What is ‘The Nordic model’.

Some US conservatives inaccurately refer to the model of capitalism used in Nordic nations such as Sweden, Denmark and Iceland as being ‘socialist’.

This is completely wrong. All of the Nordic nations (Finland, Sweden, Norway, Denmark and Iceland) are capitalist democracies, and as the editor of a blog dedicated to analysing businesses in the region it is unlikely that this would exist if there were socialist economies in the Nordics.

I checked Wikipedia and a few other sites to make sure that I had got to the letter the definition of socialism correct. It is defined as ‘social ownership’ of the means of production and management of the economy, with China, Vietnam and Cuba all defined as ‘socialist’ (although Cuba is making substantial free-market reforms).

The Nordic nations are all ‘social democracies’. Social democracies combine elements of both socialism and capitalism, in which there is both a strong welfare state and protection for workers and corporation are encouraged to take care of their workers and are prevented from carrying out practices viewed as unfavourable to social harmony and happiness.

It is the ‘third way’ between capitalism and socialism, and is seen as offering the ‘best of both worlds’ in which the innovation and entrepreneurial spirit of capitalism is twinned with the caring aspect of socialism.

There are enormous differences between the Nordic nations, but I will attempt to showcase some of the key differences by looking at a few important areas.

1. Tax

Nordic nations universally have very high levels of income tax, and unlike the UK and USA these often start at higher rates for workers on lower incomes (which is counterbalanced by the fact these wages are higher than for comparable jobs in the Anglo world).

For example in Denmark you have to pay local taxes – typically around 25 per cent – a health care tax – around six per cent – as well as a church or religious association tax of around one per cent. The ‘labour market’ tax which everyone pays is eight per cent.

On top of this there is a ‘bottom’ rate of tax of six per cent and a top rate of 15 per cent. Put together this means that people will generally pay (just on income) between 46 per cent to 51.5 per cent in income taxes.

On the other hand while the income taxes in Denmark are very high on average – baring in mind that lower-paid workers in the UK pay the 20 per cent rate – the fact that so many people are at a higher rate helps build a sense of social stability and makes people feel they are not being ‘unfairly targeted’ for earning a high amount.

Those thinking the Danish model is unfairly onerous may also consider that the inheritance tax burden in Denmark is more modest than in the UK or USA.

Inheritance tax stands at 15 per cent and is not levied on the close family or spouse/partner of a deceased person. Meanwhile in the UK the inheritance tax rate is a staggering 40 per cent, the same in the UK where the top rate is 40 per cent.

There is also no inheritance tax in Sweden or Norway, with Norway abolishing the tax last year. Iceland has a modest 10 per cent rate while it is only Finland that bucks the trend, with a top rate of 36 per cent.

The difference with the Anglo model is that while income taxes are lower you get hit with a much larger inheritance tax bill at the end of your life.

2. Support for the unemployed

Support for the unemployed is far more generous in almost every Nordic nation. As a result many employees tend to have a more relaxed view of redundancy given that a combination of a generous social safety net and a strong economy should help shield them from the inevitable fall in living standards that would be expected in most other economic models.

In Sweden anyone seeking out a job – what would be the equivalent of Job Seekers Allowance in the UK – is entitled to 320 Swedish Kroner per day (£25 a day).

Sweden also has an ‘unemployment fund’ that you pay into during your time in work. You would normally have to work for at least a year to claim the highest rates of benefit, which is up to 80 per cent of your income, with a ceiling of 680 Swedish Kroner (£52 or £364 per week).

The thinking is that if you have a bit more money to cushion you in your time of difficulty you will be better-placed to seek out suitable work. By contrast an unemployed person in the UK would receive a measly £57 a week.

Oil-rich Norway is even more generous. With more cash on hand they will pay you up to 62 per cent of your earnings for up to two years if you were a higher-earner and one year if you had a lower-paying job.

After this point however the Norwegian system will encourage you to get a job.

3. Unions

Unions have a strong place across the Nordic model, and are viewed as vital to maintaining a harmonious relationship between employer and workforce.

In Sweden workers unions tend to act to ensure working hours, conditions and pay are set at appropriate levels and most workers will join a union at some point, with almost 70 per cent said to belong to a union.

In Finland similarly almost three quarters of employees belong to a union, with similar relations between employers and the workforce to the Swedish model.

Interestingly Denmark does not have a minimum wage, however employers negotiate with their workers to the point that a minimum of £12.7 an hour is generally paid, with major corporations such as McDonald’s having to pay twice what they would to workers elsewhere.

Conclusion

There is much that could be written on the Nordic model, with the rights of women, the minimum wage and how big corporations work all other areas that could be tackled. The differences in ‘hire and fire’ practices is also important.

Clearly workers have a stronger role than in the Anglo model, while income taxes are higher to help fund the generous provisions for the unemployed.

Interestingly however the Nordic nations tend to be hostile to inheritance tax, with Norway and Sweden both abolishing it altogether in the last ten years and Iceland and Denmark both providing very modest rates compared to the Anglo model.

The differences between the two systems are profound however it is clear that Nordic nations offer a higher standard of living for working-class and middle-class people while seemingly not stifling innovation or new job creation.