Labour markets in the Nordics

National labour markets in the Nordic countries reflect trade union and Social Democratic principles of full employment and solidarity, while conforming to the conditions of capitalist market economies. They combine high levels of labour force participation with excellent systems of unemployment compensation. Throughout the region there is now a heavy emphasis on active labour market policies frequently referred to as 'flexicurity'. Wage differentials are low. Since 1954, the Nordic countries have had a common labour market in which citizens of any Scandinavian country can work freely within the region. Today, all the Nordic countries participate in the common labour market of the EU and European Economic Area.

2019.02.15 | John Logue

A poster from a 2010 demonstration against the Danish government's plan to pass a number of money-saving measures including reduce the period of unemployment compensation from four to two years. The law was subsequently passed. Photo: Musernes Samlinger (Arbejdermuseet).

Right to work

The right to work as a human right is a core tenet of Social Democratic and trade union principles in the Nordic region, driven in part by a distributive ideology. Central to this ideology has been the commonly expressed views that:

"We cannot distribute more than we produce!"

"There is no productivity in an unemployment line"   

Nordic labour force participation rates are among the highest in the world. In 2017, according to the OECD, the Nordic labour force participation rates ranged from 77.4% (Norway) to 88.3% (Iceland), a few points higher than in the other European Union countries and the United States. This reflects primarily higher female labour force participation rates which are roughly 5-8 percentage points higher than in the rest of the EU, and 7-10 points higher than the United States. This gap has diminished over the past decade.

Nordic unemployment rates have generally run below those of the rest of the EU, though this difference has decreased in recent years. As of 2018, Nordic unemployment rates ranged from 2.7% (Iceland) to 8.6% (Finland) versus 6.7% in the EU and 8.1% in the Euro area and 3.8% in the United States. Both Sweden (5.5%) and Finland (6.2%) have struggled with higher unemployment than was typical of the 1950-90 era. 

Unemployment compensation in the Nordic countries

Nordic unemployment compensation is designed to provide a real security net. Replacement ratios (i.e., the percentage of the average single insured production worker’s wage income replaced during unemployment) were, in 2015, 65% in Norway, 59% in Denmark, 65% in Finland, and 42% in Sweden as compared to 44% in the United States. Similarly, the maximum period for receiving unemployment compensation varies between 60 weeks (Sweden) and 104 weeks (Denmark) versus 26 weeks in the United States. In most countries, families with children receive additional 'top-ups'. As a consequence, almost all unemployed individuals receive compensation in the Nordic countries while typically less than half do in the United States. Nevertheless, unemployment compensation has been cut in the Nordic countries over the past 25 years. Policies increasingly aim at 'activation' of the unemployed through training or subsidised jobs.

Passive labour market measures

High unemployment compensation is costly making full employment of the utmost economic importance. Unemployment compensation was, after 1950s, deemed to be a passive labour market measure due to the Swedish Social Democratic economists Gösta Rehn and Rudolf Meidner. They theorised that macro-economic stimulus (‘fiscal policy’) could not achieve full employment in the long run without unacceptable levels of inflation. National fiscal policy was too blunt a weapon to deal with structural or regional unemployment, much less the results of a major plant shutdown, for example. Rehn and Meidner argued for supplementing macro-economic policy with selective labour market policies. These selective measures are generally described as ‘active labour market policies’, to be contrasted with ‘passive’ measures such as unemployment compensation.

Active labour market measures (Flexicurity)

Active labour market policies, which to this day characterise particularly the Nordic labour markets, assume that the labour market is not a self-equilibrating system in which everyone seeking work will ultimately find a job. In order to assist unemployed workers, measures include:

  • retraining;
  • public sector and subsidised employment;
  • systematic efforts to locate new jobs in towns or regions of job loss;
  • 'activation policies' that encourage long-term unemployed to return to work; and,
  • in the past, subsidies to relocate workers and their families to regions with labour shortages

To some extent, these active labour market policies reflect the idea that work in itself is valuable both to the individual and to society. Denmark, Sweden and Finland spend about eight to ten times as much on active labour market policies as a percentage of GDP as does the United States.

Employees’ rights and flexicurity

The combination of good unemployment compensation and active policies to help people back into work has dramatically increased the trade unions’ willingness to accept – indeed, to welcome – technological innovation and change in the workplace.

It can be easier to justify redundancies when workers are not faced with destitution and are assisted back into work. This has led to a culture in some parts of the Nordic region where it can be easier for businesses to reorganise and/or dismiss employees than in other European countries (such as the UK or France) where laws more stringently protect against dismissal. In Denmark, for example, one part of the flexicurity model since the 1990s is that the goal is to protect workers not specific jobs. 

Further reading:

  • Eric S. Einhorn and John Logue, Modern Welfare States: Scandinavian Politics and Policy in the Global Age (New York: Praeger, 2003)
  • Eric S. Einhorn and John Logue, ‘Can Welfare States Be Sustained in a Global Economy? Lessons from Scandinavia’, Political Science Quarterly, 125, 1 (2010), pp. 1-29
  • Søren Kaj Andersen, Jon Erik Dølvik and Christian Lyhne Ibsen,Nordic Labour Market Models in Open Markets, Report 13 (Brussels: European Trade Union Institute, 2014)