How well is the Nordic model doing? A review of the economic performance of the Nordic economies

How well is the Nordic model doing? A review of the economic performance of the Nordic economies Lars Calmfors ETLA 30 October 2013

Three issues • Is there a distinct Nordic model? - structural characteristics - economic outcomes • Developments over the last two decades • Challenges for the future

Structural characteristics • Not so particular with respect to the size of government • Different degrees of income protection in the case of unemployment • Some labour market institutions are similar, others are very different • Similar degrees of product market regulations • The Nordic countries are not so disticnt a group as commonly believed

Figure 1 Total government expenditure, percentage of GDP, 2012

Figure 3 Total tax revenues, percentage of GDP

Figure 2 Government employment, percentage of total employment, 2012

Figure 4 Net income replacement rate for short-term unemployed (first year), 2009

Figure 6 Trade union density, percentage of employees, 2010

Figure 7 Coverage of collective bargaining agreements, percentage of employees, 2010 or latest

Figure 8 Strictness of employment protection, 2012

Table 1 Expenditure on active labour market programmes, 2011

Figure 9 Product market regulation, 2008

Economic outcomes • High income equality • High employment - females - elderly workers • Differences in working time • Strong public finances (except Iceland) • Different levels of GDP per capita • More similarities among the Nordic countries in terms of outcomes than in terms of structural characteristics

Figure 13 P90/P10 percentile ratio, disposable income, households, 2010

Figure 14 Employment rate, percentage of population, 20-64 years old, 2012

Figure 15 Employment rate, percentage of females, 2012

Figure 19 Employment rate, percentage of population 55-64 years, 2012

Figure 20 Annual hours worked per employed, 2011

Figure 23 Government consolidated gross debt, per cent of GDP, 2012

Table 2 The degree of trust

Similarities in developments: Denmark, Finland, Norway and Sweden • Crises in the early 1990s • Fiscal reforms • Deregulation of product markets • Labour market reforms - less generous unemployment insurance and EITCS (not Norway) - more emphasis on activation • More decentralised wage-setting but large elements of co-ordination retained

Differences in developments in Denmark, Finland and Sweden • Exchange rate systems • Most labour market reforms in Denmark and Sweden, the least in Norway • R&D-intensive growth in Finland and Sweden – ICT-sector • Credit-fuelled house price bubble that burst in Denmark

Iceland is a special case • Gradual transition from a heavily regulated economy to a more market-oriented one • Unsustainable expansion of banks, credit boom and financial collapse • Deep recession

Figure 25 GDP, 1991=100

Figure 26 Labour productivity: GDP per employed person, 1991=100

Table 3 Contributions to labour productivity growth (GDP per employed person)1995-20072008-2012 LabourLabour ICT-kapital Non- TFP LabourLabour ICT-kapital Non- TFP productivity composition ICT-kapital productivity composition ICT-kapital

Table 3 Contributions to labour productivity growth (GDP per employed person)

Figure 29 Unemployment, per cent of labour force

Figure 33 Government net lending, per cent of GDP

Figure 34 General government net debt, per cent of GDP

Figure 36 Relative unit labour costs, 1995=100

Figure 37 Export market shares, 2000=100

Table 4 Changes 2008-2012

Challenges • Productivity growth • Education • Tax system • Fiscal sustainability • Fiscal framework • Financial stability • Employment

Productivity growth • Earlier high TFP growth in Finland and Sweden • Low productivity growth during the crisis - cyclical developments? - lower trend growth? (decline in Sweden and Norway already before the crisis) • Slower technological development • Long-run effects of the downturn • Smaller ICT-sector and slower productivity growth there • Investment in immaterial assets • Service sector – deregulations - government-dominated sectors (health sector) - loosening of zoning restrictions in retail sector

Human capital accumulation • Finland topping PISA rankings • Room for improvement in the other Nordic countries • Positive trend for Norway in mathematics and reading • Strong downward trend for Sweden - ambitious reform programme in Sweden takes time to produce results • All the Nordic countries do better for the adult population - Sweden tops the ranking for problem-solving in technology-rich environments - lagged effects - adult education • Overlapping groups of drop-outs, young immigrants and employees in elementary occupations

Table 6 Proficiency of adult populations, rankings according to PIAAC scores

Tax system • Tax ratios have fallen in Sweden and Finland, but remained stable in Denmark and Norway, and increased in Iceland • Less favourable treatment of owner-occupied housing would be preferable - allocation of capital - balancing of income-distribution effects of lower marginal taxes on labour income • Uniform VAT rates would be desirable • Tax rules for closely held companies - balance incentives for entreprenuership against risk of tax avoidance

Figure 38 Tax revenues, per cent of GDP

Fiscal sustainability • Rising old-age dependency ratio - but less than elsewhere except in Finland • Need for linking retirement age to longevity - Denmark - discussion in Sweden • Need for less generous early retirement - Finland, Norway and Denmark • Trade-off income protection for disbled older workers against incentives for later effective retirement age

Figure 39 Old age dependency (ratio (65+/15-64), 2010 and 2060

Figure 40 Sustainability gap, S2-indicator

Fiscal frameworks • Earlier deficit problems has fostered a consensus on the need for fiscal discipline - stronger fiscal frameworks • But – desirable – deteriorations of the fiscal balance in the current crisis • Do not take it for granted that prudent fiscal policy will automatically be restored - stronger legal backing for fiscal targets and expenditure ceilings - guidelines for how deviations are to be handled - expenditure ceilings to cover more categories • Establish fiscal councils - so far only in Sweden and to some extent in Denmark - need for strengthening also in these countries

Financial stability • Risks with elevated house prices and high private-sector debt illustrated in Iceland and Denmark • What about Sweden, Norway and Finland? • Mismatch between households’ liquid assets and their liabilities - loan-to-value regulations - amortisation requirements • Wholesale funding of banks • Higher capital requirements (and countercyclical) and larger risk weights for mortgage loans • Roles of monetary policy and financial supervision • Risk that regulation goes too far • Cross-border activities of Nordic banks provide arguemtns for ex ante burden-sharing agreements • Abolishment of favourable tax treatment for home ownership

Figure 41 Private-sector debt, per cent of GDP

Figure 42 House prices, 2000-100

Employment • Risk that unemployment becomes persistent - cf Finland and Sweden after the crisis in the 1990s - Iceland and Denmark at risk • Activation programmes - often disappointing results of large-scale programmes - access to ordinary school and university systems • Limits on duration of unemployment benefits and falling benefits over an unemployment spell • EITCs and stricter gate-keeping in systems of sickness insurance and disability pensions has kept up labour force participation in Sweden • High low-skilled unemployment • High youth unemployment in Sweden - difficult to improve vocational schooling and to introduce apprenticeship systems as in Denmark • Reduce early retirement in Denmark and Finland • Reduce sickness absence and retirement for disability reasons in Norway and Denmark

Figure 31 Unemployment of unskilled workers, per cent of labour

Figure 43 Employment rate in Sweden accordning to education, males 25-54basic, high school, university

Figure 44 Employment rate according to education, females 25-54 basic, high school, university

How well is the Nordic model doing? A review of the economic performance of the Nordic economies