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Recent Changes in Nordic Labour Market Policy – National Applications of International Ideas



Introduction: The International Competition State Paradigm

In the 1980s and 1990s a new international economic paradigm began to spread around the Western world. Its roots can be traced to the 1960s and the so called ‘Chicago school’ of economics in the US. In addition to business funded think tanks, international organisations, such as the OECD and later the EU began to promote this paradigm that proposed a new relationship between the state and the market.

In terms of labour market policy, the new imperatives of the international competition state paradigm can be summarised into five key points:

1) passive unemployment insurance should be minimal
2) the state should improve the availability of a labour supply for all sectors of the economy through bureaucratic means
3) tax rates should be as low as possible
4) wage negotiations should occur at the individual level instead of the collective level
5) employment protection legislation (rules concerning hiring and firing) should be as relaxed as possible

Within the international competition state paradigm it is thought that high levels and wide coverage of unemployment insurance increase what is termed ‘structural unemployment’, below which inflation keeps increasing. Similarly, it is thought that high income taxes, collective wage negotiations and tight employment protection legislation contribute to a higher level of structural unemployment. The only way to reduce structural unemployment is to reform the reform the labour market according to the above listed imperatives in order to increase incentives to take up work.

The international competition state paradigm is the almost complete opposite compared to the traditional Nordic welfare state paradigm. Regarding the five key points listed above, the opposite policies were pursued in the Nordic countries: unemployment insurance covered more people and was more generous than in most other countries, the state pursued often demand side measures in order to reduce unemployment, taxation was comparatively high and progressive, wage negotiations were pursued at the collective level and employment protection legislation was moderately strict.

In the Nordic countries, policy reforms since the 1990s have followed the lines of the new international competition state paradigm. This process of combining new international ideas with national political and cultural traditions will be briefly outlined in the following.

Sweden: New Ideas but Moderate Legislative Reforms

New ideas began to take hold of Swedish political life in the 1980s. The Social Democratic Prime Minister Ingvar Carlsson (in office 1986-1991 and 1994-96) has later expressed the ideological change in the following way:

The ideas of community and solidarity associated with the People’s Home were met by a slogan to ‘invest in yourself’. The option of creating a better future through political decisions was rejected. Markets were to replace politics. The Timbro group  constituted another bourgeois party to deal with, one more efficient and more difficult to reach than the parties in parliament.

In the early 1990s Sweden experienced a serious economic crisis, which was followed by a few years of Conservative rule. A Commission headed by Assar Lindbeck suggested a reform package tailoring Swedish society in a fairly crude and simple way into a favourable environment for business. The Commission’s proposal apparently did not capture the views of the general population, since it backfired in the 1994 elections with the consequence that the Social Democrats returned to power for the next twelve years.
Part of the Swedish post-war model had been a fiscal policy (taxes) geared towards redistribution of resources and restriction of consumption in order to prevent the economy from overheating. High taxes slowed down the economy and social security benefits redistributed income between various groups in society in accordance with Social Democratic ideology.

In the 1990s fiscal policy became geared towards growth and monetary policy (interest rates) towards price stability. It then appeared important to have as low tax rates as possible in order to stimulate the economy. From a social policy point of view, cash benefits started to appear to an increasing extent as disincentives for participation in the economic sphere
Sweden joined the European Union in 1995 but retained control of its own monetary policy by not joining the EMU. However, in the end of the 1990s the Social Democratic government put the goal of price stability above the goal of full employment – which indicates a strengthening influence of competition state ideas.

Legislative reforms in the area of Swedish labour market policy have been fewer compared to Denmark and Finland. However, a departure from traditional Nordic universalism was made in 1998 by widening the obligations of income support recipients. In practice this means that refusing an offer of so called ‘activation measures’ (employment training, skill enhancement, subsidised work etc.) may lead to withdrawal of benefit.

Denmark: Gradual Drift towards the New International Paradigm

Whereas the early 1990s were difficult in Sweden, Denmark faced a similar crisis in the early 1980s. The Social Democratic-led government resigned voluntarily in 1982 acknowledging a loss of political direction in the middle of the challenging economic situation. A Conservative-led government headed by Poul Schlüter took over and this government stayed in power until 1993.

