Scandinavia’s Accounting Trick

While most of the world’s advanced countries face increasing difficulties in coping with the forces of globalization and competition from low-wage countries, the Scandinavian countries -- Denmark, Finland, Norway, and Sweden -- seem to have managed these challenges quite well. To be sure, Scandinavian growth is mediocre. With average yearly GDP growth of 2.2% from 1995 to 2005 it fell short of the non-Scandinavian countries of the EU-15, which grew by 2.8% on average. But Scandinavia is good in terms of levels of per capita GDP and unemployment. Its average per capita GDP was 39% above that of the other EU countries, and on average the unemployment rate stood at 6.7%, compared to 8% elsewhere in the old EU.

What is the secret behind Scandinavia’s success? One explanation of Scandinavia’s strong performance is Sweden’s courageous product market liberalization, the reduced generosity of Denmark’s wage replacement system and the Nokia miracle in Finland. However, while these factors may explain some of Scandinavia’s success, the low rate of unemployment and the high level of GDP per capita also have a much more straightforward explanation: the high share of government employment in the labor force. When private jobs are no longer competitive, government jobs seem an easy solution to keeping people employed.

Indeed, the share of government in employment in Scandinavia is surprising. In Sweden, it amounts to 33.5% of “dependent employment” (total employment excluding the self-employed), and 32.9% in Denmark. On average the share of state employment in the workforce across Scandinavia is 32.7%, compared to only 18.5% on average in the non-Scandinavian countries of the EU-15. In Germany, Europe’s largest economy, the government’s share of the workforce is only 12.2%.

So the high share of government employment contributes to the region’s low unemployment rate. Moreover, it also contributes greatly to the high per-capita GDP figures, for the simple reason that the value-added created by these government jobs is part of GDP, even if it could never have been produced in the market economy.