ENOUGH?
Nordic labour markets pool risks and em- brace free trade
6
Policies support a high participation rate of women
ily policies that Nordic demographic projections look better than those of Southern European countries (in which childrearing at home has been more prevalent).
We thus see a lot of strengths in the Nordic labour market. However, many of the labour market institutions and policies that we currently observe were designed in the 1950s and 1960s, in an era when the welfare state, the productive technologies as well as the rules of the global economy were very different from what they are today. We believe that some of these institutions and poli- cies, perhaps notably in Finland, are not in conformity anymore with what is required to achieve the basic “Nordic” objectives. Therefore, and in tune with our overall argument, our thesis is that the Nordic labour market model can remain successful only if it is thoroughly reformed.
A well functioning labour market is, needless to say, an in- dispensable precondition for favourable economic developments. Given the demographic transformation discussed in chapters 4 and 5 above, the labour force and employment constitute the key resource constraints of the economy. It is essential for the viability of the Nordic model that the amount of productive employment in the economy be high enough to meet the manpower demand of a large public service sector as well as to generate the tax base and revenues needed to pay for its expenditures, including the welfare services and pensions.
High employment requires well designed stabilization policies as well as structures and institutions that are conducive to low unemployment. The Nordic countries have traditionally been associated with ambitious employment policies, but their perform- ance since the 1990s has been more ambivalent. For example, the labour markets in Sweden and Finland were subject to severe macroeconomic shocks in the 1970s and notably in the 1990s, and unemployment rates have not returned to the low levels of the 1950s and 1960s. The very low unemployment rates in those decades are probably partly to be seen as a consequence of the continuous expansion of the public sector.
A high level of employment and labour input requires: 1 a high aggregate supply of labour or a high rate of labour
force participation;
Historical strengths are not enough – there is need for reform
High employment rates are a sine quo non of the Nordic model
The labour market: enough workers working enough?
· 105
2 a sufficient amount of average hours worked per employedperson; and
3 a low rate of (structural) unemployment.
We will deal with these issues separately in subsequent sec- tions.
Box 6.1
What are Nordic labour markets made of?
Rate of unionization. The rate of union membership, though it has recently de-
clined somewhat, is higher in the Nordic countries than elsewhere. Negotiations between organizations have a signifi cant infl uence on wage formation and work- ing conditions.
Uniform pay increases within industries. Nordic pay bargaining was for a long time
after WWII characterized by collectively agreed uniform pay increases – all mem- bers of a union would receive the same wage increase in relative (per cent) or ab- solute (units of money) terms.
Inter-industry coordination. The economy-wide rate of pay increase has often been
determined in bargaining or consultations between central trade union federa- tions and employer organizations. This has made it easier for unions to take into account the negative consequences of high wage claims for the economy as a whole (to “internalize” the “externalities”). It may also have made it more diffi cult to introduce fl exible pay at the workplace, since national bargaining tends to fo- cus on the size of wage increase as such and to neglect more sophisticated con- tract designs.
Mutual consultation and interplay with macroeconomic policy. The economy-wide
coordination of pay bargaining has been facilitated by the government. Politi- cal decisionmakers have encouraged pay moderation by making tax adjustments conditional on the pace of contractual wage increases, particularly in Finland. In Sweden, however, government involvement in the wage bargaining has normal- ly been rejected. In the period of high infl ation – up until the 1980s – the con- sequences of comprehensive pay settlements, when undermining competitive- ness, were often mitigated through soft exchange rate policies (devaluations). This way of supporting high employment was obviously unsustainable in the long run.
“Solidaristic” pay bargaining. The uniform wage increases in Sweden were origi-
nally motivated by the need to control infl ation and limit local wage drift while enhancing productivity. The concern of the so called “Rehn–Meidner” model, launched in the 1950s, was to contain the excessive wage claims of workers in fi rms with above average profi tability. A uniform pay increase was advocated as a solution, also on the grounds that it would promote productivity growth by enhancing the investment possibilities of fi rms with above average profi tability (this was a time of credit rationing). A stronger form of solidarism was attempt- ed in Sweden in the 1970s, when low wages were systematically raised more in
absolute and relative terms than high wages. This redistributive solidarism was subsequently abandoned, as it led to a revolt of businesses and professional em- ployees and, fi nally, to the collapse of national coordination of wage bargaining in the 1980s.
Generous unemployment insurance schemes. In Sweden, Finland and Denmark,
unions have assumed responsibility for operating unemployment insurance schemes, aided by tax-fi nanced subsidies. This “Ghent system” has strengthened the unions, since access to unemployment insurance has been linked to union membership. In Norway, the Ghent system was never introduced and unemploy- ment insurance has been undertaken by the state, which explains the lower Nor- wegian unionization rate. In Finland, after the introduction of unemployment insurance funds decoupled from the unions, the rate of unionization promptly shrank from about 85 per cent to about 70 per cent2. The average net unemploy- ment benefi t replacement rate in the Nordic countries is about 10 percentage points higher than in the euro area countries and about 20 percentage points higher than in the Anglo-Saxon countries (cf. table 2.1 in chapter 2).
Employment protection legislation. The Nordic countries diff er with regard to the
strictness of their employment protection legislation. On average, employment protection is less strict in the Nordic countries than on the Continent or in South- ern Europe (cf. fi gure 2.1 in chapter 2). Sweden has probably the most restrictive labour laws, but that has not hindered Sweden from achieving an employment rate of about 80 per cent in 2007. Employment protection measures that make it harder for fi rms to dismiss employees have during the last two decades been relaxed in Finland.
Active labour market policy. The Nordic countries spend more than others on ac-
tive labour market policies in the form of job intermediation as well as training and subsidized employment. One element of the Rehn–Meidner model of uni- form wage increases was the idea of helping dislocated people to fi nd new jobs and move to new regions and occupations, and Sweden has been the country with the largest expenditures on active labour markets policy measures. Active labour market policies in the form of workfare, i.e. a more stringent conditioning of benefi ts on job search or training, have gained popularity in recent years.