The truth about the “Nordic Model”

By Ami Vatury (Translated from Hebrew by Rachel Beitarie)

The reality of the Nordic economic model has little to do with the derisive way it is described by the The Marker or The Economist. One writer takes apart the right-wing business media’s analysis, revealing the truth behind the successful social democracies.

The Scandinavian model” found in Sweden, Norway, Denmark and Finland is exactly what the social left [1] says it is. It is an economic model based on large, strong, democratic trade unions; considerable involvement of the unions in management; a large public sector (relative to other countries); high taxes and high public spending, as well as considerable job security both on a country-wide level, as well as by workplace.

So why does The Marker [2] and its role-model, The Economist, heap praises for a model so in conflict with their own values? Because they have no other choice. Their favored economic model, based on a “small” government, low taxes and a market-above-all approach, has been exposed with the global financial crisis. Members of the public, some of them from what liberals in Israel like to call “the middle class,” have come to realize that the system does not work, or at least it does not work for them. In other places, such as the U.S. and the U.K., people are waking from the delusion that capitalism serves them well.

This happened, among other reasons, thanks to a freer flow of information that exposes people to a more fair system found in the Scandinavian countries, along with the fact that those countries still maintain their unique, successful model (they were not the ones to collapse during the last crisis, despite doomsayers on the right envisaging their downfall for decades). So what do you do with the Scandinavian model? Try to present it as something other than what it really is – appropriate it.

Turning social democracy into capitalism

The Scandinavian model consists of all the basics of good old social democracy. What’s more, both the Swedish Social Democratic Party and Norway’s Labor Party define themselves as anti-capitalist parties. Lucky for The Economist and The Marker though, the Scandinavian model isn’t built upon solely one component. It is a complex model comprised of many complementary factors. Naturally, there are also some differences between the four Scandinavian countries.

Looking at texts that have appeared on both these publications regarding the Nordic model, one can see the way in which they avoid mentioning its basic components, and instead choose to focus on the component of “market socialism.” Those texts present a model different from what it really is. The Economist, for example, admits that 30% of workers in Scandinavia are employed by the government’s regional and local authorities, yet it focuses on the option – available in some localities – to receive service from a private service provider or a non-profit competitor, rather than from a municipal body. The magazine does not bother mentioning that employees of those private services enjoy the sectors’ collective bargaining rights and collective agreements, or that in Scandinavian countries those services are fully funded by the state, unlike in many other OECD countries where they are sometimes bought privately.

May 1, 2012 Goteborg. Photo: Socialdemokrater, cc by-nc-nd

May 1, 2012 Goteborg. Photo: Socialdemokrater, cc by-nc-nd

The Economist engages in an even more blatant manipulation of data when it compares public expenditure in Sweden during the depth of the 1993 recession (under a center-right government) and expenditure during a period of full employment, in an attempt to show a dramatic drop in public expenditure when the change is actually a mere cyclical one. Cyclical change means a recession, which is a result of a supply crisis in the global markets. This affects export-based economies such as the Scandinavian countries. In the case of the early 90s, the recession occurred due to the collapse of the Soviet Union, formerly an important export market for Scandinavia. Cyclical recession is accompanied by increase in unemployment and a natural increase in government expenditures on unemployment benefits, training etc. Moreover, a recession means a drop in GDP. Given the lack of a similar drop in government spending, this expenditure would become higher when calculated as a percentage of GDP.

Even more misleading is the comparison made by The Economist between Swedish tax rates after 1990 and during the 70s. The comparison ignores the fact that the 1990 reform canceled all previously existing tax exemptions on capital gains. That is, The Economist is trying to paint a picture of tax rate decrease while ignoring the content of Sweden’s tax reform. It does not bother mentioning that the overall tax burden in Sweden as a percentage of GDP is nearly identical to 1970s figures, or that today’s top tax rates (on average 56%), is higher than the figures for the years 1991-1994.

The Marker is less blunt. The paper admits that nearly all workers in Scandinavia are unionized, but attributes the success of this model to the relaxed, non-confrontational style of Scandinavian unions, and to their sense of national responsibility. As far as I know, Ofer Eini [3] and the Histadrut Labor Federation are also relaxed and pleasant to work with, at least for employers. The workers are the ones often feeling a different attitude from Eini and the organization he leads. The Marker ignores the reality of Scandinavia where they have a broad right to strike with billions of euros in strike funds, such that unions need not make threats to get most of their demands. And what about those heated exchanges in the negotiation room? That is mostly a question of style.

