7 Sweden and Social Democracy
Area (Thousand sq. km.)
France
450
Currency
krona, SEK 9.16 = $1
Population 2000 (millions)
9.00
Population Growth Rate
0.4%
GNI per capita 2000
$26,780
GNI per capita PPP
$23,770
GDP Growth 1990-2000
1.8%
Inflation Rate (1995 – 2001)
% OF gdp 2000
Value Added as %
of GDP 2000
Agriculture
0.7%
2%
Industry
29%
Services
69%
Government
Expenditure
53%
Exports
38%
HTTP://WWW.CIA.GOV/C IA/PUBLICATIONS/FACT BOOK/GEOS/SW.HTML
FUNDAMENTAL FEATURES OF THE SWEDISH MODEL
Characteristics of Swedish Society
Size
Homogeneity
Political stability
Unionized
Corporatistic
Prosperous
Equitable --- gender, class
Permissive
Non-core EU
SOCIAL DEMOCRACY
Even after the reforms of the early 1990s which curtailed some aspects of public spending, Sweden remains the
best example of social democracy. A social democratic system is defined by Henry Milner1 in terms of six basic
principles governing the interaction of government and citizens. These principles can be summarized as follows:
1. A fair distribution of economic well-being. The fruits of economic prosperity are to be distributed fairly, but
in such a way as not to undermine that prosperity. In other words, taxes and transfer payments are to be
used but care should be taken lest high tax rates or overgenerous transfers create substantial disincentives to
effort.
2. Work for all as the primary means of eliminating deprivation. Since human beings seek to live productively,
fair distribution is to be effected through decently remunerated employment rather than simply cash or
services.
3. A high degree of social solidarity to bind individuals to a common purpose. Individuals are members of
communities through ties of culture and history. Members have reciprocal rights and obligations over and
above the right of all human beings to be treated with tolerance and compassion without distinction as to
race, sex, disability, and so on.
4. Rules to be made by a democratic process. A society of justice must follow rules, without which it
degenerates into a jungle in which the “fittest” prosper. Democracy entails that the rules to be obeyed—by
leaders and followers alike—result from decisions made by the people themselves through free elections
that fully safeguard fundamental political freedoms.
5. Participation extends beyond electoral democracy. Especially in modern societies with complex systems of
economic coordination, democracy entails active decentralized decision making and employee participation
in management.
6. All citizens should have access to information. Democratic participation requires open and informed
discussion—that is, a free and responsible press, an informed, well-educated citizenry, full public access to
information based on data reliably gathered and presented, and publicly accountable independent boards of
inquiry into matters of controversy.2
This section on the underlying principles of social democracy is taken and modified from Henry Millner’s
Sweden: Social Democracy in Practice (New York: Oxford University Press, 1989), 4–5.
1
A final principle could be added: respect for the environment. Through creative decentralized planning, social
democracy ideally protects and enhances the natural environment as vital to human existence.
2
THE TAX AND TRANSFER SYSTEM
TABLE 7.2
Dimensions of Capital Income Taxation
Interest, Profits, Dividends, Capital Gains, and Wealth Taxes
Highest
Corporate Total
Taxation
Tax Rate on
Tax
Dividend
of
Interest Income Rate
Taxation Capital Gains Rate
Sweden
30
28
50
30
1.5
Austria
25
34
50
0
0
Belgium
15
40
49
0
0
Denmark
59
34
60
0–40
0
Finland
28
28
28
28
0.9
France
25
33
66
26
0.5–1.5
Germany
56
58
49
0
0
Ireland
48
32
55
40
0
Netherlands
60
35
74
0
0.7
Norway
28
28
28
28
0.7–1.1
United Kingdom
40
31
48
0–40
0
United States
47
35
68
0–20
0
Threshold
0.9
1.65
6.25
0.77
0.13
Notes: Tax rates are in percentages and thresholds are in SKr million.
