Download Chapter 4 discussed the operation of a market economy and some

7 Sweden and Social Democracy
FUNDAMENTAL FEATURES OF THE SWEDISH MODEL
Chapter 4 discussed the operation of a market economy and some of the failures that might result. Different in type from the
problems of externality and public goods was the concern that income distribution resulting from the operation of a market
economy might not be equitable or “fair.” In a pure market system, an individual’s income is dependent on his or her
ownership of factors of production. The pattern of economic well-being generated might be considered unsatisfactory from a
variety of points of view, providing a motivation for government action. In fact, one of the largest activities of governments in
modern market economies involves modifying the income distribution. This involves the use of transfer payments, the public
provision of goods that might otherwise be supplied privately and the finance of these expenditures out of taxation. This
activity is what is generally referred to as the operation of a “welfare state.”
Sweden is generally regarded as the quintessence of the welfare state; everyone who is prepared to work is guaranteed a
high minimum standard of living, and all the population has access to a wide range of services provided by the government.
These services include free education at all levels (with stipends for students above the high school level), free health care,
and a comprehensive pension scheme. Such policies have ensured a high profile for the government in many aspects of
economic life. Total government expenditures in Sweden are equal to about two-thirds of total gross domestic product.
Payroll taxes amount to over one-third of the total payroll, and the marginal income tax rate paid by most blue collar workers
is over 40 percent.
A further feature of the “Swedish model” is the high level of government activity in the labor market. This has two aspects.
In macroeconomic terms, the government has been aggressive in its use of monetary, fiscal, and exchange rate measures to
maintain a high level of employment. On the microeconomic side, the government has used a comprehensive system of
assisted job search and retraining programs to keep the level of frictional unemployment low.1 These policies have ensured
that the rate of unemployment in Sweden has until recently been consistently below that of most other market economies.
By maintaining low unemployment and high levels of social goods and social insurance, Sweden has avoided the sharp
contrasts between the affluent and the poor that can characterize pure market capitalism. The Swedish model has also gone a
step further by its use of highly centralized collective bargaining practices. Wages are, by and large, determined by
negotiations between representatives of labor and employers on the national level, which are undertaken under the
stewardship of the government. Sweden is the most heavily unionized society in the world—85 percent of workers are
covered by some form of collective bargaining agreement—and such central bargaining is a key feature of the determination
of the distribution of the social product in Sweden.
One objective of this collective bargaining system has been to eliminate social waste by arriving at settlements without
resort to socially and economically damaging strikes and labor disputes. Another objective has been the promotion of “wage
solidarity.” This involves an overt attempt to keep the earnings of all workers more closely grouped than is the case in less
socially conscious societies. This aspect of policy is directed at producing a high degree of social cohesion within the
population, and the consequent elimination, or at least minimization, of class conflict.
Although the distribution of income and goods in kind in Sweden is strongly shaped by the government, the means of
production are almost entirely owned by the private sector. Thus, many authors describe Sweden as being representative of a
“middle way”—socialist in terms of its distribution policy but capitalist (relying on markets and competition) in production.
Because of this, and the apparent elimination of the “market failure” of highly skewed distribution of well being, the Swedish
model is, at first sight at least, highly attractive. However, critics point to the high level of taxes required to finance
redistribution policies, and the consequent erosion of incentives, as the flaw that ultimately hobbled the Swedish system.
Moreover, although Swedish firms are capitalist in terms of ownership, the strength of unions, powerful labor laws, and other
government restrictions place constraints on Swedish managers’ ability to operate. These constraints may have adverse longterm affects in terms of maintaining international competitiveness. This chapter looks at the key features of the Swedish
model and asks whether other countries—developed, developing, or in transition from some form of socialism—might
profitably learn from the Swedish experience.
Characteristics of Swedish Society
The first thing to note about Sweden is that it is a small country. It has a population of only nine million people, and that
population is remarkably homogenous, both politically and ethnically. There is no great racial conflict, and the political
debate is rather localized in terms of the ideological spectrum. Most Swedes accept the essential propositions of Swedish
society, a commitment to wage solidarity and social cohesion. Whether this consensus is a product of the model or a cause of
it is an open question. Government has largely been the monopoly of the Socialist party since the 1930s, with only an
occasional aberration. Moreover, whoever has been in power, the political system has remained highly corporatist. Decision
making is collective, but only through institutions that are sanctioned by the state and granted access to the process. Groups
outside of those formally recognized by the government (and therefore made a part of policy making) have only a small voice.
While the level of individual liberty is relatively high, there is an expectation of conformity to the basic objectives of society.
