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Growth and Employment in Nordic Welfare States in the 1990s: a Tale of Crisis and Revival

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  • Jaakko Kiander
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    Abstract

    This paper reviews the macroeconomic performance of the so called Nordic welfare states, especially in terms of growth and employment. In the post-war years the Nordic economies enjoyed rapid growth and full employment. At the same time, under the rule of Social Democratic governments they also built their extensive welfare states. However, starting from the 1980s, the Nordics ? together with other European countries ? have suffered from various economic imbalances and crises, which have led many observers to doubt the economic viability and fiscal sustainability of the welfare states. In Sweden and Finland the economic problems and structural changes culminated in the beginning of the1990s in a severe macroeconomic and financial crisis, which can be viewed partly as an adjustment to integration and globalisation, especially to financial deregulation, and partly as a result of macroeconomic policy failures. In this paper we review the experiences of Denmark, Finland and Sweden in the 1990s in adjusting their public sectors and welfare states to the fiscal consolidation. It can be concluded that even after the hardships of the 1980s and 1990s the Nordic model of social policy remains clearly distinctive and in many respects successful. The Nordic countries have been able to maintain their position among the richest economies in the world and also to avoid the under-employment typical to larger European economies. However, there lie further challenges in the future. The most important of them are possible tax competition which may threaten the financial basis of the current welfare systems, especially in Denmark and Sweden, and expected demographic change, which will add excess burden to the public finances within the next 20?30 years.

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    Bibliographic Info

    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 336.

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    Date of creation: 11 Jun 2004
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    Handle: RePEc:fer:dpaper:336

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    Keywords: Welfare state; integration; Nordic countries;

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    References

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    1. Lars E.O. Svensson, 1994. "Fixed Exchange Rates as a Means to Price Stability: What Have We Learned," NBER Working Papers 4504, National Bureau of Economic Research, Inc.
    2. Jaakko Kiander & Pentti Vartia, 1996. "The great depression of the 1990s in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 9(1), pages 72-88, Spring.
    3. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    4. Jaakko Kiander & Juha Kilponen & Jouko Vilmunen, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," Discussion Papers 235, Government Institute for Economic Research Finland (VATT).
    5. Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc.
    6. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    7. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting and Unemployment - Theory and Swedish Evidence," Papers 15, Uppsala - Working Paper Series.
    8. Sherwin Rosen, 1996. "Public Employment and the Welfare State in Sweden," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 729-740, June.
    9. Giancarlo Corsetti & Nouriel Roubini, 1996. "Budget deficits, public sector solvency and political biases in fiscal policy : a case study of Finland," Finnish Economic Papers, Finnish Economic Association, vol. 9(1), pages 18-36, Spring.
    10. Assar Lindbeck, 1997. "The Swedish Experiment," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1273-1319, September.
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