Changing Nordic model

Application summary

Nordic countries have been exceptional in their ability to combine equality and strong social protection with high taxes and dynamic economies. In developed countries, there has been a tendency to lower taxes and weaken social protection in recent decades, and Nordic countries are not exceptions. We evaluate the effects of Nordic tax-benefit systems on employment, redistribution and well-being. Although Nordic countries share institutional similarities, they have important divergences. Sweden tops other Nordic countries in terms of inequality. In addition, Nordic countries have implemented different tax-benefit policies in recent decades. Denmark introduced its well-known flexicurity model in the early 1990s. In Sweden, redistribution has weakened, and lower benefit levels aimed at increasing labor supply have increased the gap between labor market insiders and outsiders. In Finland, the current government has implemented similar retrenchment policies. We estimate the effects of the austerity policies on subjective well-being. Implementing tax-benefit polices requires a careful balance between societal costs and gains. The comparison of different Nordic tax-benefit policies provides important insights into well-designed tax-benefit systems and well-functioning society.