Denmark had been a member of the EEC since 1973 and was subject to European impulses in a different manner from Sweden and Finland. In 1992 the Danish population rejected the Maastricht Treaty after a referendum producing a number of Danish exceptions in the Treaty that established the European Union. In 1998 the European path towards a new social and economic order was once again rejected in Denmark when the Economic and Monetary Union did not receive public support.

Unemployment had remained stubbornly high until the late 1980s and in the early 1990s labour market issues gained high priority in Danish politics. Reforms after 1993 focused on two key aspects: 1) the role of Active Labour Market Policies and 2) the balance of rights and obligations of benefit recipients.

The labour market reform of 1994 created a path along which later legislative reforms during the 1990s proceeded. Between 1994-98 the maximum duration of earnings-related unemployment benefit was gradually reduced from seven to four years. At the same time, the number of unemployed people began to decrease. Falling unemployment rates added to international interest in this system of employment policy, which has since become known as ‘flexicurity’ (a combination of flexibility and security).

A shorter duration of unemployment benefit is in line with the suggestions of the international competition state paradigm but the level of compensation of Danish unemployment benefit was not subject to reform during any of the labour market reforms of the 1990s.

The composition of the government coalition changed in 2001 and a coalition headed by Conservative Prime Minister Anders Fogh Rasmussen entered office. This regime change appears to have been associated with a slight ideological shift as well – pushing Danish employment policy more towards the ideas of the international competition state paradigm.
An increased stress on sanctions (loss of benefit in cases of non-compliance) since 2001 indicates a stronger adherence to the ideas of the competition state paradigm, according to which ‘passive’ unemployment benefits create a disincentive to look for work in the open labour market. ‘Activation’ measures are therefore designed to counteract these disincentives through the testing, monitoring and controlling of the work availability of the unemployed.
In Denmark the negotiated adaptation of the ideas of the competition state paradigm led to an original model of employment policy in the 1990s, but in the 2000s the country has drifted towards a stronger adherence of the paradigm.

Finland: Orthodox Application of Ideas of Competitiveness and Productivity

From the early 1990s onwards, Finland experienced a severe economic depression. The Finnish economy shrank in size during the few years of depression and the government had to introduce a series of austerity measures to maintain the stability of the national economy. Finnish policy makers became increasingly sensitive to new perceptions regarding the relationship between the state and markets.

In Finland the key processes of corporatisation, commercialisation, privatisation, local government restructuring and EU/EMU membership were largely dealt with without public discussion. At the elite level of policy making it was perceived that economic globalisation and post-industrialisation posed great challenges to society and the economy.
In accordance with the imperatives of the international competition state paradigm, new supply side measures gained priority in efforts to increase employment rates. As part of a strategy to increase incentives to take up work, the availability of social security benefits and income support was made more limited, and comparatively rigorous sanctions were put in place for cases of non-compliance.

From the point of view of the competition state paradigm, a solidaristic wage policy and the entire structure of the post-war Nordic labour market are seen as a problem for employment growth. This is clearly expressed in an influential policy document produced by the Prime Minister’s Office in 2005:

[…] Attention is focused on a few potential problem areas. Firstly, the income distribution in Finland is in European terms narrow both with regard to gross and net wages […]. Low productivity work tends to become too expensive in this situation with respect to productivity and the price that is paid on the market for these services. The problem is primarily that the lowest wages are too high in relation to average wages.

In other words, the Finnish income distribution is perceived to be too narrow for a low-wage low productivity service sector, which in turn is seen as necessary in order to enhance overall productivity. As the real value of social security benefits has decreased it has indeed become possible for a low-wage service sector to begin to develop in Finland. Privatisations in the public sector and externalisations in the private sector have resulted in deteriorating terms and conditions of employment – which job-seekers have been forced to accept. Income differences have also been increasing rapidly.


Since the 1980s and 1990s a new policy paradigm has dominated Western economic and public policy. There is no general consensus what this set of ideas should be named. From a perspective of labour markets the new ideas have in this article been grouped under the title ‘international competition state paradigm’. The label has been chosen to underline the fact that in this new way of thinking the state acquires a new role in its relation to markets. According to the dominant way of thinking about public and economic policy, the markets are seen as central in allocating resources and the role of the state is seen as assisting the operation of market forces. In employment policy this is reflected in the stress on supply side measures.