Sweden is also a high-income society. Although recent inflation, slow growth, and currency depreciation have cut into
Sweden’s international ranking, it remains among the group of most affluent societies in the world. In 1987 only Switzerland
and the United States ranked ahead of Sweden in terms of purchasing power parity per head of population. More recently the
World Bank placed it about 16th. In current terms, its 1994 gross domestic product (GDP) per head was about $17,000, and
its real purchasing power per head is about 66 percent of the U.S. level. Sweden’s income distribution is remarkably uniform
when compared to most other nations. The ratio of the income share of the most affluent quintile to the least affluent is only
4.6 to 1, thus Sweden may be thought of as about twice as “equitable” as the United States. This equality owes much to the
strong role of the government, which spent 66 percent of GDP in 1995. Although this is down from 71 percent in 1993, it is
well above the average for the European Union (EU), which was only 50 percent, and twice the relevant U.S. figure. Social
security transfer payments alone account for 19 percent of GDP, against an average of 10 percent for the industrialized world
and only 7 percent for the United States. General government revenue was about 60 percent, pointing to one of the enduring
problems of the Swedish welfare state—chronic government deficits that require financing.
Contrary to much popular wisdom, Sweden is not a nexus of social problems, and statistics show it does well on most
measures. It has one of the highest life expectancies in the world (second only to Japan) and one of the lowest infant mortality
rates. There are fewer people in prison in Sweden than the average in the industrial world; in fact, the incarceration rate is
only about 11 percent of that of the United States. Suicides are about the mean for developed nations. In terms of overall
“human development,”2 as defined by the United Nations Development Programme (UNDP), Sweden ranks 10th in the world.
The divorce rate is about the same as that of the United States, though births outside of matrimony are higher. Alcohol
consumption is low, and (perhaps not coincidentally) injuries in traffic accidents are one-fifth of the U.S. level. Sweden has
probably the oldest population in the world; 18 percent of the population is now above the age of 65, and the share is
growing. This gives Sweden one of the highest dependency ratios in industrialized countries, and the necessity of providing
for this growing retired population will put further strain on the public finances.
SOCIAL DEMOCRACY
Even after the reforms of the early 1990s, Sweden remains the best example of social democracy, which is defined by Henry
Milner3 in terms of six basic principles governing the interaction of government and citizens. They can be summarized as
follows:
1. A fair distribution of economic well-being. The fruits of economic prosperity are to be distributed fairly, but in such a
way as not to undermine that prosperity. In other words, taxes and transfer payments are to be used but care should be
taken lest high tax rates or overgenerous transfers create substantial disincentives to effort.
2. Work for all as the primary means of eliminating deprivation. Since human beings seek to live productively, fair
distribution is to be effected through decently remunerated employment rather than simply cash or services.
3. A high degree of social solidarity to bind individuals to a common purpose. Individuals are members of communities
through ties of culture and history. Members have reciprocal rights and obligations over and above the right of all
human beings to be treated with tolerance and compassion without distinction as to race, sex, disability, and so on.
4. Rules to be made by a democratic process. A society of justice must follow rules, without which it degenerates into a
jungle in which the “fittest” prosper. Democracy entails that the rules to be obeyed—by leaders and followers alike—
result from decisions made by the people themselves through free elections that fully safeguard fundamental political
freedoms.
5. Participation extends beyond electoral democracy. Especially in modern societies with complex systems of economic
coordination, democracy entails active decentralized decision making and employee participation in management.
6. All citizens should have access to information. Democratic participation requires open and informed discussion—that
is, a free and responsible press, an informed, well-educated citizenry, full public access to information based on data
reliably gathered and presented, and publicly accountable independent boards of inquiry into matters of controversy.4
While Sweden is perhaps the best real-world example of a social democracy, it fell short of these defining characteristics in
key ways. In particular, the first principle’s drive for equalitarianism has conflicted with economic efficiency, hampering the
operation of the labor market, reducing saving, and leading to high rates of absenteeism. This led to rising unemployment and
a falling sense of solidarity. Although democratic in terms of its electoral policies, real power in Sweden was held by a small
group of individuals within a limited set of institutions. This chapter asks whether egalitarian labor market policies and high
degrees of redistribution through transfer payments are compatible with continued growth in the long run.
THE TAX AND TRANSFER SYSTEM
The cornerstone of social solidarity is Sweden’s very comprehensive system of social insurance and redistribution, which
ensure that a worker who is willing to work will not be unduly harmed by involuntary job loss, injury, sickness, or even family
responsibilities. The Organization of Economic Cooperation and Development (OECD) calls it “[a] universal and generous
system of social protection [that] has combined with progressive income taxes to achieve a high degree of poverty alleviation
and equalization of incomes.” Sweden outperforms most other countries in terms of relative income levels for key groups such
as families with children and old-age pensioners.5 A full 35 percent of all household income in Sweden results from transfer
payments up from only 15 percent in the mid-1960s. Table 7.1 shows that today Swedish workers lose little of their takehome pay for most unwelcome circumstances, on the whole much better than the other countries illustrated, all of whom have
a reputation for being something of a welfare state.
Unemployment insurance funds are government financed but administered by the powerful and omnipresent labor unions.
Membership is voluntary but open to all members of the labor force, and benefits may be claimed after 12 months of
membership with a replacement rate of 80 percent of gross earnings. Benefits are exhausted for younger workers after 300
days and if the worker is out of work for a year the last 65 days carry no unemployment benefit. Hence the replacement wage
for a full year’s unemployment is only 69 percent, as seen in Table 7.1, though workers over 55 can receive benefits for 450
days. The same table also shows that Sweden’s sickness, injury, maternity, and retirement schemes are generous by global
standards.
