Social Democracy and its Misconceptions: A Look into the Nordic Welfare State
We get it wrong when we talk about the Nordic countries. According to recent 2022 OECD data, Scandinavia’s public social expenditure (education, healthcare, childcare etc.) as a percent of total consumption (GDP) is very similar to its European neighbours. Yet, Nordic countries consistently rank higher in terms of living standards, government accountability and transparency, business freedom, quality of life and infrastructure, along with their unique social structure and institutions when compared to most European countries. This is often overlooked by commentators and popular debates.
The distinction between social democratic welfare states lies not only in their quantitative components but also in their distinct structures and institutions within the European welfare state. Economist George Lakey points out that Americans generally misunderstand the nature of the Nordic model since they tend to focus solely on the quantitative aspects:
imagine that “welfare state” means the U.S. welfare system on steroids. Actually, the Nordics scrapped their American-style welfare system at least 60 years ago and substituted universal services, which means everyone — rich and poor — gets free higher education, free medical services, free eldercare, etc.
So, how should we go about defining the social democratic welfare state?
The Nordic countries are, of course, not fully socialist societies, but it is important to highlight the socialist historical precedents of these countries. To get this out of the way, we must state up-front that there are no full social democracies. There are merely archetypes of what we imagine a social democracy to be. ‘Social Democratic’ should be seen as a ‘programme of political tendency’ of historical reformist socialist parties.
In his book The Three Worlds of Welfare Capitalism, Gøsta Espring-Anderson outlines a definitive categorisation of welfare states across Europe. These states can be classified as liberal, conservative, or social democratic regimes. Social democratic regimes are characterised by high levels of decommodification in areas such as pensions, sickness, and unemployment, as well as high income equality and low stratification. Despite the common belief that social democracies have thriving free markets, they actually have a significant amount of public-sector employment and union membership compared to other welfare state types.
Throughout the 20th Century, socialist leaders in Nordic countries recognised the importance of reducing social stratification and building greater equality and solidarity. To achieve this, they sought to replace private market systems with public ones in areas such as old-age and health insurance. The Swedish political concept of Folkhemmet, or “People’s Home,” emphasised the social democratic goal of uniting the Swedish citizenry into a single community, in contrast to the conservative continental approach of tying benefits to one’s workplace (i.e. occupationally segmented benefits). Nordic social democracies aimed to use welfare policies to empower the working class and prevent divisions between the state and the market. According to Anderson, all welfare policies either reinforce or remove existing social stratifications. Means-tested welfare regimes, for example, divide the population into recipients and non-recipients, creating stigma and reducing social solidarity.
This comes to the natural essence of why the Nordic model is not ‘liberal’: decommodification. The level of decommodification describes the extent to which a person’s livelihood is insured without relying on the labour market. Social Democratic decommodified welfare policy says that all citizens deserve healthcare, education, and an adequate minimum wage regardless of the sways of the free markets and their position within the economic system. For liberal welfare regimes such as in the UK and US, welfare policy is subordinated to the whims of the market: nothing should undermine the ability of workers to participate in the market. Socialists sought to end labour’s commodification as it caused stratification, competition and alienation between workers.
If we look at Anderson’s rank-order of welfare states in terms of combined decommodification in pensions, sickness and unemployment, we can see the typology of the Anglo-Saxon liberal, Continental conservative and Nordic social democratic regimes.
Socialists prefer universalism within Social Democracies as it aims to build a sort of socialist ‘universal’ solidarity between workers of all classes, thereby eliminating competition between workers.
In essence, social democratic universalism aimed to boost horizontal equity as well as reduce bureaucratic burdens, allow popular buy-in to take away the framing of explicit poor-relief and replace it with the logic of social insurance, as well as reducing overlapping phase-outs — ‘eligibility cliffs’ — that allow recipients to end up in poverty traps. This compares to the Anglo-Saxon welfare-state model, where means-tested programs are preferred with high welfare eligibility criteria based on income and ‘proper moral behaviour’. Universal programs exist, for instance, the NHS and Universal Childcare in the UK or Universal Old Age, Survivors, Disability Insurance (OASDI) and Social Security in the US. However, the gross majority of programs in Anglo-Saxon welfare-states remain means-tested.
