Does high employment require high social inequality?

Third, the Nordics rely relatively heavily on “social investment” as an instrument of redistribution and, as argued below, this approach is employment-friendly.

Why are the Nordics able to deliver lower social inequality than the Anglos - yet match them on employment?

Although Nordics allow more labour market flexibility than the Continentals, they have retained higher levels of employment protection, stronger legal safeguards for trade unions and generally higher minimum wages than the Anglos. This network of worker protection regulation, combined with more generous welfare benefits and more progressive taxes, helps explain why they have lower levels of inequality.

But doesn’t economic theory suggest that higher social regulation damages employment performance? Why hasn’t this happened in the Nordic countries? My explanation is twofold.

First, as many economists have long suspected, it appears that in moderation worker protection regulation is not too damaging for employment. Indeed an argument can be made that the deregulation process works best in the initial stages and then runs into diminishing returns and may even become counterproductive for productivity and employment if taken too far.

Second, and more importantly, the Nordics have used non-regulatory instruments of redistribution to promote employment. Three types of “social investment” seem to have contributed most to the Nordic success:

• specific targeting of early child and youth disadvantages;
• policies which explicitly seek to reduce socio-economic inequalities of access to health care, pre-schooling, public education, public housing and public transport; and
• “active labour market programs” targeted specifically at disadvantaged job-seekers and people of working age (disabled persons and lone parents). These programs include diligent, well-funded job search and placement services; in-work bonuses; government training and job-readiness schemes; family-friendly policies, such as paid parental leave and good quality and affordable child-care assistance; remedial programs for youth who drop out from high school; financial incentives for employers to employ and train the long term low-skilled jobless; and subsidies to jobless persons who are capable of setting up and managing their own business.

There are credible studies showing high national economic returns in the long term from many of these social investment programs. The returns come in the form of higher employment (participation) rates; a more productive workforce and citizenry; greater geographic and occupational mobility of labour; less waste of potentially successful entrepreneurs; diminished health costs; lower imprisonment rates; less spending on juvenile delinquency; and savings in commuting time. There are also “external” economic spin-offs from increased community trust and harmony and greater community acceptance of structural reform.

In short, a major reason why Nordics have been able to reconcile high employment with low inequality is that they have invested heavily in their people and this has tended, over time, to offset any negative employment, efficiency and disincentive effects from social regulation and relatively high taxation.

Is the Nordic achievement sustainable in the long term?

It is often argued that Nordic tax levels are unsustainable in the long term. This argument has two strands. One is that voters will eventually rebel. And to an extent they have - but not sufficiently to fundamentally alter their social model. The other argument is that, in an integrated, highly competitive world economy, governments will in time be forced to cut taxes in order to avoid a brain drain and compete with low tax countries. That argument too is questionable. While high taxes do have negative effects per se, it appears from the Nordic experience that the economic returns from social investment have over time tended to outweigh the tax efficiency costs and there is no reason why the economic balance sheet should change markedly in the future.

Is the Nordic model exportable to Australia?