The rise and fall of the Swedish model - interview with Swedish economist Rudolf Meidner - Interview

Challenge, Jan-Feb, 1998 by Bertram Silverman

Introduction by Bertram Silverman

By the end of the 1940s, Swedish social democrats, like most socialists in Western Europe, had abandoned the goal of socializing production as the primary way of reforming capitalism. Instead, they sought to construct a welfare society within a capitalist structure. As affluence spread after World War II, most social democrats came to realize that the market system could achieve the goals of rising income and high employment. These golden years of high growth rates, full employment, and balanced foreign trade ended Sweden's brief flirtation with nationalization and planning, which had arisen in response to wartime conditions. But clouds appeared to darken Sweden's increasing prosperity. What came to be known as the "Swedish model" was a response to threatening economic problems.

The most significant postwar issue was the looming conflict between full employment and price stability. The task of rebuilding a war-ravaged Europe and rising real income at home had pushed demand for Swedish products beyond the nation's productive capacity. Labor shortages caused wages to increase faster than productivity, inducing cost-push inflation. The social democratic government responded by introducing various income-policy measures, including a wage freeze in 1949-50. But these restrictions on wages failed, and they undermined workers' confidence in their unions. Economists within the LO (Swedish Confederation of Trade Unions) reacted by developing a strategy to resolve the conflict between full employment and price stability. Named after its chief architects, Gosta Rehn and Rudolf Meidner, the plan became a central part of the Swedish model.

The Rehn/Meidner plan proposed that the government use restrictive fiscal and monetary policies to ensure that aggregate demand for goods and services was kept below the full employment level as a way of reducing wage-cost pressures. Full employment would be achieved through labor-market measures, such as retraining and travel allowances designed to make workers more employable. Active labor-market policies have been an important component of Sweden's non-inflationary full-employment strategy.

The Swedish model also sought to create a more equal society. This was achieved in two ways. First, the government implemented a comprehensive and universal welfare system based on generous transfer payments and extensive public and social services. Second, the unions instituted what they called a wage policy of solidarity. Under solidaristic wage guidelines, workers doing the same work were to be paid the same wages regardless of the firm's profitability, size, or location. At the same time, the wages of lower-paid, less-skilled workers were to increase more rapidly than the more-skilled, higher-paid employees. Sweden's highly centralized collective-bargaining system and cooperation between the trade union confederation (which had organized 85 percent of the workforce) and the employers' confederation made it possible to implement the solidaristic wage policy.

Two consequences followed from the wage policy of solidarity. On the one hand, less efficient firms unable to pay the higher wage costs for less productive workers were forced to either rationalize their operations or shut down. This created pockets of unemployment. On the other hand, more profitable firms gained excess profits as a result of the wage constraints exercised by the well-paid workers. The unemployment problem was resolved through active labor-market programs. The second problem was addressed by a plan pioneered by Rudolf Meidner.

Under the Meidner plan, part of the "forfeited" wage increases of the more skilled workers would be transferred into collective wage-earner funds as a way of sharing the excess profits that employers accumulated because of union wage constraints. Had it been implemented, the Meidner plan would have provided a mechanism for greater trade-union participation in investment decisions. But the Social Democratic party did not endorse the Meidner plan, and it never became part of the Swedish model.

Until the end of the 1980s, Swedish social democrats could proclaim that the primary goals of the Swedish model - full employment and equality - had been achieved. Unemployment rarely rose above 2 percent, and as more women sought paid employment, Sweden's labor-force participation rate was among the highest in Europe. At the beginning of the 1980s, Sweden had the most egalitarian wage structure in Western Europe. Public expenditures reached a peak of 55 percent of the gross domestic product financed by the highest taxes in Western Europe. Thus, a substantial part of the economy was not regulated by market rules. Not surprisingly, by the early 1970s many social democrats had begun to feel that Sweden was on its way to constructing what a popular Swedish prime minister, P.A. Hansson, called a "people's home" - a place where all Swedes would be treated like members of a family and where such values as equality, cooperation, helpfulness, and security would prevail. No wonder the Swedish model became a symbol for a Europe put on the defensive because of the rise of neoliberalism and the disintegration of state socialism.