Nordic differences

My Swedish friend Torbjörn just sent me a paper clip containing a notice of a Swedish economics professor commenting on the economic situation in Norway. Lars Calmfors in DN 22 feb 2021. The notice is triggered by his involvement in a Norwegian Green Paper Commision on Labour and Income Policy. NOU 2019:7. The Commision shouldpropose new measures to increase labour participation in Norway.

Internationally the Nordic (sometimes only Scandinavian) countries are mostly treated as fairly much of the same under the heading of ‘The Nordic Model’. This article however points to the particularities of Norway compared to Sweden.

Calmfors’s main point is that Norway will not be able to tackle both decreasing oil returns and high levels of health-related labour market absense when at the same time the population is quickly aging.

As expected the economists look to ‘increased labour market participation’ as the ‘key factor’ to tackle the problems Norway is now fronting. (This was in their mandate).

Compared to Sweden the percentage of people living on health-related social contributions are much higher in Norway (17 pct around the double of Sweden). Calmfors interprets this figure av ‘medicalization of labour market problems’ - which might for sure be true.

When discussing what to do about this situation the differences to Sweden come to the surface. The Nowegian way is quite more corporativistic than what could happen in Sweden. After receiving expert proposals from the economists the Commision is enlarged with participants from Employers and Labour Unions plus from Government. Together they are charged with finding (for all) acceptable ways forwards.

This way of working together (3-party co-operation) to me lies at the heart of the ‘Nordic Model’, so I am a bit surprised by learning from Calmfors that this is not the way it works in Sweden? May be the ‘Norwegian Model’ is not the same as the ‘Nordic Model’ after all? Calmfors’s conclusion is that this cooperative mode paired with strong egalitarian drives will create great obstacles for getting more people involved on the labour market.

May be he is right in this. But to me it sounds like an argument to skip the core of the ‘Norwegian Model’ - for something more neo-liberalistic? That would be out of date. The Reagan-Thatcher era is long gone - if not yet among mainstream economists.

However, to my mind Norway faces problems at the end of the oil age that calls for looking much more broadly into the strategy of economic transition for the coming decades. Strikingly the issue of greening the economy is out of focus for this commision. But let me first take a look at the workings of the ‘Norwegian Model’ - which has been in operation from the mid 1930s up till now - and may be longer?

The Norwegian Way

An interesting analysis of the ‘Scandinavian Model’ is found in Barth 2014 (pdf)

The conclusion of this work is as follows (my emphasis):

Why has the Scandinavian model worked so well? And, why have its institutions and policies survived, in spite of changing economic and political circumstances? Our answer to both questions is that there is a strong complementarity between the Scandinavian non-market institutions and capitalist dynamics.

Our paper emphasizes the political–economic equilibrium between three sets of mechanisms. Encompassing organizations in the labor market follow a policy of wage coordination and wage compression, with a strong preference for full employment in central bargaining and microeconomic efficiency in local bargaining. Wage compression leads to a higher pace of creative destruction and further wage compression with an increasing average wage. More wage equality and higher average wages fuel the political support for welfare spending. There might even be a feedback from public welfare policies to productivity rise and further wage compression. This complementarity explains why the same outcomes—efficiency and a high level of equality—could not have been achieved by redistribution through the political system alone. This political-economic equilibrium path has benefitted from consistent policies that have supplemented market forces. Active labor market programs and moderations on employment protection have been important policies to facilitate structural change and reallocation of labor without excessive wage differentials.

A similar concern for consistency is evident from the extensive use of ‘work-fare’ policies, which are used in Denmark, Norway and Sweden to ensure that work pays in the presence of generous welfare benefits. High employment reduces the cost of a generous benefit system and increases the tax base. Active job search or qualification efforts are for example required in order to obtain unemployment benefits.

In sum, the complementarity between the non-market institutions and capitalist investments help explain why the main institutions and policies have survived over 80 years. The gains are spread widely across groups. There are many winners and few losers. Both low paid groups and employers are clear winners as wage compression and rising profits are two sides of the same coin. High skilled workers are potential losers. But also high skilled workers may gain from wage moderation, as the average productivity goes up.

The stability of the Scandinavian model can in part be explained by the good performance, and the good performance must have been helped by the stability of the model. The key is that both depend on the egalitarian aspects of the Scandinavian model that share the gains of good performance on almost all groups. Since the interactions be- tween wage coordination, investments, and welfare spending all strengthen the egalitarian aspects of the model, it would not be possible to achieve the same egalitarian results by redistribution through the welfare state only.

So - the ‘Nordic / Scandinavian / Norwegian Model’ turns out to be just a smart way to let capitalism evolve. And it has worked well - on that premise - so far.

The model’s ‘golden age’ was before 1980. But the neoliberal era - from 1980 onwards has created some dilemmas- which might be read in the constant decline of the labour parties in all the Nordic countries during the last couple of decades.

The alliance between Labour and Capital was based on mutual benefits: Labour Organizations accepted wage restraints as long as capitalist continued investing in project that created increade number of jobs. However in the 1980’s this closed loop was broken be globalization. Capitalist’s started putting the money into China and other developing countries instead of investing at home. Labour is no longer on the winning side of the play. The gains are no longer as widely spread across groups. As in other countries there is a rising precariate.

This has been most visible in the other Nordic countries - for Norway the oil money came in between as a saving angel - allowing for such ’economic diseases’ as 17% health-related social contributions to people not participating in the labour market. Thus, the coming end of the oil era put Norway up for greater challenges than the other Nordic countries, as Calmfors rightly explained.

To green the economy while at the same time get out of ‘oil addiction’ is really a double challenge.

To find the way forwards one will need a lot more than main-stream econmic thinking a la Calmfors.

A starting point could be an ’evolutionary economics’ approach. Interesting extension in the understanding of how the ‘Norwegian Model’ works come from Wlison and Hessen (2015). (My emphasis)

The success of the so-called “Nordic Model” is commonly attributed to factors such as income equality, a high level of trust, high willingness to pay tax, which is tightly coupled to strong social security (health, education), a blend of governmental regulations and capitalism, and cultural homogeneity. These and other factors are important, but we think that viewing them through an evolutionary lens is likely to shed light on why they are important. Our hypothesis is that Norway functions well as a nation because it has successfully managed to scale up the social control mechanisms that operate spontaneously in village-sized groups. Income equality, trust, and the other factors attributed to Norway’s success emanate from the social control mechanisms.