The result of these articles is a description of the Scandinavian model that is detached from the way in which high salary and beneficial conditions are actually being bargained for by the Scandinavian workforce. Guy Rolnik [4] argues with a passion that the model is “neither left nor right”. I honestly don’t know what he means by that, but he might be interested to know that reality in Sweden and Norway, as well as, to a large extent, in Finland and Denmark, is very similar to the socio-economic agenda detailed in the Hadash [5] party platform. So are the declared agendas of the Swedish Social Democrats and of Norway’s Labor Party, respectively.

How difficult are layoffs in Scandinavia?

May 1, 2012 Stockholm. Photo: Socialdemokrater, cc by-nc-nd

May 1, 2012 Stockholm. Photo: Socialdemokrater, cc by-nc-nd

At the same time, in industries dependant on proximity to consumers such as fresh food industry, services, construction and transportation, where private employers don’t have the option of shifting production to another country, employers are compelled to pay high salaries and make do with lower profits, without much impact on employment. When structural changes (that require lay offs) take place in Scandinavia, they are accompanied by significant workers’ training and a guarantee of high salary at the future workplace as well. Similar structural changes take place in Israel, just like in any other industrialized country, but unlike in Scandinavia, they are executed with brutality. In Israel when structural changes happen, such as a shift from industrial production to services, they are accompanied by pay cuts, along with a decrease of the salary component and an increase in the profit component in local industries. Therefore, a comparison to Scandinavia has to focus on employment protection in the workplace where no structural changes take place, as well as protection during a period of structural changes, rather than on the question of whether or not changes accrue at all.

Within Scandinavia, Norwegian law offers the strongest employment protection. Finnish and Swedish laws take a middle-of-the-road approach and Danish law is relatively soft (not much stronger than in Israel). However, collective agreements in Denmark complement the law and bring actual protection closer to Swedish levels.

There is much ignorance in Israel regarding the question of employment protection and what protection local workers actually get through law or through Histadrut collective agreements. A comparison of the situation in Israel and Sweden might help clarify what the Israeli worker lacks relative to her Swedish peer.

Israeli law provides workers with a rather short compulsory two weeks notice before dismissal for those employed over less than a year, and a one month notice for workers employed for over a year. There is an obligation to hold a hearing before sacking an employee. There is protection from discriminatory layoffs, such as dismissal on the basis of gender or ethnicity, and unless a labor court rules otherwise, a dismissed worker is forced to battle her dismissal decision in court while no longer working for her former employer. Some collective agreements provide further protection but nowadays they apply to less than 20% of the Israeli workforce. A temporary worker, even under most collective agreements, and those covered by agreements for the cleaning, security and construction sectors, enjoy almost no protection besides a minimum required by law. Those protected by the best collective agreements enjoy a slightly extended notice. For example, a worker employed for over five years by local municipalities get two months notice, according to an agreement dating back to 1960.

There is much ignorance in Israel regarding the question of employment protection. May 1, 2012 Stockholm. Photo: Socialdemokrater, cc by-nc-nd

There is much ignorance in Israel regarding the question of employment protection. May 1, 2012 Stockholm. Photo: Socialdemokrater, cc by-nc-nd

The essential part of job protection in Israeli collective agreements is a clause stating that in a situation where the union and the employer cannot reach an agreement regarding layoffs, the decision is made by an agreed-upon arbitrator. The arbitrator gets to decide whether a dismissal was “justified.” In addition, if layoffs are done due to cost reduction, there is an obligation to consider factors such as family status and length of employment. At the same time, employment protection agreements do not give unions veto power on the necessity or extent of layoffs – they can only argue over the specific identity of dismissed employees. This often puts the union in a cruel position, especially when considering that it is the worker’s representatives who have to decide who would be let go.

In Sweden, employment protection is regulated by a 1982 law that has since been moderately altered several times. The law, which applies to all Swedish workers, excluding few special cases, defines among other things, a time frame and the ways in which a temporary employee will become a permanent employee under employment protection. It also regulates how layoffs are done both in cost-reduction and non-cost reduction situations. Today, 86% of Swedish workers are permanent ones, while only 14% are temporary. This ratio has remained steady throughout the last 20 years.