Households unable to reach a reasonable living standard can claim social assistance benefits, administered by local
authorities, but access is subject to strong means testing, requiring recipients to sell capital assets. Housing benefits are means
tested too, depending on the number of children, the income of the household, and the level of housing costs. Weekly cash
payments are issued for each child in the family, with a higher amount coming into effect from the third child on. Family
benefits compensate parents for staying at home to take care of their children during the period immediate after their birth.
The replacement rate is 80 percent (as elsewhere in the social insurance system) for the first 12 months. Day care for children
is provided at prices below cost and dependent on parental income. Transfers are taxed on a par with labor income when they
substitute for a short- or long-term earnings loss to avoid tax considerations playing into the take-up of benefits. Social
insurance benefits are thus generally provided gross of taxes, the exception being social assistance. Child and housing benefits
are consequently provided net of taxes.
This comprehensive system does not come cheaply and Sweden has long been notorious for its high level of personal
taxation. However, concerns about the disincentive effects of high taxation brought about a comprehensive reform in the tax
system. The top rates of tax on unearned income remain high since reforms only cut the effective tax rate6 from about 63
percent in 1989 to 60 percent today, still almost twice the U.S. rate of 35 percent. Table 7.2 shows that capital taxation in
Sweden is not punitive and compares favorably with the United States, although Sweden does have a wealth tax of 1 1⁄2 percent
per annum in principle levied on all personal wealth over about $110,000 (however, loopholes abound and evasion is
common).
CORPORATISM
Though ideally social democracy gives everyone a role in the decision-making process, in reality Sweden is a highly
corporatist state with much of the power, especially in economic matters, being located in the government (which has been
Social Democratic for most of the postwar period), the employers’ federations, and the labor unions. We saw in chapter 5 that
Sweden is the most highly unionized society in the world with the vast majority of workers represented by unions. However,
this concentration of power by labor is matched by a similar centralization in capital. Sweden is home to a disproportionately
large number of major companies, and as Table 7.3 shows it has the highest density of companies among Europe’s 500 largest
of any European nation. Moreover, because of a limited domestic market, those companies must be globally competitive and
reach markets beyond Sweden’s seven million consumers. These export-oriented industries are vital for Sweden’s well-being
and play a key role in wage negotiations. Government’s close relationship with the few business leaders who dominate
Swedish industry is one reason why rates of taxation on capital are relatively modest compared to those falling on labor
income—28 percent for corporate taxes as opposed to over 60 percent for wage income under the personal income tax.
Not only is Swedish industry dominated by large firms, the corporatist structure of the country is increased by the
dominance of a single holding company, Investor AB, which holds controlling interests in many of the big companies. Firms
either controlled by Investor or in which it has a dominant interest make up about 40 percent of the Stockholm stock market’s
capitalization. Concentration of economic power is further exacerbated by the fact that 40 percent of Investor AB is owned by
members of, or trusts controlled by, the Wallenberg family. Economic power in Sweden is much more centralized than in any
other major capitalist country, and this facilitates the operation of the troika of employers, unions, and the Social Democratic
Party that has controlled Sweden for decades.
THE SYSTEM OF LABOR RELATIONS
The Basic System
One of the most distinctive features of the Swedish economy, and the one that we wish to focus on here, is the system of
collective bargaining and industrial relations. This system originated in the late 1930s in discussions motivated by the need to
reduce the then high degree of industrial unrest that Sweden had experienced in the 1930s. In 1938 a basic agreement was
signed between the employers’ federation (the SAF) and the Swedish Trade Union Confederation (the LO) in the resort town
of Saltsjöbaden, near Stockholm. This Saltsjöbaden agreement is the cornerstone of the system. It provides a mechanism of
collective bargaining to determine the rate of wage increase across industry and places limits on the nature of industrial action
by the unions.
As we have noted, Sweden is now one of the most heavily unionized societies in the world. Some 85 percent of workers
are members of some union.7 The LO represents only blue collar workers and now has about 2.2 million members. White
collar workers, which have been growing as a percent of the workforce, are represented by their own confederations, the
largest of which is the Swedish Confederation of Professional Associations (TCO). The SAF now represents some 42,000
firms of all sizes including all of the major employers. Government-sector employees are represented by their own agency.
Throughout the entire postwar system until the end of the 1980s, national level negotiations between the SAF and the LO
provided the framework for changes in wage costs. Both sides saw benefit in this. The employers viewed the agreements as
being able to deliver lower increases in labor costs, and lower prospects of strike activity, than might result from
disaggregated bargaining. The unions supported the policy because it offered an avenue toward their overall political goal of
wage solidarity (discussed later). Negotiations conducted at the national level hammered out a framework agreement that
determined the overall increase in the wage bill. This was subsequently supplemented by industry agreements, which
translated the total settlement with norms for the various sectors of the economy.
