income
taxes: The fear of
immigration
•
•
•
•
Not marginal tax rate that is important here
It is the total income tax
It is not only income taxes that are important
It is the total tax people have to pay
- including VAT
- including property tax for homeowners
Globalisation and
income taxes: The fear
of immigration – II.
• Not only taxes are important
• The important calculus includes taxes plus
necessary social expenditures (including
private insurance)
• For those age groups that are mobile
across borders (roughly those aged less
than 35)
• Provided people move because of selfinterest
Low Taxes mean high
private welfare expenses
2000
Public gross
expendture
Total net social
expenditure
Rank net social
expenditures
Sweden
35.1
30.6
3
Denmark
34.2
26.4
5
France
33.0
31.2
1
Germany
30.6
30.8
2
Norway
27.0
23.6
8
Netherlands
24.3
25.0
6
UK
25.4
27.1
4
USA
15.7
24.5
7
Surcey: Adema & Ladaique (OECD, 2005)
Conclusions regarding
taxes
• Probably no economic incentives at all to emigrate
• Rather economic incentives to return
• This is inconsistent with the suggestions of e.g. the Danish Welfare
Commission 2003-06,
• But it is perfectly consistent with the data of the welfare commission
If there are any problems with taxes, it concerns immigration, not
emigration; immigrants may also under-exploit welfare
We might exploit intra-Nordic differences to see if there is an effect
• Provided that people move because of economic motives to
maximize post-tax consumption possibilities
• This doesn’t seem to motivate migrations within the Nordic countries
CONCLUSION
• Difficult to claim that Nordic Welfare Model is a
Comparative Disadvantage – or that it is threatened
• This is an important lesson internationally
• Is the Nordic Welfare Model even a Comparative
Advantage?
Emphasis on care: Yes. Both to avoid
unemployment, to increase labour supply, to
maintain fertility
Universalism: Probably. Described as employment
friendly. But not so strong documentation
Compressed wage structures: Need to know more
High social minima: Need to know more
Progressive taxes: Need to know more
Education: Yes, but probably the most important
challenge
Beyond
Conclusion
It is likely that:
• Social capital (which is very high) is (a) causally
related to the welfare state and (b) has an
important impact on economic efficiency and
competitivenes
• Feelings of influence at the workplace is (a)
causally related to the welfare state and (b) has
an important impact on innovation
We need to know more about this
– but this is highly difficult to document