How Well is the Nordic Model Functioning? Lars Calmfors Nordic Council: press lunch 28/

Background Study for the Nordic Council co-ordinated by ETLA in Finland: The Nordic Model – Challenged but Capable of Reform Not so easy to define the Nordic Model

Combinations of average living standard and equality

Employment rate, percentage of population years old

Employment rate, percentage of females years old

Sources of income equalisation relative to the US

Trade union density, percentage of employees

Net income replacement rate for short-term unemployed (first year), per cent

Total tax revenue, percentage of GDP

R&D expenditure, percentage of GDP

Public expenditure and education outcomes

Organisational change and new technology

GDP per employed person, 1991 = 100

Challenges for the Nordic model 1.Maintain high productivity growth - lower productivity growth during the international crisis - falling productivity in Sweden and Norway already before the crisis - international debate 2. Financing of public services - ageing population - Wagner’s law - Baumol’s disease

Challenges for the Nordic model cont. 3. Employment - technological change reduces demand for low- skilled - globalisation - non-European immigrants 4. Income distribution - increasing inequality from a low level 5. Adjustment capability - Finland: Nokia, steel industry, forest industry

Total 8, år 32, år 14, år 5, år 3, år 3,8 Education Primary 13,4 Secondary 5,1 Tertiary 3,8 Country of origin Outside Europe 16,0 Europe outside Sweden 8,7 Sweden 5,2 Unemployment in Sweden 2013

How can challenges be met? 1. Productivity - combination of selective and general policies - subsidisation of researchers and researchers in the business sector rather than of research per se 2. Financing of public services - longer working life - retirement age should be indexed to life expectancy - earlier labour market entry for young people: graduation bonus dependent on age 3. Employment - school system: focus on weak pupils - higher wages for teachers and more wage dispersion in the profession - accept larger wage differentials (education cannot solve all problems) 4. Trade-off between efficiency and income distribuation objectives - wage differentials - tax system - Swedish Earned Income Tax Credit

Requirements on policy Improvements can be made in tax policy - property tax - equal taxation of capital income - uniform VAT Active labour market programmes - earlier focus: weak groups - new focus employers and matching

Differences in wage and PISA results(90/10) Källor: PISA 2014 och Eurostat Structure of Earnings Survey 2010

Wage dispersion in Sweden Percentilkvoter

Real disposable income for employed and non-employed in Sweden, respectively

The degree of trust