Labor in the Nordics

When I talk about the success of Nordic social democracies, I am frequently told, vaguely, that they are actually very economically free and deregulated countries. This seems to be based upon such things as the Heritage Freedom Index, which is broadly uninteresting like most Heritage products. I've never written my take on this line of talk. So I figured I'd do so here.

Public Employment

The notion that the Nordics are just big welfare states layered on top of wonderful free market capitalism is in tension with the fact that the countries have large public workforces.

More than one-third of Norwegian workers are employed by the government, either in governing functions or by state-owned corporations. Denmark, which is probably the best performing of the four Nordics right now, is right behind them. Finland's number is quite a bit lower, but even it has 57% more public employees than the US. (Sweden's numbers weren't available).

I don't personally think having big public workforces has anything to do with economic freedom. But those who push that line tend to believe public employment is an almost complete waste. It's certainly removed from the supposed free market efficiency of private labor markets and private production.

Heavily Organized Workforces

Workers in the Nordic countries are heavily organized into labor unions and sectoral labor agreements cover the vast majority of workers:

This is important for two reasons. First, obviously, inescapable labor agreements covering entire sectors of the economy is not really that free market goodness that the economic freedom sorts typically have in mind.

Second, the labor tradition in these countries is that collective bargaining agreements are where a lot of what we might call "labor regulation" happens. This seems to confuse normal taxonomies of "economic freedom" because those taxonomies assume that only government regulation is regulation. And, if you want to define it that way, that's certainly fine. But it doesn't really reflect the reality of what's going on: a bargaining agreement covering an entire industry's labor market is not technically law, but you have to follow it just the same.

Finland's Recent Experience

If you want to see the interesting dynamics of Nordic labor markets in action, the last year or so in Finland has provided an interesting case study.

The Centre Party formed a "bourgeois government" (the actual phrase used in their english-language media) with the National Coalition Party (right-wing) and the Finns Party (nationalists like Trump). A key goal of the new government was to cut unit labor costs by 5%. The purpose of this was to make exports more competitive and help Finland's economy, which has been hit hard by the decline of its paper industry, fall of Nokia, and Russian sanctions.

The problem is that the government doesn't really have that much power in this regard. Unit labor costs are determined by sectoral bargaining agreements, not the state. The government has repeatedly called upon the employer associations and unions to create new agreements in order to acheive the competitiveness boosts. All such attempts have failed. The government has repeatedly threatened various austerity and other changes to try to coerce the unions and employer associations to strike a new bargain. These threats haven't worked yet. Instead, they've induced labor stoppages, such as the massive one in September of last year that was estimated to cost the country 100 million euros of output.

Is this economic freedom or not? In some sense, it is: labor unions are resisting the tyrannical state's attempt to meddle in their collective bargaining agreements and force them to cut unit labor costs. And some accounts I read actually describe it in precisely this manner. However, in the sense that the free market people mean it, it isn't economic freedom: these collective bargaining agreements are preventing employers from bargaining individually with workers. How you score the economic freedom here largely depends on what definitions you read into the word, but more importantly here: this is not exactly the flexible labor market of right-wing dreams.