Nordic Model: Comparing The Economic System to the U.S.

What Is the Nordic Model?

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

Understanding the 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, child care, and other services associated with human capital; and strong labor-force protections through unions and the social safety net. There is no minimum wage because unions ensure that wages remain high.

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. These Scandinavian 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.

The Nordic Model vs. the U.S. System

The Nordic model is paid for by some of the highest tax rates in the world. In 2019, tax revenues as a percentage of gross domestic product (GDP) were approximately 46.3% in Denmark, 39.9% in Norway, and 42.9% in Sweden, according to the Organisation for Economic Co-operation and Development (OECD). That compares to the 24.5% of GDP raised by the United States through taxation in 2019.

According to TradingEconomics.com, in 2018 Sweden’s top personal income tax rate was 57.3%, Denmark’s was 55.8%, and Norway’s was 46.6%.   Tax rates in these countries are relatively high on nearly all income, not just that of wealthy people.

By comparison, the top tax bracket in the U.S. in 2018 was 37% and only levied on individuals who make $500,000 or more ($600,000 for married couples filing jointly). A key theme under debate in the 2020 U.S. elections was whether or not the Nordic model, also known as democratic socialism, could work here.