Nordic model – prospects and challenges Torben M. Andersen University of Aarhus CEPR, CESifo and IZA

Nordic model: Achievements Tax burden: 25 % vs 50 %

Nordic model – main characteristics Universal: individual rights, collective financing Social safety net: decent standard of living Welfare services: satisfy the needs of most - NOT a residual = a large tax financed public sector

euros Average age dependent net-contributions: The social contract

The social contract in Sweden

Employment focused model No self-support: entitlement to some income transfer In work: higher income and therefore higher tax payments The financial balance of the model requires a high labour force participation!

Labour force participation by age: Finland, OECD max and min

An implicit insurance contract Welfare arrangements = a large implicit insurance contract (collective risk sharing) Conditionalities (health, abilities, luck etc) determine both the use of and contributions to the welfare state Direct welfare effect + conducive for flexibility/adjustment

Challenge I: Ageing Total and old age dependency ratios %

Primary balance projection % of GDP For given arrangements – not including any new initiatives

Non-Solutions More children: too late…. and they can expect a high longevity Immigration: in need of some who are willing to pay some taxes! Growing the pie: more wealth – but who are not going to have their share ? The ageing problem is a distribution problem, not a problem of lack of resources!!!

Solutions ? Expenditure cuts: a change of the welfare model Tax increases: likely to be costly given the already high taxes + globalization Increase employment: more tax revenue, less expenditures on transfers

Challenges II: Services How to maintain a satisfactory level and quality of welfare services? For some core activities it is very difficult to increase productivity – human relations are involved

Higher living standard = increased demand for services Increased material well-being: basic needs are satisfied Increased focus and demand for services, e.g. health New possibilities = new demands

Public finances – systematic deficits primary balance in % of GDP -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1, Baseline: Pure demographics A: Higher productivity growth: +0,5 pa B: A + welfare service growth: 0,25 % pa

Challenge III: Globalization Globalization paradox? Support for globalization is very strong (or less strong lobbying for protectionism) Welfare model - most threatened by globalization? Nordic countries have always been open and the welfare state has been developed alongside openness

Globalization and taxation Tax base mobility – difficult to tax highly mobile tax bases Most tax revenue accrue from direct and indirect taxation of labour income Need for tax reform, but not a major problem if employment rates can be kept high

Globalization - employment Globalization + technology = skill-bias Education becomes increasingly important Not only for the elite but for distributional reasons (to prevent a large supply of unskilled)

Migration and the welfare state Immigrants from low income countries = low qualifications High unemployment risk: qualification gap is large High risk of transfer-dependency Qualifications WageSocial safety net

Employment gap for immigrants from low income countries

Policy challenges How to ensure a high employment rate –Ageing/Longevity –Skill-bias/Qualifications Services: satisfactory supply Migration: how to square the model with open borders