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

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

What is globalization?

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

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

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

More serious arguments

Knowledge Economic intensive Globalization economy (EU) (OECD) Less room of maneouvre in economic Policy? End of full employment policies?

Trade off between equality and employment?

Pressure on low-skilled workers?

Tax competition: ”Race to the Bottom”?

-Capital taxes?

-Income taxes?

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)

Equality – comparative figures

High/increasing inequality Not unavoidable Denmark Sweden Norway Finland Average Netherlands Austria France Germany Italy UK USA 2000 P 90 / P 10 Ratio Mid-1980s 2.7

2.8

2.8

2.4

2.8

3.1

2.8

3.0

3.3

3.1

2.7

2.7

2.7

2.9

3.4

3.5

4.6

4.2

5.4

3.3

3.2

3.9

3.6

5.5

Gini-coefficients Denmark, 25-59 years old

Personal income Taxes P.Income after tax Capital income 1994 38.7

-19.1

19.6

0.6

1996 38.3

-18.8

19.6

0.6

1998 38.3

-18.4

19.9

2.5

2000 38.5

-18.7

19.8

3.8

2001 38.6

-18.7

19.9

4.0

2002 38.3

-18.3

20.0

4.0

Disposable income 18.9

19.2

20.5

21.4

Increasing inequality in general= Mainly an effects of capital income + 99th percentile After 2002: Taxes probably less redistributive = POLITICS 21.8

22.4

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

Unemployment, by education (25-64 years old)

Denmark Sweden Norway France Belgium Germany UK USA 1. Less than upper secondary 2. Upper Secndary 7.2

6.1

3.9

12.1

10.7

18.0

6.9

9.9

4.4

5.2

3.6

7.5

6.7

10.2

3.9

6.1

3. Tertiary 4.7

3.9

2.5

6.1

3.5

5.2

2.4

3.4

1.5

1.6

1.6

2.0

3.1

3.5

2.9

2.9

(1:3) % employed among low educated men 71.6

73.3

71.7

68.3

61.9

61.2

61.9

68.9

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

Taxes and Globalization Combined income taxes as per cent of gross wage expenditures, 2004

Single person Belgium Germany Sweden France Italy Austria Finland Netherlands Denmark Spain Norway UK Ireland USA 67% APW 46.9

45.4

46.2

32.5

41.7

38.6

38.6

38.1

39.4

33.6

33.8

26.4

15.6

27.3

100 % APW 54.2

50.7

48.0

47.4

45.7

43.8

43.8

43.6

41.5

38.0

36.9

31.2

23.8

29.6

167% APW 60.3

55.7

52.4

50.6

50.5

49.7

49.7

40.5

49.9

41.9

43.4

34.2

35.0

34.8

Married, 2 children, 100% + 67 % APW 46.0

42.7

43.2

37.6

41.5

37.5

37.5

37.3

36.3

34.6

31.8

24.1

14.4

23.6

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)

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?

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

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

Low Taxes mean high private welfare expenses

2000 Sweden Denmark France Germany Norway Public gross expendture 35.1

34.2

33.0

30.6

27.0

Netherlands UK USA 24.3

25.4

15.7

Surcey: Adema & Ladaique (OECD, 2005) Total net social expenditure 30.6

26.4

31.2

30.8

23.6

25.0

27.1

24.5

Rank net social expenditures 3 5 1 2 8 6 4 7

Conclusions regarding taxes

• 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

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

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