SOURCE: OECD; International Bureau of Fiscal Documentation, “European Tax Handbook 1998,” United
States Internal Revenue Service, in OECD Economic Survey of Sweden, 1999, 133.Wealth Tax
CORPORATISM
TABLE 7.3
Large Companies per Million Inhabitants, 1998:
Number of Companies among Europe’s 500 Largest Companies
Country
Number of Companies
Country
Sweden
3.6
Ireland
Switzerland
3.5
Denmark
United Kingdom
2.7
Portugal
Belgium/Lux.
2.3
France
Netherlands
2.1
Norway
SOURCE: Financial Times, 1999.
Number of Companies
1.7
1.3
1.1
1.1
0.9
BOX 1 ; Sweden’s Missing Entrepreneurs
Sweden’s deserved reputation as welfare state with an industrial sector dominated by a few large firms
may be in conflict with its long-term growth prospects. While on the one hand Sweden’s excellent
education and the high level of human capital embodied in its work force it may lack one specific factor
of production that has been found to be important in furthering growth – entrepreneurship. In 2000
two economists at the Stockholm School of Economics undertook a study of the determinants of the
start-ups and high growth firms. With the internet and communications revolution being led by the
small growth firms of Silicon Valley and the success of other small companies and services and
retailing this was thought to be on the keys to economic growth. They tried to measure
entrepreneurship, and also the economic and cultural environment, by establishing by survey the
number of people who actually tried to start their own company. They found that Sweden was the
lowest of any of the European countries that they studied; only 2.2% of Swedish adults had experience
as entrepreneurs against 3.1% in the UK and 3.8% in Norway. Europe as a whole, however, was poor
against the US where 8.4% of adults had, at one time or another, tried to start a business. Whether this
is due to “national character”, the tax regime or other aspects of government policy is not clear. It can
be used to support a general thesis that provision of job security does deplete initiative.
Source: Magnus Henrekson and Per Davidsson, "Determinants of the Prevalence of Start-ups and High-Growth Firms", Small
Business Economics, Vol. 19, No. 2, 2002
The System Of Labor Relations
The Basic System
One of the most distinctive features of the Swedish economy, and the one that we
wish to focus on here, is the system of collective bargaining and industrial
relations. This system originated in the late 1930s in discussions motivated by the
need to reduce the then high degree of industrial unrest that Sweden had
experienced in the 1930s. In 1938 a basic agreement was signed between the
employers’ federation (the SAF) and the Swedish Trade Union Confederation (the
LO) in the resort town of Saltsjöbaden, near Stockholm. This Saltsjöbaden
agreement is the cornerstone of the system. It provides a mechanism of collective
bargaining to determine the rate of wage increase across industry and places limits
on the nature of industrial action by the unions.
The EFO Model
Exposed sector
˙W = ˙P + ˙Q / ˙L
Wage Solidarity
In 1959 the spread between average wages in the highest and the lowest paid
industries was 39 percent. By 1964 it had fallen to 26 percent and by 1981 was
down to only 12 percent. A similar narrowing was observed in terms of wage
differentials by sex. Average female wages in Sweden are 90 percent of the male
level, considerably above the “60 cents on the dollar” experienced in the United
States.
The Breakdown of National Agreements
TABLE 7.4
Aggregate Wage Growth (percent)
1994
2.4
1995
3.3
1996
6.0
1997
4.5
1998
3.6
Aggregate wage growth, percent
Contribution from
Central bargaining
1.5
2.1
4.4
3.8
2.8
Wage drift
1.0
1.2
1.7
0.7
0.8
SOURCE: Statistics Sweden; National Institute of Economic Research; Ministry of Finance, in OECD Economic
Survey of Sweden, 1999, 68.
Other Aspects of Labor Market Policy
active labor market policy
labor exchanges
In Britain, for example, the ratio is 375 cases per employee; in Germany it is 370, and in the Netherlands
160. In Sweden, in contrast, it varies between 15 and 30, depending on the region and as a result the
individual attention afforded to each job seeker is high.
The law requires that employers must report all vacancies to the authorities and the labor exchange
professionals have access to essential information concerning all job openings in the country.
