Sweden: Whither the Welfare State?

I.    The Environment

A.  Geography - Relatively isolated; allowed Swedes to avoid major war since 1813.  Rich endowment of timber, and iron ore and other natural resources.

B.  Sociological - Isolation contributes to cultural homogeneity.  Supports equalitarianism.   Welfare programs are not seen distributing income from one group to another.

C.  Political - Dominant since 1932, the Social Democratic Party lost control during 1936, 1976-1982, and 1991-1995. From 1995-2006, led by centrist social democrat Göran Persson, a renewer. In 2006, SDP had worst performance in elections since 1920 (although it still had more seats in Parliament than any other single party), and Moderates had their best. A center-right alliance gained power, headed by PM Fredrik Reinfeldt. The Social Democrats returned to power in 2014 with Stefan Löfven as prime minister.

II.  Industrial Organization

A.  Nationalization - SDP philosophy did not call for the nationalization of industry.  Some were nationalized to prevent them from facing bankruptcy, but some of those have been returned to private hands.

B.  Monopolies and Industrial Concentration - Small domestic market contributes to high industrial concentration ratios.  Dominance of small number of large multinational companies.  Still, a high level of foreign competition and extensive system of consumer cooperatives. 

III. The Labor Market and Labor Relations

A.  Collective Bargaining -

1.   Basic Agreement - Swedish Confederation of Trade Unions (LO) formed in 1898, and Swedish Employers Association (SAF) formed in 1902.  In 1938, employers and labor accepted the Basic Agreement of Saltsjobaden, under which management recognized the labor unions and established general rules about layoffs and dismissals.  Both sides agreed to hold direct negotiations before resorting to strikes or lockouts.

2.   Centralized bargaining - Developed after World War II.  Employers wanted more orderly bargaining.  Unions wanted wage solidarity (largest wage increases to the lowest-paid workers).  Wage negotiations take place at the national level and result in a binding framework.  Local negotiations are held between employers' groups and union affiliates.

3.   Evaluation - 1945-1970, central bargaining worked well.  In 1970 departures from the central agreement became common and inflation rose above the average of other industrial countries.  Disagreements over wage solidarity have weakened the system.

B.  Active Labor Market Policy - Includes programs to increase the demand for labor, programs to tailor labor supply to new job openings, and to match supply and demand through job information and placement services.  National and 24 regional Labor Market Boards.  Unemployment benefits are less generous in Sweden than OECD average


The Economist, July 7, 2001. According to the OECD annual Employment Outlook, governments should target policy towards more "active" programs that focus on getting people into jobs (such as job-search assistance and training) and away from "passive" programs that ... give them income while they are out of work (unemployment insurance, for instance). . . Spending on active policies varies widely by country. In 1998 such spending accounted for 0.2% of GDP in the United States, 1.3% in Germany, and 2% in Sweden. Do active labor-market programs actually reduce unemployment? . . Simple programs, such as intensive help with searching for jobs, are very successful--and also cheap.

C.  Codetermination and Employee Ownership - Workers participate in management through advisory works councils, and through representation on boards of directors.  Controversial wage earner funds were designed to increase employee ownership.  Failed to gain public support, and were discontinued in 1991.


IV. The Governmental Sector

A.  Fiscal and Monetary Policy - Even before the Depression, policies designed to reduce unemployment were proposed in Sweden.

1.   Investment reserve funds - allowed the government to control rough one eighth of private investment by awarding tax credits to companies that save during boom periods and invest during downturns.  According to Taylor, successfully stabilized investment. Abolished in 1991.

2.   Monetary policy - the Riksbank once exercised direct control over bank lending. In recent years, focus on inflation reduction.


Social Expenditure as Percentage of GDP
in OECD Countries, 2012

B.  Social Welfare and Income Redistribution - An extensive welfare state with services including free public education through graduate school, family allowances for children (about $135/month/child until age 16), a national health program, and generous retirement and disability pensions.  The most even distribution of after-tax income in the West.  Has a high cost; social spending represented 28% of national income in 2012, compared to 22% OECD average (but down from 37% in Sweden in 1993). Total taxation was 44.5% of GDP in 2011, compared to 34% OECD average or 25% in USA.  Critics maintain that the high tax rates have damaged incentives.  The average Swedish work week is one of the shortest in the world.  High taxes have driven a significant part of income and production underground in the form of do-it-yourself home improvements and barter activities.  Still, according to a 2013 Forbes survey, Sweden has 14 billionaires in a population of only 9.5 million -- a larger number per-capita than the U.S. Yes, it has high taxes, but also a well-educated and healthy population and a culture that embaces innovation.

Henrik Jacobsen Kleven addresses the question, "How Can Scandinavians Tax So Much?" and finds (1) that tax compliance rates are high in those countries, partly because of 3rd-party reporting; (2) low levels of legal tax avoidance due to a broad tax base that offers limited scope for reducing tax liability through deductions and income shifting; and (3) a fiscal systemthat spends relatively large amounts on means-tested transfer programs that could reduce work incentives, but also spends relatively large amounts on the public provision and subsidization of goods that are complementary to working, including child care, elderly care, and transportation. "Such policies represent subsidies to the costs of market work, which encourage labor supply and make taxes less distortionary."