DEFINITION of 'Nordic Model'

The Nordic Model The social welfare and economic systems adopted by Nordic countries. The Nordic model combines features of capitalism, such as a market economy and economic efficiency, with social benefits, such as state pensions and income distribution. This model is most commonly associated with the countries of Sweden, Norway, Finland, Denmark, and Iceland.

BREAKING DOWN 'Nordic Model'

The Nordic model embraces both the welfare state and globalization – two approaches to government that can be seen at times as opposites. The core aspects of the Nordic model include the public provision of social services funded by taxes; investment in education, childcare and other services associated with human capital; and strong labor force protections through unions and through the social safety net.

Risk Sharing

The Nordic model emphasizes society-wide risk sharing and the use of a social safety net to help workers and families adapt to changes in the overall economy brought on by increased global competition for goods and services. The region’s economies have benefited from cultural homogeneity, political freedoms, and low levels of corruption.

Much of the model is based on how Nordic cultures have developed over the centuries. The citizens have a high degree of trust in their government and a history of working together to reach compromises and address societal challenges through democratic processes. Citizens believe that both public institutions and private companies have their best interests in mind through a general social contract, with an emphasis on fairness.

Maintaining economic growth while providing social welfare services requires Nordic countries to emphasize workforce participation. Nordic governments have to create incentives for their citizens to continue to work despite having generous welfare benefits. The finances of Nordic governments are generally considered strong, with economic growth steady. This was not always the case, as several Nordic countries struggled with low productivity and high unemployment during the 1990s.

This is all paid for by some of the highest tax rates in the world. Notes the Tax Foundation, tax revenue as a percent of GDP from individual income taxes and payroll taxes in Denmark are 26.4%, Norway, 19.7%, and Sweden, 22.1%. That compares to the 15% of GDP raised by the United States through its individual income taxes and payroll taxes.  For example, the foundation states that Denmark’s top marginal effective income tax rate is 60.4% and Sweden’s is 56.4% while Norway’s top marginal tax rate is 39%. Tax rates in these countries are relatively high on nearly all income, not just that of wealthy people.

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