To further decrease rigidities and frictional cost to the unemployed, funds are available for site visits
and, should a job seeker accept a distant vacancy, for relocation expenses.
If suitable openings are not available for a job seeker, retraining funded by the government is in order
and is made available.
Furthermore, in order to cope with potentially large crises, the authorities require that they be told well in
advance about plant closings and downsizing, allowing forward thinking on strategies to address the
problem and the institution of retraining schemes even before plant closings occur.
Unemployment benefits in Sweden are generous and the reduction of take-home incomes consequent to
job loss is small. However, benefits are contingent on active job search and also have strict time limits.
Should an individual’s benefits run out, the government acts as an “employer of last resort” and will
provide a job for at least six months. As a result of this combination of policies, unemployment rates in
Sweden were until recently very low, generally between 1 and 1.5 percent but rose to over 8% by the
mid-1990s.
In August 2001 the government introduced a system of “activity guarantee.” This requires that any
person registered with the public employment to receive unemployment of social benefits to enroll in
some education program if they have been unemployed for more than six months.
Attempts to Socialize Capital
Meidner, their chief economist, to establish wage earner funds.
The idea behind the ambitious original plan was that each year all firms that employed more than 500
workers should hand over 20 percent of their pretax profits to a union-controlled fund specific to that
industry.
Under the plan these monies would have been used by the union to purchase (at book value) shares of
the firm in which the “excess” profits had been made. Consequently, the share capital of the large,
profitable elements of Swedish industry (which were concentrated in the exposed, export sector) would
be increasingly accumulated by the unions. In the limit the unions might control all industrial capital,
with the most profitable firms passing most quickly to union control. When the union share holdings
represented a majority, they would be in a position to appoint management and assume strategic control
of the firm.
Had the Meidner plan been followed the Swedish system would have come to resemble the Yugoslav
system of worker management. There would, however, have been two important differences:
1. Union workers, rather than society as a whole, would have been the owners of capital.
2. Control of the firm would have passed to industry-wide unions, rather than to the workers in the specific
enterprise.
Recent Labor Market Developments
One of the most startling recent developments in Sweden in the early 1990s was the sharp rise in unemployment,
which was shocking in an economy that had been predicated on the idea that every one had a right to work.
Unemployment peaked at about 8% between 1994 and 1997, and has fallen back considerably since.
TABLE 7.5 Labor Market Developments
1996-2000
Labor force, 1,000 persons
Unemployment rate
Unemployed and covered by government programs (%)
Covered by make work programs
Covered by Education Programs
Of Which: Adult Education Initiative
1996
4,310
8.1
14.3
4.5
1.7
na
1997
4,264
8
14.8
4.3
2.4
2.7
1998
4,255
6.5
13.8
3.9
3.4
3.3
1999
4,308
6.4
16.3
3.3
6.6
3.3
2000
4,364
5.6
14.3
2.8
5.9
3.1
The authorities have launched an extensive adult education programme. This is aimed at those with inadequate
qualifications and has now been running, in line with the quantified objectives set, for two years. Insofar as educational
qualifications are closely linked to unemployment risk, an emphasis on human capital enhancement is a key ingredient in
the long-term improvement of labour-market outcomes.3
3
OECD Economic Survey of Sweden, 1999, pp 13–14.
