An article by Nima Sanandaji, the president of the Swedish think tank Captus
In many European nations taxes, government regulation and public programs have expanded rapidly during the past 50 years. Many people today are dependent on government jobs and handouts whilst others are paying into the system year after year. The political discussion in Western European nations has focused on the short term interest of various interest groups. It might be useful to break the status quo of the political debate and ask ourselves what social model makes sense for Europe.
Sweden is often used as an example of the modern European welfare state and might thus serve as a model for policies in Western Europe. Since the political landscape radicalized in the 60s an important change has occurred in the country. The high taxes and the generous welfare programs have led to a situation where the number of people of working age who are living off public welfare has risen from around 10 to over 20 percent. Reduced incentives to work and labour market regulations have also affected the situation for immigrants. Immigrants have gone from being a group who had a larger labour market participation and higher incomes from working compared with native Swedes to becoming a group that to a large degree lives off taxpayers’ money.
What are we trying to achieve through welfare programs and income redistribution?
A report from the National Institute of Economic Research, a Swedish governmental organization, shows that the incentives to go from handouts to work are relatively small for Swedish workers. The report, published in December 2006, looks at a typical Swedish worker whose employer pays 300,000 Swedish Kronen in employer’s tax and salary (corresponding to some 32,000 Euros). Under the past Socialdemocratic government this person would only gain 12 percent of the 300,000 by working rather than living off unemployment insurance. The reforms implemented by the recently elected center-right government would increase this figure, but only to 14 percent.
If the salary of this worker including employer’s tax is said to be around 14 Euros an hour and he or she worked a typical 8 hour work day, the reward for going to work would be less than 16 Euros per day. But there are also costs associated with working. Going out to lunch rather than staying at home to eat might cost an extra 4 Euros per day. Travel to work might bring on an additional expense of 5 Euros. The reward to the individual for a hard days’ labour would thus shrink to only some 7 Euros for each day spent working. If the alternative to work is a black market job, there would be a considerable loss in going from unemployment to employment.
A recent survey in Sweden showed that a majority of company owners have experienced that people come to job interviews for employment that they are clearly not interested in. The motivation for turning up to these interviews is rather to convince the government that they are actively seeking employment. This is the result of a system that barely rewards the individuals who work.
The European welfare states are based on the idea that individuals only make use of welfare programs when they absolutely need to and that the strong work ethic prevents people from taking advantage of the system. But people slowly adapt to the system and the work ethic declines in view of the low rewards for hard work. We must ask ourselves if this situation is what Sweden’s welfare programs were constructed for. Is it reasonable that welfare systems originally designed to help the very poorest now encompass a large fraction of the national economy? Is it fair that hard work is punished whereas dependence is rewarded? There is a need for a moral and principled discussion of the social system that exists in Sweden and that is mirrored in most European nations.