The bleak future of the Nordic model

Increasing inequality and rapidly changing demographics challenge the future success of the Nordic model says Norwegian think tank FAFO

With their extensive healthcare systems, strong institutions and high levels of equality, the Nordic states have enjoyed almost unparalleled standards of living and economic stability in recent decades.

But a report by Norwegian think tank FAFO suggests that unless some hard decisions and radical changes are made in the coming years, the Nordic model might be heading for trouble.

The report, entitled ‘The Nordic Model towards 2030. A New Chapter?‘, was released last month and lists the key challenges facing the  Nordic states – Denmark, Norway, Sweden, Iceland and Finland. The report indicates that bleak times may be in store for the region, with the real possibility that the model may have all but eroded by the year 2030.

Not to scale

Trouble ahead
Central to the Nordic challenge is an ageing population, declining labour market participation, decreased unionisation, increased immigration and growing inequality.

The average age has increased by a month each year since 1990, and it is estimated that the number of people aged over eighty will have doubled to 2.1 million by the year 2030.

As the birth rates continue their slow decline, the increasingly aged population can look forward to being supported by fewer and fewer working age people. The birth rate has tumbled from 123 births per 1000 people in 1990 to 100 in 2013, and this trend is set to continue.

The labour market participation is also expected to continue declining. In 1990, 78 percent of the region’s population were of working age. In 2013 the number had fallen to 73.7 and is expected to reach 72.2 percent in 2030.

This combination of factors places an increasingly heavy burden on societies with generous public healthcare and pension schemes.

One saving grace is immigration, which has stabilised populations in the region despite the declining birth rate. The number of immigrants in the Nordic states has risen from 750,000 in 1990, to over three million today, accounting for around 13 percent of the population.

Rising inequality
But while immigration has replenished the ageing workforce, it has increased the pressure on welfare programmes and suppressed wages.

Decreased unionisation will also likely impact the labour market. The 7.3 million union members in 2012 represent a drop of 420,000 members since 1990. Should the trend continue, unions can expect to lose a further 1.3 million members by 2030, reducing the influence of organisations that have helped maintain generous unemployment benefits and high standards of living.

While unionisation the level of unionisation is dropping, inequality is rising. Using the Gini coefficient – where 0 is perfect equality and 1 is perfect inequality – inequality across the Nordics rose from 0.22 in 1990 to 0.27 in 2011, and is expected to reach 0.3 in 2030. While the Nordics are renowned for their relative equality, the study found that inequality is rising faster than in comparable European countries, such as France and Germany.

These factors demonstrate the rapid changes taking place in the region. A smaller tax base will have difficulty supporting the ageing population and, as inequality increases and unionisation drops, pressure on reducing wages and welfare will likely develop.

The report’s authors argue that while the Nordic model enjoys widespread political support, complacency is its greatest threat. New ideas are required to ensure that people don’t fall out of the system, to increase labour market participation, and to address the pressures of an open labour market. Politicians need to both increase efficiency and equality in order to succeed in adjusting the model to new conditions, but the authors also have a warning:

“It is possible to imagine ‘vicious cycles’, where politicians bicker, key institutions disintegrate, government measures do not provide the desired results, for example in integration and labour market policies, and the consequences are continued high unemployment, lower employment, growing inequality and increased pressure on the welfare system.” M


By Elias Thorsson

Managing editor. @Eliasthorsson

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