The Swedish Model in Turbulent Times: Decline or Renaissance?

The main objective of this paper is to analyse the major transformations of the Swedish model. We argue that the current Swedish model appears today more in line with the three core components of the original Swedish model developed during the 1950s. In our view, the period 1975-1991 represents a clear deviation from the original Swedish model, a departure that culminated in the most severe crisis than Sweden has experienced since the 1930s. After this period of turbulence, the Swedish economy has undergone a particularly favourable development. Unemployment has been cut by half, inflation has been curbed and the country appears to have recovered from the deep economic crisis of the early 1990s. The changes in economic policy towards a more restrictive and anti-inflationary macro-economic policy, the reorientation of active labour market policies towards supply oriented measures and the structural reforms undertaken in the tax and social protection systems during the 1990s suggest a revival and renaissance of the traditional Swedish model. The modifications in Swedish industrial relations, in particular the clear tendency to a re-coordination of collective bargaining have also played a vital role in the Swedish recovery. These new developments appear to respond to a three-pronged objective: ensuring industrial peace; limiting the impact of transaction costs associated with the absence of coordination mechanisms and the negative externalities on employment and firm competitiveness of uncontrolled wage drift; and finally guaranteeing a principle of subsidiarity making it possible to adapt the provisions contained in industry-wide collective agreements to the productive and competitive constraints of Swedish companies. The various reforms of the social protection system undertaken during the 1990s have essentially taken the form of a temporary reduction of income replacement rates and, with the notable exception of the restructuring of the tax and pension system, have left the Swedish welfare state system almost intact. The Swedish welfare state remains, by international standards, still clearly universal and inclusive in nature and still enjoys a high level of across the board political and public support. The reshaping of the pension and the tax systems aiming at strengthening work incentives are also clearly in line with the general philosophy of the original Swedish model favouring integrative transitions instead of passive support and social exclusion. The recent modifications of the Swedish model constitute an interesting advance, creating an institutional framework favourable to the emergence of negotiated flexibility and a return towards a more balanced economic and employment growth. In our view, these developments reinforce the coherence of the Swedish Model and the robustness of its social cohesion.