What is the Nordic model?
The Nordic model is the combination of social and economic systems adopted by the Nordic countries. It combines features of capitalism, such as a market economy and economic efficiency, with social benefits, such as state pensions and income distribution. Also known as the Scandinavian model, it is most often associated with the Scandinavian countries: Sweden, Norway, Finland, Denmark and Iceland.
Key points to remember
- The Nordic model combines elements of capitalism and socialism.
- Important features of the Nordic model include the public provision of social services, investment in human capital services and a strong social safety net.
- Risk sharing across society is an essential component of the Nordic model.
Understanding the Nordic model
The Nordic model encompasses both the welfare state and globalization, two approaches to government that can sometimes be seen as opposites. The main aspects of the Nordic model include the public provision of social services financed by taxes; investment in education, child care and other human capital services; and strong labor protections through unions and the social safety net. There is no minimum wage because unions keep wages high.
The Nordic model emphasizes society-wide risk sharing and the use of a social safety net to help workers and families adapt to the changes in the global economy brought about through increased global competition for goods and services. These Scandinavian economies have benefited from cultural homogeneity, political freedoms and low levels of corruption.
Much of the model is based on the evolution of northern cultures over the centuries. Citizens have great confidence in their government and are used to working together to reach compromises and meet the challenges of society through democratic processes. Citizens believe that both public institutions and private companies have their best interests in mind through a general social contract, with an emphasis on equity.
To maintain economic growth while providing social protection services, the Nordic countries need to focus on labor force participation. Nordic governments must create incentives for their citizens to continue working despite generous social benefits. The finances of Nordic governments are generally considered to be solid, with stable economic growth. This was not always the case, as several Nordic countries faced low productivity and high unemployment during the 1990s.
The Nordic model is paid for by some of the highest tax rates in the world.
The Nordic model against the American system
All of this is paid for by some of the highest tax rates in the world. According to the Organization for Economic Co-operation and Development (OECD), tax revenue as a percentage of GDP from income taxes and payroll taxes in 2020 was around 25% in Denmark, 13% in Norway and 19% in Sweden. This compares to the 16.5% of GDP collected by the United States through income taxes and payroll taxes in 2020, according to the Center on Budget and Policy Priorities, a non-partisan research and policy institute based in Washington, DC
According to TradingEconomics.com, in 2020 the highest tax rate in Sweden was 61.85%, Denmark 55.8% and Norway 38.52%. Tax rates in these countries are relatively high on almost all incomes, not just those of the wealthy. In comparison, the highest tax bracket in the United States in 2019 is 37%, and it’s only levied on people who earn $ 510,300 or more ($ 61,250 for married couples filing jointly). There is an ongoing debate in the United States, currently underway in the 2020 presidential election, over whether the Nordic model, also known as democratic socialism, could work here.