This universalism still resonates with the next theme being social policy, the labour market and full employment. Social Democracy first ought to guarantee full employment as unemployment limits mass-worker bargaining power and thus reduces workers’ rights. Social policy — for the social democratic welfare state — is meant to protect individuals against the “exigencies and risks” that confront them within the life cycle from youth to maintaining a family to old age. This is especially needed when those participating in the labour market do not garner enough income to support their non-working co-dependents (children, the disabled, the elderly and non-workers). The welfare state redistributes some of each worker’s pay (dependent on the income of course) in the form of old-age pensions, disability benefits and various child allowances. Full (or high) employment helps maintain these forms of support within the welfare state. Full employment, of course, brings about a higher growth economy, higher wages and, indeed, the socialist goal of empowering workers. Importantly, full employment allows for “better labour utilisation” and diverts crucial welfare state revenues to other needs. Some of these revenues get directed towards paid-leave benefits when there are inescapable ruptures in workers’ life cycle from sickness, maternity or parenthood, education, vacation and others, as highlighted in the People’s Policy Project diagram below. Despite incentivising people to take time off work, paid leave, in fact, reinforces full employment. Workers, instead of leaving their employment, will remain there, taking full advantage of the various benefits they receive.
Full employment, however, must come with associative comprehensive welfare-state institutions that guarantee this, including large sectoral union agreements.
The right of workers to control and manage their workplaces through collective bargaining seems to be another distinguishing element of the Scandinavian welfare state. Union membership in Scandinavia exceeds that in Anglo-Saxon welfare regimes. In 2019, trade union density (the number of net union members (excluding unemployed and self-employed) as a proportion of the number of employees) was 90.7% in Iceland, 67.5% in Denmark, 65.2% in Sweden, 58.8% in Finland, and 50.4% in Norway; this is compared to Germany at 16.3%, the UK at 23.5% (though higher than most liberal regimes!) and the US at 9.9%. In contrast, 20–30% of employees are generally unionised in most other EU countries apart from Belgium. A much larger percentage of employees are covered by collective bargaining agreements, at 80–90% of workers in the Nordic countries.
Unions are organised sectorally rather than occupationally and participate in sectoral bargaining with negotiation between employers, unions and governments. Similar to the socialist goal of generating solidarity among workers, sectoral bargaining reduces competition between enterprises. Large sectoral unions can generate economies of scale that provide increased wages and unemployment insurance. Sometimes, such as in Denmark, large sectorial unions have a level of monopsonistic bargaining power that allows them to negotiate a sectoral wage; thereby, workers are no longer dependent on a single statutory minimum wage.
In the UK, the lack of union cohesion “closed off many potential avenues” to fighting pressures from price instability, following the inflationary crisis of the 1970s. The institution of wage and price controls alienated unions from a once friendly Labour government. Polish Economist Michel Kalecki’s famous piece “The Political Aspects of Full Unemployment” suggests that preventing an inflationary spiral — following the Phillips Curve — requires the welfare state to protect ‘full’ employment through institutions such as sectoral trade unions.
Nordic social democracies have a large public sector, with approximately one in three workers in Denmark and Norway being public employees. These governments also have significant ownership of national wealth, ranging from 54.6% in Norway (always an outlier due to its North Sea oil revenues) to 31.7% for Finland, 24.1% for Sweden and 11.2% in Denmark as of 2014. By contrast, the US government owns -3.2% of its national wealth in the same year. Enterprises are either fully or partially owned or controlled by the state, with sovereign wealth funds or investment funds investing in real and financial assets. Norway, in particular, has state-owned enterprises (SOEs) that are equivalent to 87.9% of its GDP as of 2012. These SOEs include postal services, public broadcasting channels, alcohol makers and retail services, real estate companies (e.g. Entra in Norway), marketing communication companies (e.g. Nordic Morning in Finland), telecommunications companies (Telenor in Finland) , state-owned oil companies and even an airline (Finnair).
Implementing an exact copy of Nordic social democracies is not feasible outside of Scandinavia. Based on their complex histories, these economies have developed a unique cooperative behavioural ethos and universalist voluntary communitarianism over the years. The complex history of these nations includes the independent mercantilism of the peasantry, early private property rights, the abundance of storage economies, the Reformation, the institutionalisation of education, social reforms, and the rise of the labour movement. These specific regional and national transformations set these nations apart from the rest of the continent.
Despite their successes, the Nordic social democracies are not without their challenges. The rise of right-wing anti-immigration movements, demographic changes in age and employment structure, the impact of globalisation, and the need for wage restraint to maintain high employment levels are all threats to social democratic cohesion. It is essential to recognise that the success of these economies is not solely due to their political system but also their unique historical and cultural context. All in all, the structures and institutions that support social democracy must come from below, not above. Nation-states are neither prisoners of history nor of geography. But, as to whether countries should choose this path or not? It is not a question of whether or not countries could make the social democratic transition, but rather whether they should undertake the long and arduous road to do so.