The EFO Model
A primary constraint on the system of wage settlement was the need to maintain international competitiveness. Sweden, a
small and relatively open economy, exports roughly one-quarter of its GDP, and wage cost inflation could not be allowed to
jeopardize international competitiveness. To ensure this, the system of negotiation explicitly differentiated between a
competitive (“exposed”) sector (comprised of firms like Volvo, Saab-Scania, and Electrolux) that had to operate in world
markets, the price structure of which was beyond the control of anyone within Sweden, and a domestic (“protected”) sector in
which prices might be endogenously determined.8 The rate of wage increase in the competitive sector was determined first on
the proposition that the rate of growth of unit labor costs (basically wage cost increases less any anticipated productivity
gains) should not outpace the rate of growth of prices for Swedish exports, which were determined in world markets. This
implies that
W˙x 5 P˙x 1 (˙Qx 2 ˙Lx)
where W˙ is the rate of change of wages; P˙ is the rate of change of prices; ˙Q is the rate of change of output; and ˙L is the
change in the use of labor. (˙Q 2 ˙L) is therefore the change in productivity; subscript x denotes the exposed sector. Any
wage increase above this rate harms international competitiveness, resulting in a fall in exports, balance of payments
problems, depreciation of the currency, and serious inflation in an open economy like Sweden’s. An arithmetic example of the
process is useful. If world prices for Swedish exports are expected to advance by 4 percent and productivity gains in Swedish
industry are predicted to lower costs by 2 percent, the maximum increase in unit wages compatible with sustained export
competitiveness is 6 percent. This determined the wage settlement in the exposed sector. Subsequently, the rate of wage
increases in the protected (i.e., nonexport) sector would be fixed at a rate comparable to that determined for the exposed
sector. Such agreements were truly national and employees in the nontradable service and government sector were able to
enjoy a rate of increase of wages predicated on the rate of price increases and productivity gain in the most competitive
sector.
Wage Solidarity
This model enabled the trade union movement to pursue one of its most cherished objectives—wage solidarity. The
underlying idea is that the wages for all jobs requiring comparable effort and comparable skills should be the same across the
industry. To put it another way, the unions were committed to equal pay for equal work and to the notion that one’s wage
should not depend on the profitability of the industry that one works in. This proposition conflicts with the market logic that
wages are linked to the marginal value product. Critics predicted that adherence to wage solidarity would lead to a variety of
problems. Growing firms would find it hard to attract labor. Work incentives would be lowered, and the workforce would be
inefficiently allocated between occupations and industries. Nevertheless, the unions did have considerable success in eroding
wage differentials between industries. In 1959 the spread between average wages in the highest and the lowest paid industries
was 39 percent. By 1964 it had fallen to 26 percent and by 1981 was down to only 12 percent. A similar narrowing was
observed in terms of wage differentials by sex. Average female wages in Sweden are 90 percent of the male level,
considerably above the “60 cents on the dollar” experienced in the United States.
The sustained growth of the government’s role in the Swedish economy and the extensive provision of social goods made
the public sector Sweden’s largest employer. The Municipal Employees’ Union is now the largest union in Sweden, and the
workforce actually engaged in the exposed sector has diminished as a share of total employment as the services and
government sectors grew. Furthermore, because any increase in pay for government-sector workers had to be financed from
taxes, a system where public-sector wages shadowed those of the most competitive sector embodied a serious problem.
Simply, whenever productivity or prices rose in the export, or exposed, sector, wages for the workers in that sector would
increase. The system of national wage negotiation meant that a wage increase in the service and government sectors would
inevitably follow. This implied domestic inflation, as well as tax increases to pay the increased wages in the government
sector, both of which had ultimately injurious consequences for competitiveness in export markets.
The Breakdown of National Agreements
While praiseworthy in terms of equity, attempts to ensure that equal work meant equal pay dulled the efficiency of the labor
market. Wages in a market system, like other prices, are signaling devices that indicate shortages; rising wages set in motion
shifts that act to eliminate shortages. Since Swedish policy explicitly tried to eliminate wage differentials, the labor market
could not adjust to rectify shortages in particular industries or sectors. With demand for Swedish products in world markets
high, employers in the exposed sector found themselves short of labor and unable to increase wages to attract new workers.
Expansionary macroeconomic policies ensured that the aggregate level of employment was high, and because of the national
agreements, wages in protected sectors were close to those in the exposed sector and workers were reluctant to change jobs.
Initially, employers in firms short of labor attempted to attract new workers while nominally living within the wages
determined by the national agreement. Because nominal wage rates could not be raised at a rate above the agreed level,
special “perks” and fringe benefits were introduced as inducements to retain the workforce and attract new recruits. These
included productivity-related bonuses, extra premia for shift work, shorter hours, and longer vacations. This phenomenon of
raising the effective wage per unit labor while leaving the basic wage unchanged is known as wage drift. It has been
estimated that during the 1980s about 50 percent of effective wage increase was attributable to wage drift. Wage drift is still
present but has fallen to a smaller share of overall wage increase; in 1998 it represented less than 25 percent of the total
changes. (See Table 7.4.)
