Why Do Scandinavians Work?

30 Pages Posted: 8 Jun 2010

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: May 2010

Abstract

Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation rate despite high tax rates and a generous social safety net. This either refutes the standard incentive argument or leave the Scandinavian countries as a puzzle. This paper argues that both the standard view and the Scandinavian experience can be reconciled when taking into account both the pecuniary and non-pecuniary incentives build into the social safety net. The social safety net in the Scandinavian countries is at the same time both generous and employment conditioned. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. Such employment conditionalities make it possible to achieve distributional objectives without jeopardizing the incentive structure.

Keywords: tax incentives, labour supply, activation

JEL Classification: J01

Suggested Citation

Andersen, Torben M., Why Do Scandinavians Work? (May 2010). CESifo Working Paper Series No. 3068, Available at SSRN: https://ssrn.com/abstract=1621538

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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