Reassessing the Nordic Welfare Model Kickoff Conference, Oslo, 24-25.Oct,2007

1. Reassessing the Nordic Welfare Model Kickoff Conference, Oslo, 24-25.Oct,2007 Globalization, Competitiveness and Social Inequality • Is Globalization a Threat to the Nordic Welfare model? • Or is the Nordic Welfare Model a Key to Global Competitiveness? • Jørgen Goul Andersen • Aalborg University www.ccws.dk

2. What is the Nordic Welfare Model? Minimum definition: • Universalism • High priority to services, especially child & elderly care • Equality: Compressed wage structures, High minimum protection, Progressive taxes • Tax financing • High priority to basic & lower education

3. What is globalization? • Interaction • Dependence • Across borders, across continents Economic, Political, Cultural Globalization (and immigration) Economic globalization: • Trade • Foreign Direct Investments • International Capital Flows

4. A Few Reservations • There was a Roman empire once … • There was a globalization once: (1850) 1870-1913 • Foreign trade/GDP: 1913 > 2005 (and 1960>2005) in Dk. • Globalization was reversed 1914-45 • Not that much intercontinental trade • Small open economies always exposed to comptetition • Most jobs are in the shielded sector • Transportation costs could increase But: • Capital movements • Dependence; competition is global • Global explosion in education & technology

5. But why should that impact on the welfare state? Previously diffuse arguments: • Nation state building & welfare state was linked • Competitiveness requires less regulation, lower taxes,etc. (≈ ”Washington Consensus”) • Global competition lead to increased inequality. And less state capability to do anything about it

6. More serious arguments

7. Trade-off equality – employment? Or trilemma: Equality – employment – balanced budget? Strong theoretical arguments: Imports/outsourcing = de-industrialization =unskilled surplus population Many ”systemic errors” in Nordic Countries: • Compressed wage structures / high minimum wages • Small work incentives especially for low-skilled workers (those who have fewest non-economic work incentives)

8. Equality – comparative figures

9. Gini-coefficientsDenmark, 25-59 years old

10. Denmark poverty Report 23. October 2007/ Danish LO: Increasing poverty in Denmark Especially after 2001 Overwhelmingly function of political factors: • MAKE WORK PAY politics = increasing poverty, especially for families Necessary/unavoidable? • Empirical evidence shows small/no effects • Denmark has the highest non-financial emploment commitment in the world

11. Unemployment, by education (25-64 years old)

12. What is the secret? • Flexicurity? (good for Denmark) • Public service sector: (Good) Service jobs • Qualification effort: Denmark lost some 20 per cent of unskilled jobs – but some 25 per cent of unskilled workers • High social minima: Avoiding poverty Weaker incentives but more resources? • High minimum wages: Efficiency requires motivation/Job satisfaction = incentive to work? At least the Bumblebee seems to be flying We need to know more about why

13. Taxes and GlobalizationCombined income taxes as per cent of gross wage expenditures, 2004

14. Income taxes Nordic Countries • Difficult to speak of a Nordic Model here • Eldorado for most similar design in studying - effects on labour supply - effects on migration • (Not very promising for people hoping to demonstrate large effects of taxes on labour supply, it seems … but perhaps we should include Iceland)

15. Globalization and Taxes • Corporate taxes: Some indices of race to the bottom, but mostly by widenig tax base • Income taxes: Somewhat lower marginal taxes in most countries, party by widening tax base • Are these policy changes necessary adaptations to globalization?

16. Globalisation and income taxes: The fear of immigration • Not marginal tax rate that is important here • It is the total income tax • It is not only income taxes that are important • It is the total tax people have to pay - including VAT - including property tax for homeowners

17. Globalisation and income taxes: The fear of immigration – II. • Not only taxes are important • The important calculus includes taxes plus necessary social expenditures (including private insurance) • For those age groups that are mobile across borders (roughly those aged less than 35) • Provided people move because of self-interest

18. Low Taxes mean high private welfare expenses

19. Conclusions regardingtaxes • Probably no economic incentives at all to emigrate • Rather economic incentives to return • This is inconsistent with the suggestions of e.g. the Danish Welfare Commission 2003-06, • But it is perfectly consistent with the data of the welfare commission If there are any problems with taxes, it concerns immigration, not emigration; immigrants may also under-exploit welfare We might exploit intra-Nordic differences to see if there is an effect • Provided that people move because of economic motives to maximize post-tax consumption possibilities • This doesn’t seem to motivate migrations within the Nordic countries

20. CONCLUSION • Difficult to claim that Nordic Welfare Model is a Comparative Disadvantage – or that it is threatened • This is an important lesson internationally • Is the Nordic Welfare Model even a Comparative Advantage? - Emphasis on care: Yes. Both to avoid unemployment, to increase labour supply, to maintain fertility - Universalism: Probably. Described as employment friendly. But not so strong documentation - Compressed wage structures: Need to know more - High social minima: Need to know more - Progressive taxes: Need to know more - Education: Yes, but probably the most important challenge

21. Beyond Conclusion It is likely that: • Social capital (which is very high) is (a) causally related to the welfare state and (b) has an important impact on economic efficiency and competitivenes • Feelings of influence at the workplace is (a) causally related to the welfare state and (b) has an important impact on innovation We need to know more about this – but this is highly difficult to document