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Why do Scandinavians Work?

  • Torben Andersen
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    Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation rate despite high tax rates and a generous social safety net. This either refutes the standard incentive argument or leave the Scandinavian countries as a puzzle. This paper argues that both the standard view and the Scandinavian experience can be reconciled when taking into account both the pecuniary and non-pecuniary incentives build into the social safety net. The social safety net in the Scandinavian countries is at the same time both generous and employment conditioned. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. Such employment conditionalities make it possible to achieve distributional objectives without jeopardizing the incentive structure.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-05/cesifo1_wp3068.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3068.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3068
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    8. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
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    11. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
    12. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
    13. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 2002. "Social Norms and Welfare State Dynamics," Working Paper Series 585, Research Institute of Industrial Economics.
    14. Andersen, Torben M. & Holmström, Bengt & Honkapohja, Seppo & Korkman, Sixten & Söderström Hans Tson, & Vartiainen, Juhana, . "The Nordic Model. Embracing globalization and sharing risks," ETLA B, The Research Institute of the Finnish Economy, number 232.
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