Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2013:1: In-Work Benefits and the Nordic Model

Ann-Sofie Kolm () and Mirco Tonin ()
Additional contact information
Ann-Sofie Kolm: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Mirco Tonin: University of Southampton (and Central European University, Budapest; IZA, Bonn), Postal: Economics Division, University of Southampton, Southampton, SO17 1BJ, United Kingdom

Abstract: Welfare benefits in the Nordic countries are often tied to employment. We argue that this is one of the factors behind the success of the Nordic model, where a comprehensive welfare state is associated with high employment. In a general equilibrium setting, the underlining mechanism works through wage moderation and job creation. The benefits make it more important to hold a job, thus lower wages will be accepted, and more jobs created. Moreover, we show that the incentive to acquire higher education improves, further boosting employment in the long run. These positive effects help counteracting the negative impact of taxation.

Keywords: Nordic model; in-work benefits; wage adjustment; unemployment; education; skill formation; earnings

JEL-codes: H24; J21; J24

30 pages, January 10, 2013

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