Nordic equality and the bumblebee

Always been interested in the Nordic economies especially when you look at their standing in HDI and other indicators like happiness, trust and ease of doing business etc. There is a series of three books that looks at the fundamental features of these societies whether it be Equality, Economic Performance and Happiness – see image.

The Nordic countries rank amongst the best for equality in society. How is it possible that these economies are some of the richest and the most equal? Many people compare the Nordic model of equality to a bumblebee. The bumblebee tends to go against the laws of aerodynamics – a very big body with tiny wings. The Nordic countries model of inequality is very expensive but there is still economic growth in the economy. Carsten Jensen talks of 3 aspects of Nordic society that makes this possible.

  1. The flexicurity system – flexibility and security. This is where employment regulation is fairly lenient (ability to make employees redundant) combined with a generous welfare programme The welfare support has two main aims: to protect against loss of income that come with losing your job and ensuring that you have the right skills to better fit the labour market. Should be noted that the government play an important role in the provision of free education at the tertiary level in Nordic countries. This leads to the golden triangle of flexicurity – flexible labour markets, training and retraining, and unemployment protection – see fig below.
  2. The business friendly environment. The World Bank’s Ease of Doing Business Index ranks countries according to how conducive their regulatory environment is to establishing and running a company. In the 2020 Index Denmark were 4th, Norway 9th and Sweden 10th. However this does not imply that equality is somehow intrinsically good for a country’s commercial environment.
  3. Social trust – this is important for growth as it make cooperation between individual citizens and companies easier. The lower transaction costs from social trust mean the environment is more conducive to investment from entrepreneurs and banks. Those countries that have less social trust spend more time and money on monitoring employees, other companies and consumers.

Source: Equality in the Nordic world – Carsten Jensen – 2021

The topic Inequality on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

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Unemployment in Denmark – generous benefits with strict controls

With unemployment at 4.2% – less than 120,000 – in Denmark it has one of the lowest rates of unemployment in Europe. Those unemployed get 90% of their former salary but there are very strict controls on those receiving these benefits. Some of them are outlined below:

  • Check-in with the government website every 7 days
  • Apply for 3 jobs each week that you are unemployed – also have to prove their efforts
  • Within two weeks after you become unemployed, you must upload and activate a CV on the government website.
  • Each month they have to attend an interview with a government job centre
  • Financial benefits maybe cut if they don’t abide by the conditions.

The video compares the French system with that of Denmark.

Scandinavian countries most expensive but happy

Another good video here with Tom Chitty from CNBC – outlines why the cost of living is so high in Scandinavia – Norway, Sweden and Denmark. These countries on average have some of the highest tax rates (see graph) in order to fund a large welfare state. Expenditure in social welfare is one of the highest as a % of GDP and eventhough it is very expensive to live in these countries they rank as some of the happiest.

Danish Mortgages – Levelheads v Woodheads

An interesting paper* by the Harvard Economics Department looked at the Danish mortgage market and the fact that people tend to ignore the chance to save money when they can refinance their mortgage at any time without incurring a penalty. They identify those that are attentive to mortgage market changes and refinance their mortgage as ‘levelheads’. On the contrary those that are inattentive and experience inertia are seen as ‘woodheads’

The researchers found that many household characteristics move inertia and inattention in the same direction, so these attributes are positively correlated across households. Younger, better educated, and higher-income households have less inertia and less inattention. Almost three times as many homeowners refinanced in 2010, after rates had fallen sharply, than in 2011 when interest rates briefly spiked higher again. But woodheads were prevalent in 2010 as only 44% of those with a mortgage rate of more than 6% refinanced their loans even though rates of nearly 4% were available. On average woodsheds paid an extra 1.5% of interest as a result of their lethargic attitude.

The figure below illustrates the history of refinancing activity in our sample of Danish fixed-rate mortgages. In each plot, the bars (left vertical axis) represent the number of refinancing households, while the solid line (right vertical axis) shows the history of the mortgage interest rate. The top panel shades each of the bars according to the coupon rate on the old mortgage from which households refinance. The bottom panel shades each of the bars according to the coupon rate on the new mortgage into which households refinance.

*“Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market” by Andersen S, Campbell JY, Meisner-Nielsen K, Ramadorai T. 2015

Danish Mortgage Refinancing

Danish Fat Tax in the scraps

Smor ButterAfter a year in operation the Danish government recently announced that it was to abolish its tax on saturated fats. The idea behind the Fat Tax was to increased the price of unhealthy foods and therefore reduce consumption and improve the health of the population. However in practical terms the tax was a nightmare to administer as it not only targeted chips, burgers, hot dogs etc but also high-end food including gourmet cheeses. According to some critics this was to the worst example of the nanny state. The Economist reported some of the problems:

* Bakers were concerned with fat content in their cakes.
* Pig farmers said their famous bacon would cost more than imports.
* Independent butchers complained that supermarkets could keep their meat prices down as they could spread the cost of the tax across other goods.
* The tax applied on meat was imposed by carcass not per cut, which meant higher prices for lean sirloin steak as well as fatty burgers.
* Before the tax was imposed there was significant hoarding especially in margarine, butter and cooking oil

However there was also a surge in cross border shopping and a study estimated that 48% of Danes had done shopping in Germany and Sweden – sugary drinks, beer, butter etc were no doubt high on the shopping list.