The Nordic Model: Embracing Globalization and Sharing Risks
Economists' report on how small open economies combine flexibility with heavy taxation.
Summary
Torben Andersen, Bengt Holmstrom, Seppo Honkapohja, Sixten Korkman, Hans Tson Soderstrom and Juhana Vartiainen, a group of Nordic economists including a subsequent Nobel laureate, produced this report on whether the Nordic economic model can survive globalisation and demographic change.
Their characterisation of the model has several components: extensive public provision of education, health and care services; income insurance through generous unemployment benefits; active labour market policy; coordinated wage bargaining that compresses wage differentials; and openness to trade and to competition, with no protection of individual firms. They argue that the combination is coherent rather than accidental. Openness produces continuous restructuring; income insurance makes workers willing to accept it; wage compression means low-productivity firms cannot survive on cheap labour and must exit; and public services support labour force participation, particularly by women.
The challenges they identify are ageing populations, which raise the dependency ratio while the model's financing depends on high employment; increased mobility of capital and skilled labour, which constrains taxation; immigration of workers whose productivity is below the wage floor that compression creates; and the difficulty of raising productivity in public services. Their recommendations concern raising employment rates, particularly among older workers, and reforming service delivery. The report is measured and empirical rather than polemical, which distinguishes it from most writing on the Nordic model in either direction.
Key takeaways 7
- The Nordic model's components are complementary: openness forces restructuring and income insurance makes workers accept it.
- Wage compression prevents low-productivity firms from surviving on cheap labour, which forces exit and raises average productivity.
- Public provision of care services supports labour force participation, particularly by women, which is what funds the system.
- The model requires high employment rates, so ageing populations threaten its financing directly.
- Mobility of capital and skilled labour constrains the taxation on which the model depends.
- A high wage floor excludes workers whose productivity falls below it, which makes low-skill immigration a specific problem for this model.
- The authors argue that the Nordic countries protect workers rather than jobs, which is what permits their openness.
Who should read it
Policy analysts and investors who want a measured empirical account of how the Nordic model works and what threatens it, from economists inside it.
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