31 August 2015

Scandinavian Unexceptionalism #9: Is Norway the last Soviet-state?


In 1999 Björn Rosengren, the current Swedish social democratic Minister of Enterprise, made the mistake of being too honest when talking to a journalist. Not realizing that the camera was still running, Rosengren explained that “the Norwegians are really the last Soviet-State”. It might sound odd to an international audience that a leading Swedish social democrat would have that view of Norway. Isn’t Norway, much like Sweden, a social democratic welfare state with high taxes?

The two countries are, in many ways, quite comparable. They have a similar geographical situation, closely related cultures and similar languages. For long they also had similar policies. The difference is that Norway has great oil wealth and this has meant that the country has not reformed its welfare state and continues to rely on state-intervention in the economy. Norway still has welfare systems that are so generous that the incentives for work are sometimes small or even non‑existent. In Sweden on the other hand, considerable market reforms and welfare reforms have been introduced since the early 1990s by both governments on the right and the left. The simple reason is that Sweden cannot rely on oil, and therefore has had to adjust to economic realities. In a sense, a comparison of Sweden and Norway is almost a natural experiment that illuminates the consequences of welfare reform.

The differences between Sweden and Norway were evident already in the final year of the 20th century, when Rosengren let slip his tongue. They were further brought to light between 2006 and 2014, when Sweden was run by a center-right government which focused on a broad reform agenda. The workfare policies that were introduced included somewhat less generous benefits; tax reductions aimed particularly at those with lower incomes; liberalization of temporary employment contracts; and a gate-keeping mechanism for receiving sick and disability benefits. These policies were intended to address high hidden unemployment. Indeed, the number on sick leave and in early retirement has fallen following the reforms. In 2006, 20 per cent of the working age population in Sweden was supported by one form of government benefit. During the following six years the Swedish economy was significantly affected by the global financial crisis. Despite this, the share supported by government benefits fell to 14 per cent in 2012.

In Norway the share of the population depending on public benefits was also 20 per cent in 2006. In 2012 it had been reduced by less than one per cent. Since Norway relies on oil-wealth, the country should, if anything, have been better at creating employment following the crises (especially given the rising oil price). That Sweden managed to reduce public benefit dependency considerably more indicates that workfare reforms were indeed successful.

One consequence of the generous welfare policies in Norway is deterioration in work ethic. The TV-series Lilyhammer, starring Sopranos actor Steven Van Zandt as a US expat to Norway, has regularly made fun of the lack of work discipline in the country. Also this phenomenon is apparent outside popular culture. In 2014 the Financial Times reported: “Norway’s statistics office says many people have started to call Friday ‘fridag’ – ‘free day’ in Norwegian. The state railway company says commuter trains serving the capital are less full on Fridays, and the main toll road operator says traffic is noticeably quieter on Fridays and on Mondays.”

Primarily young Norwegians are adapting to a system with limited incentives for hard work. Employers are therefore turning to foreign labour, including from Sweden. Between 1990 and 2010 the number of young Swedes employed in Norway increased more than 20-fold. Swedish youth have come to make up almost one fifth of the Norwegian capital Oslo’s youth population. One reason why Swedes are attracted to the Norwegian labour market is that wages are higher there as a result of the wealth that comes with oil-revenues. Another is that the work ethic has deteriorated more in the generous Norwegian welfare system than in the Swedish, somewhat more workfare oriented, model.

In a recent survey three out of four Norwegian employers answered that Swedish youth working in the country have a better work ethic than Norwegian youth. Out of those questioned, 28 per cent said that Swedes between the ages 16 to 24 years have a high work capacity. Merely 2 per cent held the same opinion for young Norwegians. The differences existed in various sectors, including both government and private employers. Stein André Haugerund, the president for the employment company Proffice which carried out the survey, argued that policy differences could explain the situation. According to Haugerund the Norwegian welfare model has created a situation where incentives for hard work are limited, which in turn affects the behaviour of youth.

The comparison between Norway and Sweden shows that the design of welfare policy is instrumental for how a society functions. Sure, Sweden also has major problems related to welfare dependency and eroding norms related to work and responsibility. But since the country has introduced welfare reforms, and tax cuts, the country has retained some of its working and responsibility ethics. The same cannot be said of Norway. The country doesn’t deserve the description “the last Soviet-State”, but seems to be alone in lingering to a welfare system so generous that the incentives for work are virtually non-existent for many. The results are far from impressive. On the paper Norway still is rich (due much to oil-wealth) and has low unemployment (due to massive hidden unemployment). In truth, the individual responsibility which makes societies function has eroded. From a purely economic perspective, Norway can continue on its current path until the oil-funds run out. It would be a wiser choice to follow the path of other Northern European welfare states, and start reforming the welfare state.

Dr. Nima Sanandaji is a research fellow at CPS, and the author of Scandinavian Unexceptionalism. The entire book is available through the Institute of Economic Affairs which has published it.