Nonetheless, the employers in firms facing high demand still felt shackled and in 1983 the Engineering Employers’
Association (VF), a member unit of the SAF, decided to go alone and concluded its own set of wage agreements with the
Metal Workers Union signaling the end of effective national wage determination. Since 1983 there has been no national
agreement on wage increases, although in some years the LO and the SAF have recommended a nonbinding norm to their
membership. The role of the union confederation has been reduced to one of coordination and oversight rather than a lead
negotiator.
Other Aspects of Labor Market Policy
Although centralized wage negotiation was the centerpiece of the labor market policies, it was not the whole of the story.
Sweden also has a highly active labor market policy that remains in place despite the demise of centralized wage bargaining
and the consequent slippage of wage solidarity. This policy embraces relocation grants, training, and retraining schemes,
private-sector employment subsidies, and, where necessary, public-sector job schemes.
Active labor market policy was a necessary complement to centralized wage bargaining. In a free labor market, wage
differentials between industries and occupations provides the incentives for workers to change jobs and so resolve shortages.
This ensures the flow of labor between occupations and a consequent microeconomic equilibrium, while real wage flexibility
maintains full employment. Because the Swedish system for many years actively discouraged the development of wage
differentials, the government had to resort to active labor market schemes to solve the problem.
The first point of intervention is via the “labor exchanges,” government offices that assist in matching displaced workers
with vacancies. In Europe active labor market policy is more important than in the United States, but in most countries labor
exchanges operate with high levels of caseloads per staff worker. In Britain, for example, the ratio is 375 cases per employee;
in Germany it is 370, and in the Netherlands 160. In Sweden, in contrast, it varies between 15 and 30, depending on the
region and as a result the individual attention afforded to each job seeker is high. The law requires that employers must report
all vacancies to the authorities and the labor exchange professionals have access to essential information concerning all job
openings in the country. Consequently they can work actively with the human resource departments of firms to find the best
match between job seekers and vacancies. To further decrease rigidities and frictional cost to the unemployed, funds are
available for site visits and, should a job seeker accept a distant vacancy, for relocation expenses. If suitable openings are not
available for a job seeker, retraining funded by the government is in order and is made available. Furthermore, in order to
cope with potentially large crises, the authorities require that they be told well in advance about plant closings and
downsizing, allowing forward thinking on strategies to address the problem and the institution of retraining schemes even
before plant closings occur.
Unemployment benefits in Sweden are generous and the reduction of take-home incomes consequent to job loss is small.
However, benefits are contingent on active job search and also have strict time limits. Should an individual’s benefits run out,
the government acts as an “employer of last resort” and will provide a job for at least six months. As a result of this
combination of policies, unemployment rates in Sweden were until recently very low, generally between 1 and 1.5 percent.
Attempts to Socialize Capital
The policy of wage solidarity resulted in the repression of wages in the profitable, exposed sectors of industry, and although
this contributed to managers’ problems, lessening their ability to recruit qualified labor, it had a positive impact on profits by
keeping wage costs low. Workers in these industries felt that they should have a share of the excess profits generated by their
restraint. In 1976 the Congress of the LO adopted a resolution proposed by Meidner, their chief economist, to establish wage
earner funds. The idea behind the ambitious original plan was that each year all firms that employed more than 500 workers
should hand over 20 percent of their pretax profits to a union-controlled fund specific to that industry. These monies would be
used by the union to purchase (at book value) shares of the firm in which the profits had been made. Consequently, the share
capital of the large, profitable elements of Swedish industry (which were concentrated in the exposed, export sector) would be
increasingly accumulated by the unions. In the limit the unions might control all industrial capital, with the most profitable
firms passing most quickly to union control. When the union share holdings represented a majority, they would be in a
position to appoint management and assume strategic control of the firm. Had the Meidner plan been followed the Swedish
system would have come to resemble the Yugoslav system of worker management. There would, however, have been two
important differences:
1. Union workers, rather than society as a whole, would have been the owners of capital.
2. Control of the firm would have passed to industry-wide unions, rather than to the workers in the specific enterprise.
The Swedish parliament balked at enacting the Meidner plan into law, despite aggressive union lobbying. It was a radical
idea and would have transformed the Swedish model by progressively eliminating private capital, leading to union control of
both sides of the labor process. It proved too ambitious, even for the ruling Social Democrats, and was staunchly opposed by
Sweden’s tight group of capitalists. As a compromise Parliament went for a watered-down version, establishing five regional
funds financed by a 20 percent tax on “excess profits” which were empowered to buy shares not at book value but at the much
higher market value. They are constrained not to accumulate any more than 8 percent of the capital of any one firm, and total
ownership by all of the funds together must not exceed 49 percent, thus denying the possibility of union control of business.
