Research on Finnish Society

Mauno Koivisto Lecture 2014
The Nordic welfare model and welfare services – Can we maintain acceptable standards?

Torben M. Andersen
Department of Economics and Business, Aarhus University

A key feature of the Nordic welfare model is provision of welfare services like care, education and health. They are individual entitlements, and collectively financed. It is a prerequisite that contemporary standards of services are provided; thus the public solution is not a second rate solution used only by those who cannot afford better solutions. Can the Nordic welfare model meet this objective in the future? Increasing productivity and wealth challenge this. Services tend to have lower productivity growth and thus to become more expensive (Baumol’s cost disease), but also to have a high income elasticity, and thus demands rise alongside improved material living standards (Wagner effects). The same implies to leisure, implying that tax bases may be eroded. In short, expenditures are on an upward drift and revenues on a downward trend, challenging the financial viability of the welfare model. This seems to leave a conundrum for the welfare state in the sense that the success of the model in improving living standards tends to undermine the possibility of attaining key objectives of the welfare state. It is argued that although the welfare state will be financially strained, these challenges can be met without jeopardizing its fundamental objectives.

Keywords: Baumol, Wagner, Welfare services, productivity

Full Text (PDF)