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 - Small population - 10.5 million, much smaller than Texas (30m), but larger than Denmark (5.9m), Norway (5.5m), or Finland (5.5m). Historically, geographic isolation contributed to cultural homogeneity - in 1900 only 1% of the population was foreign born. Welfare programs did not seem to distribute income from one group to another, supporting the growth of the welfare state. The foreign-born share grew to 14% in 2010 and 20% today, sparking a populist backlash.

C.  Political - Dominant since 1932, the Social Democratic Party lost control during 1936, 1976-1982, 1991-1995, 2006-2014, and currently since October 2022 when Ulf Kristersson from the Moderate party formed a coalition of right-leaning parties with the Sweden Democrats, Christian Democrats, and Liberals that gained power after a general election. The Sweden Democrats, now the largest of the coalition parties in the Riksdag parliament (although the Social Democrats are still the largest single party overall) is an anti-immigrant ("Keep Sweden Swedish") right-wing populist party, and the policies of the current government largely reflect its values.

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, leading to independent action by machine workers (who had been sacrificing larger pay raises), and centralized bargaining was replaced by standard industry-level bargaining in 1983..

B.  Active Labor Market Policy - Includes programs to increase the demand for labor, training 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.
In 2017, as % of GDP, expenditures on active programs were 0.1% in the U.S., 0.52% as an OECD average, 0.65% in Germany, 0.87% in France, 1.25% in Sweden, and 1.96% in Denmark. On the other hand, expenditures on passive programs (unemployment compensation) were 0.14% of GDP in the U.S., 0.53% in Sweden, and 0.68% as an OECD average. (Source: OECD Employment Outlook 2020).

C.  Codetermination and Employee Ownership - Workers participate in management through works councils and representation on boards of directors. 

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.

B.  Social Welfare and Income Redistribution - Although it no longer has the highest level of spending in the world, Sweden has an extensive welfare state that includes (excerpted from here):
§ Family Care: Day-care and preschool programs are almost free, with fees based on family income: If parents are unemployed, child care is totally free. Swedish pregnant women get free and subsidized prenatal care and parents get 480 days of paid leave when a child is born or adopted, which they can share (240 days each). (Sweden was the first country to offer fathers paid parental leave, in 1974.) Parents get about 80 percent of their salaries when they stay home with a sick child (up to age 12). They can take this temporary leave up to 120 days a year.
§ Education: Kindergarten through high school is free, as are school lunches. Undergraduate college/university tuition is also free. If students need money for books, food, and housing, they get nearly no-interest loans. Swedish undergraduates aged 16–20 also get $136 monthly stipends during the school year. If their families are low-income, they may get more.
On the efficiency side, Sweden has an extensive school-choice system.
§ Medical Care: Medical and hospital care are basically free until age 20. After then, doctor visits cost Swedes $10 to $32, or up to $38 for specialists. After people meet a $119 annual deductible, all care is free. Moreover, medicine is free after a $239 yearly deductible. Drugs are the same price at all pharmacies, so people needn’t shop around for the best price.
§ Unemployment Benefits: Provided from the government and from union insurance plans. The plans provide 80 percent of Swedes’ wages/salaries for the first 200 days they’re out of work and 70 percent for the next 100.
§ Pensions: Pensions are covered by the government or union/employer plans. If Swedes have low-paying jobs (under $40,000 a year), the government and employers pay into the plans, but the employees don’t contribute. If they have middle- and higher-income jobs, they must contribute, along with their employers.
§ Transportation Perks: Government subsidies vary. For example, people pushing baby strollers or carriages in some cities (such as Stockholm) ride for free on the buses. In others (such as Gothenburg), retired Swedes pay nothing, except during rush hours.
§ Housing Subsidies: Local governments subsidize low-income and elderly Swedes’ rental housing and also help them find it. The amount is based on their income and the local cost of living. In large cities like Stockholm, affordable housing is hard to find—whether to buy or rent (for which the wait is long). Thus Swedes now live farther outside the central cities and tend to buy their houses/apartments.
§ Wages: Sweden doesn’t have a minimum wage. Instead, strong unions and employers negotiate wages/salaries. This is particularly important for low-income workers: A cashier at a Swedish McDonald’s was already earning $15 an hour a few years ago.
§ Taxes: Swedes pay income tax to both national and local governments. In fact, in 2017 Sweden had the highest top marginal tax rate among OECD countries, followed by Denmark, Japan, Greece, France, and Canada. In all these countries, the top rate is over 50 percent. While some Swedes grumble about their taxes, a 2017 OECD public opinion poll (based on Gallup/World Bank data) found that 50 percent trusted their government, while the figure was only 30 percent for Americans.

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. 

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 system that 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."

C.  Covid-19 Response - Aside from closing its external borders, Sweden was slow to take action against Covid-19. It's the only country in Europe that never had a serious lockdown, and relatively few people ever wore masks. The chief epidemiologist was hoping to reach herd immunity quickly without too many deaths, but the King declared it a failure. Sweden has had fewer excess deaths than many other European countries, but higher death rates than its neighbors.