What is the difference between the Nordic countries and Japan?

Nordic countries have a high quality of life

As we all know, the Nordic countries consisting of Denmark, Finland, Iceland, Norway, and Sweden rank among the top countries in the surveys on happiness, life satisfaction and human development of their people. In contrast, Japan usually ranks far below the Nordic countries as Table 1 shows.

What is the difference between the Nordic countries and Japan that makes this difference?

Nordic countries as welfare states

What is often mentioned is the difference in terms of their features as a welfare state.

A welfare state is a state where the government intervenes in the economic activities of the people in order to improve their welfare. Capitalism in its pure form respects the outcome of the market mechanism, and the role of the government is confined to its role as a night watchman whose main responsibility is to maintain the framework of the market economy.

However, since the introduction of the Poor Law in early seventeenth century by Queen Elizabeth I of England, the establishment of the social insurance system in late nineteenth century by Chancellor Otto von Bismarck of Prussia, and the proposal of e social security system that covers “from cradle to grave” in mid-twentieth century by Lord Beveridge of the United Kingdom, governments gradually committed themselves to welfare policies.

Nowadays, one can safely say that all states are welfare states, although there are admittedly differences in their specific features. The differences can be seen by referring to the categorization advocated by the sociologist Goøta Esping-Andersen. He identifies three regimes of welfare state as Table 2 shows.

His three regimes are identified by making use of three criteria. First is the degree of de-commodification: how much is an individual free from the labor market to make his living? Second is the degree of destratification: how much is the system free from the class and status of the people? And third is the provider of the welfare services: is it the market, the family, or the state?

According to this categorization, Nordic countries belong to the social democratic welfare state regime where high level of welfare is provided universally and equally to the people. Welfare is provided under a single system, not under separate arrangements for different class and status of the people, and directly to the targeted people, not through the market nor the family.

Specific policies of the Nordic countries

What are the specific policies that are implemented by the Nordic countries in order to improve the welfare of the people?

From the wide range of policies implemented by the Nordic countries, we will focus on the policies that target middle income earners. As Table 3 shows, policies that will be covered include education policy that tries to prepare the people before entering the labor market; employment security, wage settlement, unemployment benefit, and vocational training that try to support the people while taking part in the labor market; and old-age pension that tries to assist the lives of the people after retiring from the labor market.

Education policy

Let us first look at the education policy. Education is considered to be vitally important in determining the well-being of the people in their lifetime, including the period when they are actively participating in the labor market. If education is costly and difficult to receive, the level of education will be determined by the wealthiness of the their parents, and inequality is going to be intergenerationally correlated.

Because of the importance, compulsory education (including one pre-school year) is provided free in all of the Nordic countries. In addition, education after compulsory education, including tertiary education, is provided free in all institutions in Denmark, Finland, and Sweden, and in public institutions in Iceland and Norway.

Among the Nordic countries, the education system in Finland has attracted a lot of interest in Japan. Compulsory education starts from the age of six and lasts for twelve years beginning from pre-primary education (from 2015), and all the way through basic education and upper secondary education or vocational upper secondary education (from 2021). During these years, not only tuitions are free but also learning materials and school meals are free, and if the student lives far away from school free transportation will also be provided. Furthermore, when you enter universities or graduate schools, free tuition is combined with generous assistance and student loans to support the daily lives of the students. Nursery schools and adult education are not free but the tuitions are kept low so that people would not be distracted from making use of the opportunities.

So attractive is the education policy in the Nordic countries. However, there are a number of points to note.

First is the fact that such a generous education policy for the people will inevitably be costly for the government. As a result, public expenditure on education is going to be significant. Table 4 shows that the Nordic countries spend at least about five percent of GDP worth of public resources on education: Denmark’s 4.9 percent is the lowest and Norway’s 6.4 percent is the highest. It is considerably higher than Japan’s 2.8 percent.

Second is the acknowledgement that free education is not a sufficient condition for a decline in inequality. As we saw earlier, Finland has one of the most generous education systems among the Nordic countries. However, it is not enough to prevent a large inequality to take place before income redistribution in Finland (n.b. after redistribution, Finland becomes one of the countries with the lowest inequality). As Figure 1 shows, Finland’s Gini coefficient for market income (i.e., before income redistribution) is not only larger than other Nordic countries, but even larger than Japan and close to that of the United States. Free education may be a necessary condition for a low inequality but we need to note that it is not sufficient. Unless it is combined with other policies, reducing inequality before redistribution does not seem to be possible.

Industrial relations and labor market policies

Let’s us move on to the policies related to the labor market. One of the differences between the Nordic countries and Japan is the membership of the labor unions: as Table 5 shows, labor unions in the Nordic countries have memberships well above that of Japan. With that at the background, wages and other issues are collectively negotiated between the labor unions and the employers, and the agreement is extended to other workers who are not members of the labor union. Also, in the Nordic countries, with the exception of Iceland, labor unions have the right to be represented in firms. Since the labor unions have a strong influence on wage setting, there is no possibility of an unfavorably low wage to be set: as a consequence, statutory minimum wage does not exist in the Nordic countries.

Degree of protection of the workers from dismissals are different among the Nordic countries. Since the Employment Protection Act of 1982 (and a revision in October 2022), dismissals in Sweden require certain conditions to be met. Any dismissals needs to have objective reasons and can be pursued only after investigating the possibility of relocating workers. When dismissal is inevitable, employers have the obligation to consult with the labor unions, and to follow the rule of “last-in-first-out” (allowing exemptions of three employees). This procedure also affects the hiring process because those who have been dismissed have the right to be hired with priority.