Table 7.6 Costs, prices, and profitability in the business sector
Average annual increase in percent, 1995-2001
Unit labor costs
Total
Manufacturing
Construction
Non-financial
services
2.5
0.2
4.2
3.3
Hourly compensation
5.0
4.9
4.0
5.4
Labor productivity
2.5
4.7
-0.2
2.1
Output price
1.3
0.8
2.9
2.2
Profit share in value added (% change)
-4.0
-4.4
-3.5
-1.4
Source: National Institute of Economic Research
Generally speaking it can be said that this test has been passed though the size of the agreement might a
certain amount of difficulty for Swedish industry. The pace of labor cost increases during the period
1995-2001 led, in a very competitive pricing environment, to a fall in the profit share of value added. As
can be seen in Table 7.6 labor gained a considerable share of profits from capital, average 4% per annum
over a six-year period. In manufacturing industry (“the exposed sector”) a healthy pace of productivity
increase (4.7% per annum) did minimize the rate of labor cost increase, but the slow rate of price
increases for manufactured goods in international markets still led to a squeeze on profits
BOX 2 Absenteeism, Taxes and Health
Sweden has a healthy population by most measures. Swedes smoke less, drink less and weigh less
than the European average. It is there curious that the Swedish work force leads the world in
staying home sick. In the EU as a whole only 1.9% of workers stay out sick for an entire week in
any given year; in Sweden the figure is 4.5%. On any working weekday almost 10% of the work
force is out sick, and the figure has doubled in the last ten years. The question is why, and there
are several possible answers. One is that the Swedish work force, which is older than most other
nations with high participation rates for workers over 60, actually is more illness prone. Another
is that the Swedish work ethic has collapsed, and the workers are very alienated from the large
firms and governmental organizations in which they work. Another is fiscal; the supportive
welfare state almost completely protects workers’ income from the consequence of being off
work. For most factory and office workers the worker loses all pay but subsequently the benefits
are 80% of wages up to $2,600 per month. After two weeks the employer is relieved of most
burden and the state pays the bulk of support which can be up to 90% of the in work wage. Some
workers actually see their take-home pay increase as a result of tax changes and the elimination of
commutation expenses. The policy response largely depends on the diagnosis of the problem. The
government has now created a ministerial post charged with reducing absenteeism, which costs
the government over $12 billion annually in lost taxes and support payments, to one half the
current level by 2008. That will put the incidence back where it was in 1996, when
unemployment was at a post-war high.
Source: The Economist, October 26, 2002, p. 49
LESSONS OF THE SWEDISH MODEL
During the period from the establishment of the system of centralized wage bargaining in the late 1930s
to the early 1980s, Sweden had an enviable record of labor peace and economic growth. However,
during the 1980s recurrent economic problems called the success of the corporatist Swedish model into
question.
Swedish experience in the labor market is exemplary of the problems that confront a society’s attempts
to suspend the role of wages in furthering an efficient allocation of labor. While the convergence of
wages toward equality might be regarded as a laudable social goal, without differential wages to
encourage worker mobility the labor market cannot work smoothly. The conflict between the drive for
equity in society at large and the needs of export-oriented industry caused the breakdown in the national
system of wage bargaining. The question is, can it be put back together or is it permanently consigned to
history? Both parties to the labor agreement seem to be optimistic:
Whether the social partners will be able to act in concert in order to get the economy moving again is something we cannot
yet tell. . . . We can only express the hope that out of the present labor pains a new Swedish model will be born, resembling
its forerunner. There are, in fact, good chances of this. Despite the adverse trends. . . there are many sound elements of the
Swedish economy and industrial relations system that have survived and can be built on. . . . In their hearts the Swedes
share a deep community of values. The representatives of labor and management can still mix with each other centrally and
locally in a spirit of trust and are capable of working together on matters of common interest. Promising signs are the
agreements that have been concluded in recent years on such collaboration and, above all, the fact that the debate on wage
policy is now being conducted in the broader context of the nation’s economic health. 4
There was similar guarded optimism from the union side:
Many people in Sweden see. . . the frequent breaches of labor peace as linked to the departure from the centralized
bargaining system. At the same time there is widespread agreement that prosperity must be safeguarded and equitably
shared. This is why I believe that the pressures favoring the return to co-ordinated central negotiations will prevail, even if
slight changes may be expected in the unions’ distribution policy. The bargaining system that has come to be known as the
Swedish model of industrial relations has stood the test of time and I am confident that given the opportunity it will
continue to serve both sides of industry well for many years yet.