Recent Labor Market Developments
One of the most startling recent developments in Sweden has been the rise in the unemployment rate. In 1980 using OECD
standardized unemployment rates joblessness in Sweden was 2.0 percent, most of it frictional, against an OECD average of
5.8 percent. By 1995 the Swedish rate had ballooned to 9.2 percent, while the OECD average had only risen to 7.5 percent.
Given the commitment of Swedish social democracy to limiting unemployment to ensure general well-being, this increase was
alarming. On the positive side, it must be noted that the Swedish unemployment rate is still lower than most of its partners in
the European Union. Standardized unemployment in the European Union in 1995 was 11.2 percent. There is also some
evidence of Sweden’s success, relative to most developed countries, in eradicating long-term unemployment. Workers in
Sweden have a much higher chance of ultimately finding work than in other countries, a powerful point in favor of its active
labor market policies.
Table 7.5 shows some of the developments in the labor market in recent years. The unemployment rate has fallen from its
highs in 1996, nevertheless 13.8 percent of the total Swedish labor force is either unemployed or in a government make-work
or education program, higher than the rate in 1995. More people are enrolled in education programs and fewer are actually
idle or in a make-work program. In theory this should lead to a better trained and more productive workforce, though there is
too little evidence to judge the effectiveness of job retraining schemes. The OECD reports that
the authorities have launched an extensive adult education programme. This is aimed at those with inadequate qualifications and has
now been running, in line with the quantified objectives set, for two years. Insofar as educational qualifications are closely linked to
unemployment risk, an emphasis on human capital enhancement is a key ingredient in the long-term improvement of labour-market
outcomes.9
LESSONS OF THE SWEDISH MODEL
Fifteen years ago it would have been tempting to draw a positive lesson from the Swedish experience. In the period from the
establishment of the system of centralized wage bargaining in the late 1930s to the early 1980s, Sweden had an enviable
record of labor peace and economic growth. However, since the beginning of the 1980s recurrent economic problems have
made Swedish success look much more questionable in the long-term perspective.
Swedish experience in the labor market is exemplary of the problems that confront a society’s attempts to suspend the role
of wages in furthering an efficient allocation of labor. While the convergence of wages toward equality might be regarded as a
laudable social goal, without differential wages to encourage worker mobility the labor market cannot work smoothly. The
conflict between the drive for equity in society at large and the needs of export-oriented industry caused the breakdown in the
national system of wage bargaining. The question is, can it be put back together or is it permanently consigned to history?
Both parties to the labor agreement seem to be optimistic:
Whether the social partners will be able to act in concert in order to get the economy moving again is something we cannot yet tell. . . .
We can only express the hope that out of the present labor pains a new Swedish model will be born, resembling its forerunner. There
are, in fact, good chances of this. Despite the adverse trends . . . there are many sound elements of the Swedish economy and industrial
relations system that have survived and can be built on. . . . In their hearts the Swedes share a deep community of values. The
representatives of labor and management can still mix with each other centrally and locally in a spirit of trust and are capable of
working together on matters of common interest. Promising signs are the agreements that have been concluded in recent years on such
collaboration and, above all, the fact that the debate on wage policy is now being conducted in the broader context of the nation’s
economic health.10
There was similar guarded optimism from the union side:
Many people in Sweden see . . . the frequent breaches of labor peace as linked to the departure from the centralized bargaining system.
At the same time there is widespread agreement that prosperity must be safeguarded and equitably shared. This is why I believe that the
pressures favoring the return to co-ordinated central negotiations will prevail, even if slight changes may be expected in the unions’
distribution policy. The bargaining system that has come to be known as the Swedish model of industrial relations has stood the test of
time and I am confident that given the opportunity it will continue to serve both sides of industry well for many years yet.
Whatever the future of national labor negotiations there seems agreement that the umbrella nature of the Swedish social
welfare system has hurt macroeconomic performance. The high rates of taxation required to finance the welfare state probably
had a disincentive effect on both worker effort and savings, retarding growth to a rate that was in the 1970s half the OECD
average. This is perhaps the most important issue to be addressed in a comprehensive welfare state. Millner noted it in the
1980s:
The most important and difficult question raised by critics of the welfare state concern the system of rewards resulting from the
combination of wages, taxes, transfers, and other sources of income on individuals and, ultimately, its effect on the workings of the
economy. They are perhaps most fully explored in the work of the distinguished and increasingly critical Swedish economist Assar
Lindbeck. In Lindbeck’s recent work is found perhaps the most sophisticated expression of the often-made argument that somewhere in
the 1970s the excessive redistributiveness of Swedish welfare policy began to actually decrease the aggregate quantity of socially useful
work by significantly increasing leisure through shorter work years and absenteeism and pushing activity into the “unofficial economy”
in the form of barter, do-it-yourself work, and other forms of tax avoidance.11
Disincentive effects of high benefits and taxes are seen in a variety of ways. A 1986 report by the engineering employers’
association found that blue collar Swedish workers were on the job less, putting in only 1,546 hours a year compared to 1,654
in West Germany and 1,930 in the United States in part due to increased absenteeism and “sick outs.” High tax rates have
forced activity into the black economy. One study found that between 12 and 25 percent of income in Sweden was
unrecorded.12
An OECD report a decade later addressed the issue of incentive and came to the following conclusion:
A universal and generous system of social protection has combined with progressive income taxes to achieve a high degree of poverty
alleviation and equalisation of incomes. Sweden outperforms most other countries in terms of relative income levels for key target
groups such as families with children and old-age pensioners. This redistribution has been accompanied by a continuous extension of
transfers, from 15 per cent of household incomes in the mid-1960s to 35 per cent in the late 1990s, with the result that as much as twothirds of transfers reflect redistribution over the life-cycle of individuals and only one-third interpersonal (“pure”) redistribution.