Even when the degree of protection of workers is high, the length of employment in the Nordic countries is not so long. As Figure 2 shows, job tenure in the Nordic countries is much shorter than Japan. It implies that job mobility is high in these countries. But if job mobility is high, wouldn’t workers feel less secured?

To answer the question, it should be interesting to look into the Danish policy framework of “flexicurity” (coinage by combining “flexibility” with “security”). In Denmark, dismissal is subject to less restriction compared to Sweden so that the possibility of losing a job is higher in Denmark than in Sweden. However, when a worker loses a job, he/she will be entitled to receive unemployment benefit that is generous in terms of amount of benefit relative to the previous earnings, and also in terms of the maximum days of entitlement as shown in Table 5. In order to prevent moral hazard that may arise by receiving such a generous unemployment benefit, workers are obliged to receive support and vocation training that are necessary in returning to the labor market. The set of policies that are implemented to put workers back to the labor market is called the “active labor market policy”. Under “flexicurity”, expenditure by the government on active labor market policy is more than double that of Japan in terms of their ratios to GDP.

The industrial relations and the labor market policies that are in place in the Nordic countries are obviously established in a way to secure the interest of the workers. However, following points need to be noted.

First is how we should assess the wage level that are determined as a result of collective bargaining between the employers and the labor unions. Collecting bargaining seems to have led to a limited dispersion of wage levels and elimination of significantly low wages.

However, how wages are set, and how wages at the industrial and corporate level are determined will have an important implication on the performance of the economy as a whole, and unemployment rate in particular. As Table 5 shows, unemployment rates in the Nordic countries are generally high compared to other countries including Japan. It would be important to check whether or not the wages set by collective bargaining has not been above the equilibrium wage rate. The recent shift of the collective bargaining from central to industry and corporate level may partly be a response to this kind of consideration.

Second is how to assess the significance of the policies in the Nordic countries on the issue of gender gap. School enrollment rate of female students are high (higher than the males) in the Nordic countries, and so is the labor force participation rate (gap between females and males if small). In both aspects, it is much better than the case in Japan.

However, female employment seems to depend significantly in part-time jobs. Female employment also seems to depend a lot in occupations where females are dominant (education, health and long-term cares). Nordic countries themselves see them as a problem and are trying to address them further.

Old-age pension

Lastly, we would like to touch upon the old-age pension system.

Ageing is proceeding in the Nordic countries, just like in Japan. Therefore, old-age pension system is as important in the Nordic countries as it is in Japan. the system in the Nordic countries consists of a guaranteed fixed income part and a supplementary part whose amount is proportional to the contributions that were made according to the level of earnings while at work. In that sense, the structure is similar to that in Japan.

However, the level of pension benefit is different. As Table 6 shows, net replacement rate in the Nordic countries ranges from about 56 percent in Norway to 84 percent in Denmark, considerably higher than 39 percent in Japan. Generally speaking, old-age pension is much more generous in the Nordic countries compared to Japan.

One concern with the generous old-age pension systems of the Nordic countries is whether they will still be sustainable when further aging of the population is going to take place in the future. For example, old-aged pension system in Sweden has the automatic balance mechanism which Japan made reference to when it introduced the macro-slide system to the old-aged pension system. Whether the mechanism is enough to sustain the system, and whether the level of adjusted pension is going to be sufficient to support the lives of the pensioners need to be clarified. Moreover, how the other Nordic countries are going to tackle the impact of the aging is also of interest. One of the solutions that is being taken is to delay the eligibility age for receiving pension: for example, in Denmark, a retiree becomes eligible for receiving pension only from 67, and even that is gradually shifting toward 69.

How we should learn from the Nordic countries

We have been looking at some of the policies and systems that have been implemented by the Nordic countries. Even though the survey was only for a limited area, there were many aspects of the policies and the systems that were of interest to Japan.

However, what we also realized was that, while we tend to group the five countries as “Nordic countries”, there were in fact many differences among them. Therefore, when we say that “we need to learn from the Nordic countries”, we need to make sure which country and which policy or system we are talking about. Otherwise, the discussion will never converge.

Another thing that we realized was that the Nordic countries had issues to address, not only significant achievements. When we are going to learn from their experience we need to make a balanced assessment of their issues as well as their achievements.

Finally, since there are differences in the policies and the system among the Nordic countries, we tend to look at different countries for different aspects. As a result, we are tempted to combine the best practice of different countries together to come up with an “ideal” welfare state. However, there is no assurance that they would be consistent with each other and be resilient as a whole.

We need to be careful about these points when we try to learn lessons from the admirable performance of the Nordic countries.

【References】

– Aarhus University, “Trade Unions in the Nordic Countries”, nordics.info, 2019.
– Blanchard, Olivier, and Dani Rodrik, Combating Inequality, MIT Press and Peterson Institute for International Economics, 2021.
– Esping-Andersen, Goøta, The Three Worlds of Welfare Capitalism, Polity Press, 1990.
– European Commission, “National Education Systems”. (https://eurydice.eacea.ec.europa.eu/national-education-systems).
– ——————–, “Guide to National Social Security Systems”. (https://ec.europa.eu/social/main.jsp?catId=858&langId=en).
– Icelandic Confederations of Employers and Trade Unions, Collective Agreements and Labour Market in the Nordic Countries, 2013.
– Ministry of Health, Labour and Welfare, “The Kingdom of Sweden”, Report on the Overseas Situation 2016 (in Japanese).
– Nordic Co-operation, “Facts About the Nordic Region” (https://www.norden.org/en/information/facts-about-nordic-countries).
– ——————–, The Future of Nordic Labour Law, 2020.