The imperatives of the international competition state paradigm are almost the complete opposite compared to traditional Nordic welfare state ideas. Thus, the Nordic countries have been forced to find an adaptation between national traditions and new ideas. In Denmark the result was a middle way between ‘flexibility’ and ‘security’ in the early 1990s, but since the 2000s the country has ideologically drifted closer towards competition state ideas. In Sweden legislative reforms in the area of labour market policy have been comparatively modest. Yet, efforts to renew traditional policies have been modest and competition state ideas have influenced the priorities of fiscal, employment and monetary policy. Out of the Nordic countries Finland has pursued the most orthodox application of competition state ideas. Legislative reforms have been frequent since the early 1990s and elite level policy makers have appeared very convinced by the imperatives of the competition state paradigm.

Bibliography and further reading

The International Competition State Paradigm: For informative analyses of the changes in economic thinking, see Blyth, Mark (2002): Great Transformations. Economic Ideas and Institutional Change in the Twentieth Century. New York: Cambridge University Press; Jessop, Bob (2002): The Future of the Capitalist State. Cambridge: Cambridge University Press; McNamara, Kathleen R. (1998): The Currency of Ideas. Monetary Policy in the European Union. Ithaca: Cornell University Press; Kettunen, Pauli (2008): Globalisaatio ja kansallinen me [Globalisation and the National us]. Tampere: Vastapaino. A key document in consolidating these ideas is OECD (1994b): White Paper on Growth, Competitiveness and Employment. Paris: OECD. For a historical analysis of Nordic welfare state transformation, see Kananen, Johannes (2011): Modern Societal Impulses and their Nordic Manifestations. On Emancipation and Constraint in Societal Development. Academic Dissertation. University of Helsinki.

Sweden: For firsthand experience of changes in Swedish politics, see Carlsson, Ingvar (2003): Så tänkte jag. Politik & dramatik [How I Thought. The Drama of Politics]. Stockholm: Hjalmarson & Högberg, Feldt, Kjell-Olof (1991): Alla dessa dagar… I regeringen 1982-1990 [All These Days… In Government 1982-1990]. Stockholm: Nordtedts. For an assessment, see Hort, Sven E. O. (2003): Back on Track – To the Future? The Making and Remaking of the Swedish Welfare State in the 1990s. In Gilbert, Neil & Van Voorhis, Rebecca A (eds.) Changing Patterns of Social Protection. International Social Security Series vol. 9. London: Transaction Publishers.

Denmark: On the details of the Danish unemployment benefit system, see Kvist, Jon & Pedersen, Lisbeth (2007): Danish Activation Policies. National institute Economic Review No. 202 October 2007: 99-112. On flexicurity, see Bredgaard, Thomas, Larsen, Flemming & Madsen, Per Kongshøj (2009): Flexicurity. In Pursuit of a Moving Target. European Journal of Social Security 40 (4): 305-325.

Finland: On the change in elite thinking, see Kantola, Anu (2002): Markkinakuri ja managerivalta. Poliittinen hallinta Suomen 1990-luvun talouskriisissä [Market Discipline and Managerial Power. Political Governance During the Finnish Economic Crisis of the 1990s]. Helsinki: Loki-kirjat. For an administrative perspective on the productivity of the Finnish service sector, see Sinko, Pekka & Vihriälä, Vesa (2005): Palvelusektorin koko, tuottavuus ja kilpailu. Johdatus aiheeseen ja keskeiset päätelmät [The Size of the Service Sector, its Productivity and Competitiveness. Introduction to the Subject and Central Conclusions]. In Palvelualojen kehitys, tuottavuus ja kilpailu. Helsinki: Valtioneuvoston kanslia 11/2005.

Author contact:
Johannes Kananen
Swedish School of Social Science
P.O. Box 16
00014 University of Helsinki
Tel. +358 9 19128457
Recent Changes in Nordic Labour Market Policy – National Applications of International Ideas