According to this law, a worker can be employed under a temporary status for no more than two years over an overall period of 5 years. Any cumulative employment longer than two years would make the worker a permanent one. Temporary worker contracts can last no more than six months, after which an employee would automatically become a permanent worker.

A permanent worker is entitled to the following protections:

  1. She can only be dismissed for “objective reasons.” A workplace requiring a position different from the worker’s original position is not recognized as an “objective reason” if the worker in question is capable of doing the job.
  2. Dismissal due to change in ownership of the company, or part of the company is also not considered “objective reason.”
  3. Layoff notice only starts from the date a workers’ paid vacation ends.
  4. Required notice ranges from one month for people employed for less than two years to six months for those on the job for more than 10 years.
  5. It is impossible, according to the law, to lay off a worker during maternity/fraternity leave (one year in Sweden).
  6. When dismissal is required due to a workers’ severe negligence or failure to execute an order, it is only permitted when notice was received within two months of the event in question, and that is only if the employer has notified the employee as for her obligation to follow the order.
  7. When a worker or a union appeals against a layoff move, the layoff would be delayed until a decision is made at a relevant court (usually Swedish labor court). This also applies in cases of dismissal due to negligence, though in such cases courts can refrain from giving an injunction.

In Sweden, cost-reduction layoffs include a seniority obligation. The rule of thumb is “first in, last out.” In the case of recruiting after a period of cost reduction, a company is obligated to give priority to the workers it had previously laid off, in order of dismissal and up to nine months from the day of the contract ending. In some cases, there is even an obligation to give temporary workers priority in recruitment. In any case, there is a legal obligation to hold off on cost-reduction layoffs for two weeks after negotiations with the relevant union have ended. The negotiations themselves are required by other laws as well as by various collective agreements. Industry-wide collective agreements sometimes extend required notice before the dismissal period to up to a year for workers older than 55. They can also change the order of dismissal by seniority, as long as the rules are universal and transparent. Yet other agreements define the period required to get a permanent status according to the length of time a worker has been employed in a certain industry, not a specific employer. A breach of the law might expose employers to a lawsuit and payment of special compensation if the employer insists on not taking the employee back to work. The amount of compensation can be up to 32 months salary for a worker who has been employed for ten years or more.

In conclusion, it is clear there is a wide gap between the reality of the Scandinavian model and its presentation by The Economist and The Marker, who describe Scandinavia as a place of “flexible employment” with somewhat higher taxes. We can all agree that there will be a price for turning Israel’s economy into a Scandinavian-style one, but it would not be the breaking of unions and privatization of state monopolies, as The Marker warns. Rather, the price would be the same price any struggle exacts from those who participate. The goal of this struggle should be the breaking of the political and financial elite, and the creation of a classless society.


[1] “Social left” in the Israeli context refers to socialist or social-democratic political agenda, as oppose to “political left”, which focuses on peace agenda. An individual or political party may speak on both issues but this is often not the case.

[2] The Marker is an Israeli daily newspaper dedicated to business, finance and larger economic issues. It is part of “Haaretz” media group.

[3] Eini is the general secretary of the Histadrut, Israel’s largest trade union

[4] The Marker’s chief editor and an influential columnist

[5] Hadash – The Democratic Front for Peace and Equality. A political party that currently has four representatives in Israel’s parliament. It’s socialist agenda is considered leftist and marginal.

Ami Vatury is a member in Koach La Ovdim, a general trade union, leadership.

This post originally appeared in Hebrew on Haokets.

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Comments

  1. The Swedish Economic Model. Why Sweden’s success has nothing to do with socialism.

    http://www.scribd.com/doc/204219375/The-Swedish-Economic-Model-A-Socialist-or-a-Free-Market-Success

  2. After I originally commented I swem to have clicked on the -Notify me when
    new comments are added- checkbox and from now on whenever a comment is added I get four emails with the same comment.
    Is there a means you are able to remove me from that service?
    Cheers!

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  1. […] these countries and their central role in determining the socioeconomic policies – an issue which Dr. Ami Vatury, the only local expert on Scandinavian socioeconomic policies and a cofounder of the Israeli Koach […]

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