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. Also known as the Scandinavian model, it is most commonly associated with the countries of Scandinavia: Sweden, Norway, Finland, Denmark, and Iceland.

Key Takeaways

  • The Nordic model combines elements of capitalism and socialism.
  • Important features of the Nordic model include public provision of social services, investment in services associated with human capital, and a strong social safety net.
  • Society-wide risk sharing is a cardinal component of the Nordic model.

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 is paid for by some of the world’s highest tax rates.

The Nordic Model vs. the U.S. System

This is all paid for by some of the highest tax rates in the world. Tax revenues as a percent of GDP from individual income taxes and payroll taxes in 2017 in were approximately 25% in Denmark, 13% in Norway, and 19% in Sweden, according to the Organisation for Economic Co-operation and Development (OECD). That compares to the 16.5% of GDP raised by the United States through its individual income taxes and payroll taxes in 2018, according to the Center on Budget and Policy Priorities, a Washington, D.C.–based nonpartisan research and policy institute.

According to TradingEconomics.com, in 2018 Sweden’s top personal income tax rate was 61.85%, Denmark’s was 55.8%, and Norway’s was 38.52%. 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 2019 is 37%, and it is only levied on individuals who make $510,300 or more ($612,350 for married couples filing jointly). There is an ongoing debate in America, currently being played out in the 2020 presidential election, as to whether or not the Nordic model, also known as democratic socialism, could work here.