Whatever the future of national labor negotiations there seems agreement that the umbrella nature of the
Swedish social welfare system has hurt macroeconomic performance. The high rates of taxation required
to finance the welfare state probably had a disincentive effect on both worker effort and savings,
retarding growth to a rate that was in the 1970s half the OECD average. This is perhaps the most
important issue to be addressed in a comprehensive welfare state. Millner noted it in the 1980s:
4
Both this and the following quote were from the International Labour Review, 1986, cited in Milner, 225–226.
The employers view is from L. G. Albåge and the union position from Harry Fjällström.
The most important and difficult question raised by critics of the welfare state concern the system of rewards resulting
from the combination of wages, taxes, transfers, and other sources of income on individuals and, ultimately, its effect on
the workings of the economy. They are perhaps most fully explored in the work of the distinguished and increasingly
critical Swedish economist Assar Lindbeck. In Lindbeck’s recent work is found perhaps the most sophisticated expression
of the often-made argument that somewhere in the 1970s the excessive redistributiveness of Swedish welfare policy began
to actually decrease the aggregate quantity of socially useful work by significantly increasing leisure through shorter work
years and absenteeism and pushing activity into the “unofficial economy” in the form of barter, do-it-yourself work, and
other forms of tax avoidance.5
Disincentive effects of high benefits and taxes are seen in a variety of ways. A 1986 report by the engineering
employers’ association found that blue collar Swedish workers were on the job less, putting in only 1,546 hours a
year compared to 1,654 in West Germany and 1,930 in the United States in part due to increased absenteeism and
“sick outs.” High tax rates have forced activity into the black economy. One study found that between 12 and 25
percent of income in Sweden was unrecorded.6
An OECD report a decade later addressed the issue of incentive and came to the following conclusion:
A universal and generous system of social protection has combined with progressive income taxes to achieve a
high degree of poverty alleviation and equalisation of incomes. Sweden outperforms most other countries in
terms of relative income levels for key target groups such as families with children and old-age pensioners. This
redistribution has been accompanied by a continuous extension of transfers, from 15 per cent of household
incomes in the mid-1960s to 35 per cent in the late 1990s, with the result that as much as two-thirds of transfers
reflect redistribution over the life-cycle of individuals and only one-third interpersonal (“pure”) redistribution.
High tax rates and generous replacement rates, with a de facto indefinite duration of unemployment and sickness
benefits, have worked to this effect. Income taxes and social security contributions combine with means-tested
housing and day-care benefits to reduce substantially the return from taking a better-paid job or increasing hours
worked. The added effect of the internationally high 80 per cent replacement rate in benefits actually produces a
substantial penalty for many on moving from unemployment to employment. Close to 40 per cent of unemployed
would see no or insignificant increases in disposable incomes from moving back into work.7
It is undeniable that there problems that from the high levels of distribution and the high level of taxation
that it requires. Material incentives, thought by many to be crucial to the prosperity of any economic
system are undeniably dulled. However, Sweden’s relative economic success over many years demands
that we take the “Swedish model” seriously. Despite the dip in the middle- and late-1990s, Sweden has
re-emerged as one of the most prosperous economies in the world. There is a very active debate8 on the
measurement and evaluation of Sweden’s performance. A few years ago the picture was somewhat grim
as Sweden fell in most cross-country comparisons of well-being, but recent years have seen higher
growth and lower inflation than in most of the developed world. To what extent this is due to the
durability of the Swedish model and to what extent the revival may be attributed to pro-market reform is
still open to question.
5
Henry Milner, Sweden: Social Democracy in Practice (New York: Oxford University Press, 1989). The best
example of Lindbeck’s views may be found in Assar Lindbeck, Swedish Economic Policy (Berkeley: University
of California Press, 1974).
Edward Feige, “Sweden’s Underground Economy,” in The Economics of Institutions and Markets,
ed. Gunnar Eliason (Stockholm: UIU, 1986), 127.
6
7
OECD Economic Survey of Sweden, 1999, 16–18.
8
See Henrekson, Magnus, "Swedish Economic Growth. A Favorable View of Reform". Challenge, Vol. 44, No. 4, July/August 2001.