High tax rates and generous replacement rates, with a de facto indefinite duration of unemployment and sickness benefits, have
worked to this effect. Income taxes and social security contributions combine with means-tested housing and day-care benefits to reduce
substantially the return from taking a better-paid job or increasing hours worked. The added effect of the internationally high 80 per
cent replacement rate in benefits actually produces a substantial penalty for many on moving from unemployment to employment. Close
to 40 per cent of unemployed would see no or insignificant increases in disposable incomes from moving back into work.13
KEY TERMS AND CONCEPTS
active labor market policy
corporatism
EFO model
exposed sector
Saltsjöbaden agreement
social democracy
wage drift
labor exchanges
Meidner plan
protected sector
replacement wage
wage earner funds
wage solidarity
QUESTIONS FOR DISCUS SION
1.
2.
3.
4.
Why is the concept of wage solidarity central to Swedish society?
Why does an attempt to limit the distribution of wages lessen the effectiveness of the labor market?
Why is an active labor market policy a possible remedy for the absence of wage signaling?
In what ways does Sweden as a society differ from an “ideal” social
democracy?
5. Is it appropriate to describe Sweden as corporatist? Why?
6. What were the pressures from the exposed sector that led to the breakdown of national agreements?
7. What sort of socialism would the extensive use of wage funds have led to?
RESOURCES
Web Sites
Central Bank
http://194.52.62.248/
Swedish Municipal Workers Union
http://www.kommunal.se/english/english.cfm
Ministry of Finance
In Swedish:http://finans.regeringen.se/
Swedish Employment Service
http://www.amv.se/index_eng.html
Investor AB
http://www.investor.se/lang3/m1-0/m1–0.asp
Swedish Confederation of Professional Associations
http://www.tco.se/index.htm
The Swedish Trade Union Confederation, LO
http://www.lo.se/
Swedish Government Offices
http://www.regeringen.se/inenglish/
Books and Articles
Bosworthy, Barry P., and Alice M. Rivlin, eds. The Swedish Economy. Washington, D.C.: Brookings, 1987.
Calmfors, Lars, ed. Wage Formation and Macroeconomic Policy in the Nordic Countries.
Oxford: Oxford University Press, 1990.
Canova, Timothy A. “The Swedish Model Betrayed.” Challenge, May–June 1994, 36–40.
Cohen, Peter. “Sweden: The Model That Never Was.” Monthly Review, July–August 1994, 41–59.
European Parliament. Social and Labour Markets Policy in Sweden. Directorate-General for Research, Working Papers, Social Affairs
Series, July 1997.
Lindbeck, Assar, Per Molander, Torsten Persson, Olof Peterson, Agnar Sandmo, Birgitta Swedenborg, and Niels Thygesen. “Options for
Economic and Political Reform in
Sweden.” Economic Policy, October 1993, 219–263.
Maccoby, Michael, ed. Sweden at the Edge: Lessons for American and Swedish Managers. Philadelphia: University of Pennsylvania Press,
1991.
Milner, Henry. Sweden: Social Democracy in Practice. New York: Oxford University Press, 1989.
Palme, Marten O., and Robert E. Wright. “Gender Discrimination and Compensating Differentials in Sweden.” Applied Economics 24
(1992): 751–759.
Persson, Inga, ed. Generating Equality in the Welfare State: The Swedish Experience. Oslo:
Norwegian University Press, 1990.
Ramaswamy, Ramana. “Wage Bargaining Institutions, Adaptability, and Structural Change: The Swedish Experience.” Journal of
Economic Issues 26, no. 4 (December 1992): 1041–1061.
“A Survey of the Nordic Countries: Happy Family?” The Economist, 23 January 1999, 50.
“A Survey of Women and Work.” The Economist, 18 July 1998, 48.
1Frictional unemployment is unemployment that results when a worker is engaged in some form of job search while out of work. It is compatible with a
high level of demand in the labor market.
2The World Bank’s Human Development Index is prepared as a weighted average of life expectancy, literacy, higher education, and income per head.
3This section on the underlying principles of social democracy is taken and modified from Henry Millner’s Sweden: Social Democracy in Practice (New
York: Oxford University Press, 1989), 4–5.
4A final principle could be added: respect for the environment. Through creative decentralized planning, social democracy ideally protects and enhances the
natural environment as vital to human existence.
5OECD Economic Survey of Sweden, 1999, 16.