KEY TERMS AND CONCEPTS
active labor market policy
corporatism
EFO model
exposed sector
Saltsjöbaden agreement
social democracy
wage drift
labor exchanges
Meidner plan
protected sector
replacement wage
wage earner funds
wage solidarity
QUESTIONS FOR DISCUSSION
1. Why is the concept of wage solidarity central to Swedish society?
2. Why does an attempt to limit the distribution of wages lessen the effectiveness of the labor market?
3. Why is an active labor market policy a possible remedy for the absence of wage signaling?
4. In what ways does Sweden as a society differ from an “ideal” social
democracy?
5. Is it appropriate to describe Sweden as corporatist? Why?
6. What were the pressures from the exposed sector that led to the breakdown of national agreements?
7. What sort of socialism would the extensive use of wage funds have led to?
RESOURCES
Web Sites
Central Bank
http://194.52.62.248/
Swedish Municipal Workers Union
http://www.kommunal.se/english/english.cfm
Ministry of Finance
In Swedish:http://finans.regeringen.se/
Swedish Employment Service
http://www.amv.se/index_eng.html
Investor AB
http://www.investor.se/lang3/m1-0/m1–0.asp
Swedish Confederation of Professional Associations
http://www.tco.se/index.htm
The Swedish Trade Union Confederation, LO
http://www.lo.se/
Swedish Government Offices
http://www.regeringen.se/inenglish/
Books and Articles
Bosworth, Barry P., and Alice M. Rivlin, eds. The Swedish Economy. Washington, D.C.: Brookings,
1987.
Davies, Steven and Magnus Henreksen, "Wage-Setting Institutions as Industrial Policy" (with Steven
J. Davis). NBER Working Paper No. 7502 and SSE/EFI Working Paper No. 352, January 2000
Davidsson, Per and Magnus Henrekson, "Determinants of the Prevalence of Start-ups and HighGrowth Firms" Small Business Economics, Vol. 19, No. 2, 2002
Calmfors, Lars, ed. Wage Formation and Macroeconomic Policy in the Nordic Countries.
Oxford: Oxford University Press, 1990.
Canova, Timothy A. “The Swedish Model Betrayed.” Challenge, May–June 1994, 36–40.
Cohen, Peter. “Sweden: The Model That Never Was.” Monthly Review, July–August 1994, 41–59.
European Parliament. Social and Labour Markets Policy in Sweden. Directorate-General for
Research, Working Papers, Social Affairs Series, July 1997.
Henrekson, Magnus, "Swedish Economic Growth. A Favorable View of Reform". Challenge, Vol. 44,
No. 4, July/August 2001.
Lindbeck, Assar, Per Molander, Torsten Persson, Olof Peterson, Agnar Sandmo, Birgitta Swedenborg,
and Niels Thygesen. “Options for Economic and Political Reform in Sweden.” Economic Policy,
October 1993, 219–263.
Maccoby, Michael, ed. Sweden at the Edge: Lessons for American and Swedish Managers.
Philadelphia: University of Pennsylvania Press, 1991.
Milner, Henry. Sweden: Social Democracy in Practice. New York: Oxford University Press, 1989.
Palme, Marten O., and Robert E. Wright. “Gender Discrimination and Compensating Differentials in
Sweden.” Applied Economics 24 (1992): 751–759.
Persson, Inga, ed. Generating Equality in the Welfare State: The Swedish Experience. Oslo:
Norwegian University Press, 1990.
Ramaswamy, Ramana. “Wage Bargaining Institutions, Adaptability, and Structural Change: The
Swedish Experience.” Journal of Economic Issues 26, no. 4 (December 1992): 1041–1061.
“A Survey of the Nordic Countries: Happy Family?” The Economist, 23 January 1999, 50.
“A Survey of Women and Work.” The Economist, 18 July 1998, 48.
"The Entrepreneur and the Swedish Model". In M. Henrekson, M. Larsson and H. Sjögren, eds.,
Entrepreneurship in Business and Research. Essays in Honour of Håkan Lindgren. Stockholm:
Probus Förlag and Institute for Research in Economic History, 2001.