7United Nations Development Programme Human Development Report, 1995, 201.
8This procedure is known as the EFO model after the Gösta Edgren, Karl-Olaf Faxen, and Clas-Eric Odhner, who were the chief economists for the SAF,
LO, and TCO, and who literally wrote the book on Swedish collective bargaining, Wage Formation and the Economy.
9OECD Economic Survey of Sweden, 1999, 13–14.
10Both this and the following quote were from the International Labour Review, 1986, cited in Milner, 225–226. The employers view is from L. G. Albåge
and the union position from Harry Fjällström.
11Henry Milner, Sweden: Social Democracy in Practice (New York: Oxford University Press, 1989). The best example of Lindbeck’s views may be found
in Assar Lindbeck, Swedish Economic Policy (Berkeley: University of California Press, 1974).
12Edward Feige, “Sweden’s Underground Economy,” in The Economics of Institutions and Markets,
ed. Gunnar Eliason (Stockholm: UIU, 1986), 127.
13OECD Economic Survey of Sweden, 1999, 16–18.
TABLE 7.1
International Comparison of Social Insurance Scheme
(percentage change in annual disposable income for the average production worker [APW] in moving from employment to social
insurance, 1996)
,Sweden,
United
Benefit
*1997* Denmark Finland Germany Kingdom Netherlands
Canada
12 months unemployment,
insured
229
235
238
242
279
227
244
Sickness, 1 week†
20.8
0
0
0
20.4
0
21.5
Work injury, total
incapacity
0
126
28
115
257
227
210
Maternity leave,
common duration
22
23
22
0
23
0
24
Old-age pension,‡
full work record
236
244
233
225
247
253
245
* Based on a general replacement rate of 75 percent in social insurance, the increase to 80 percent in unemployment insurance in the fourth quarter is taken
into account.
† Including occupational pensions.
‡ Maximum (and not average) benefit in public schemes but without additions from occupational schemes.
SOURCE: H. Hansen, “Elements of Social Security,” Report 98:4 from the Danish National Institute of Social Research, 1988; ESO Report Ds 1997:73, in
OECD Economic Survey of Sweden, 1999, 125.6Defined as employees social security contributions plus personal income taxes as a percentage of gross
labor costs.
TABLE 7.2
Dimensions of Capital Income Taxation Interest, Profits, Dividends, Capital Gains, and Wealth Taxes
Sweden
Austria
Belgium
Denmark
Finland
France
Germany
Ireland
Netherlands
Norway
United Kingdom
United States
Highest
Tax Rate on
Interest Income
30
25
15
59
28
25
56
48
60
28
40
Corporate
Tax
Rate
28
34
40
34
28
33
58
32
35
28
31
Total
Dividend
Taxation
50
50
49
60
28
66
49
55
74
28
48
Taxation
of
Capital Gains
30
0
0
0–40
28
26
0
40
0
28
0–40
47
35
68
0–20
Rate
1.5
0
0
0
0.9
0.5–1.5
0
0
0.7
0.7–1.1
0
Threshold
0.9
1.65
6.25
0.77
0.13
0
Notes: Tax rates are in percentages and thresholds are in SKr million.
SOURCE: OECD; International Bureau of Fiscal Documentation, “European Tax Handbook 1998,” United States Internal Revenue Service, in OECD
Economic Survey of Sweden, 1999, 133.Wealth Tax
TABLE 7.3
Large Companies per Million Inhabitants, 1998:
Number of Companies among Europe’s 500 Largest Companies
Country Number of Companies
Sweden
Switzerland
United Kingdom
Belgium/Lux.
Netherlands
SOURCE: Financial Times, 1999.
Country
3.6
3.5
2.7
2.3
2.1
Number of Companies
Ireland
Denmark
Portugal
France
Norway
1.7
1.3
1.1
1.1
0.9
TABLE 7.4
Aggregate Wage Growth (percent)
1994
1995
1996
1997
1998
Aggregate wage growth, percent
2.4
3.3
6.0
4.5
3.6
Contribution from
Central bargaining
1.5
2.1
4.4
3.8
2.8
Wage drift
1.0
1.2
1.7
0.7
0.8
SOURCE: Statistics Sweden; National Institute of Economic Research; Ministry of Finance, in OECD Economic Survey of Sweden, 1999, 68.
TABLE 7.5
Labor-Market Developments
1994
1995
1996
1997
1998
Labor force, 1,000 persons
4,268
4,319
4,310
4,264
4,255
Unemployment rate
8.0
7.7
8.1
8.0
6.5
Unemployed and covered by
government programs (%)
14.2
13.2
14.3
14.8
13.8
Percentage covered by
make-work programs
5.2
4.4
4.5
4.3
3.9
Percentage covered by
education programs
0.9
1.2
1.7
2.4
3.4
Unemployed for more
than a year
1.8
1.9
2.1
2.3
1.9
SOURCE: Statistics Sweden; National Institute of Economic Research; Ministry of Finance, in OECD Economic Survey of Sweden, 1999, 68.