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The Nordic Model:
Efficiency and Equality
From conflict to cooperation
POL-3001 and B31QD
Jon Reiersen
January 23, 2014
15.01.2014 HGSKOLEN I BUSKERUD OG VESTFOLD PROFESJONSHGSKOLEN 1
Three core institutional features that
characterize the Nordic countries
1. Better organized employers (employer
federations)
2. Better organized and stronger unions (union
federations)
3. Institutionalized collective bargaining systems
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Data and cross-country comparisons clearly
shows that the organization of the labor market,
in particular the wage-bargaining system, affect
the distribution of wages and income.
3
How to measure inequality?
Difference between percentiles (for example
p90/p10). Big numbers = high wage or income
inequality.
Gini coefficient: Represents the percentage of
total wage/income that would have to be
redistributed in order to achieve perfect
wage/income equality. Big numbers = high wage
or income inequality.
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The relationship between wage inequality and the
degree of centralization of wage bargaining:
Wage
inequality
Degree of centralization
of wage bargaining
Why?
Source: Wallerstein (1999)
Degree of centralization
W
a
g
e

i
n
e
q
u
a
l
i
t
y
Centralized wage bargaining =>
equalization of wages across firms
(equal pay for equal work) + possible to
implement solidaristic wage
bargaining (the lowest paid have been
lifted, wages on the top have been held
down.
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Still, the goals of centralized wage bargaining
and solidaristic wage policy were originally
defended more in terms of efficiency than in
terms of equality.
To understand this it is important to understand
the historical conditions for the development
of centralized wage-bargaining and solidaristic
wage policy (see Reiersen (2013).
Let us first take a look at some figures related to
the current situation of the Norwegian labor
market.
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Centralized and coordinated wage bargaining has
been essential for the development of the Nordic
model (see Moene and Wallerstein (1995), Moene
and Wallerstein (2006a), Moene and Wallerstein
(2006b).
Many of the central features often associated
with the Nordic model is a direct result of
centralized wage bargaining.
We will give examples and discuss this in detail
later.
17
Today we will discuss the following question:
What made centralized wage bargaining
possible in Norway? Under what conditions were
the first steps taken?
18
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An important step towards centralized wage
bargaining in Norway:
The Basic Agreement (1935)
An agreement between the Norwegian
Confederation of Trade Unions (LO) and The
Norwegian Employers Confederation (NAF).
19
The Basic Agreement established rules for
collective bargaining at the industry level.
Although the Basic Agreement has been altered
throughout the years, the agreement still plays
a key role in the regulation of the relationship
between the parties of the Norwegian labor
market.
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More importantly: The Basic Agreement in 1935
marks a turning point in the history of labor
relations in Norway.
The labor market went from conflict to
cooperation.
21
The Norwegian labor market in the interwar
period:
A lot of strikes and lockouts.
Number of labor conflicts in Norway
22
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The Norwegian labor market in the interwar
period:
Millions of workdays lost due to labor conflicts
23
22 million working days were lost in the period
1921-1931 (40 times larger than the number of
workdays lost in 1962-72).
The number of working days lost in one year
1931 was three times larger than the total
number of working days lost over the period
1945-70.
The Norwegian labor market in the interwar
period:
While the population were relatively homogenous in
terms of religion and language, the population were
far from homogenous in terms of living conditions:
High wage and income inequality
The social and economic gap between urban and rural
residents was huge
Unemployment was record high
Norway were far from an affluent country
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The Norwegian labor market in the interwar
period:
Norway (together with Sweden) experienced the
highest levels of industrial conflict in the world.
Nordic workers were well known for their
extraordinary militancy.
Employer were equally militant in defending
their interests. More working days were lost
in lockouts than in strikes.
25
The Norwegian labor market in the interwar
period:
The high level of conflict contributed in shaping
the parties beliefs about each other beliefs that
indicated that the opposite party was not
prepared to cooperate.
The parties beliefs about each other was also
shaped by the ruling ideology within the labor
movement, where the employers and the labor
process were interpreted by Marxist-inspired
concepts like conflict and struggle.
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The Norwegian labor market in the interwar
period:
The Labor Party adopted the following statement
at its party conference in 1930: The labor
movement must have complete freedom to act
toward the capitalist class and the capitalist state.
The party is therefore an opponent of every form of
cooperation between classes ().
Within this interpretive framework, cooperation
with the employers implied a legitimization of an
opposing party whose removal was actually
desired.
27
The Norwegian labor market in the interwar
period:
For the employers it was difficult to accept an
opposite party that believed their existence was
undesirable, and in addition created injustice.
Trust, cooperation and mutual respect were not
a prerequisite for the Nordic model.
Trust, cooperation and mutual respect is a result of
the Nordic model (Moene and Wallerstein (2006)).
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This begs the question:
How was it possible to make the transition from
deep ideological conflicts and open class struggle
to the trusting cooperative relationship that
emerged in Norway during the 1930s?
What led the parties, both of which carried a
historical experience of the other as the enemy,
to begin to seek out cooperation?
29
The analysis in Reiersen (2013) is centered
around the concept of beliefs (trust).
Both parties in the labor market carried with
them a historical experience (beliefs) of the
other as the enemy.
Their belief was that the other party was not
interested in cooperation.
This led both to choose conflict as their main
strategy.
30
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The outcome was conflict, which in turn
confirmed the parties beliefs that the opposite
part was not interested in cooperation.
The parties were trapped in a situation where
distrust and lack of cooperation led to reinforced
distrust and continued lack of cooperation.
But when ending up in a situation like this,
how do you get out of it?
31
Main argument of the paper:
During the interwar period several events took
place which contributed to changes in both the
structural conditions facing the parties and
the beliefs the parties carried with them.
These changes led the parties to consider
cooperation instead conflict as their main
strategy.
Some formalization:
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Cooperation Conflict
Cooperation
Conflict
Unions Confederation
Employers Confederation
7 , 7
d , b
5 , 5 b , d
a , a
c , c
Norway before
1935
Norway after
1935
?
Note: a > b > c > d
The parties will only choose Cooperation if they trust each other.
34
Cooperation Conflict
Cooperation
Conflict
LO
NAF
d , b
c , c b , d
a , a
Note: a > b > c > d

: Player is belief about

the probability that j
will cooperate.
Player i cooperate if :
Expected payoff from cooperation Expected payoff from conflict
Trust is reflected in
the parties beliefs about
each other.

+ 1

>

+ 1

>

+

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35
1
p
0 p*
Mistrust and conflicts
breads mistrust and
conflicts.
(Norway before 1935)
?
Cooperation
Conflict
Trust and cooperation
breads trust and
cooperation.
(Norway after 1935)
The interwar
period in
Norway:
1) A gradual change in beliefs both
among the employers and in the trade
union movement.
2) Changes in payoffs related to the
different strategies; conflict and
cooperation.
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0 1
1
Player 1s beliefs
about player 2

Cooperative
equilibrium
Non-cooperative
equilibrium
Initial
state
Two types of changes took place:
1) A gradual change in beliefs.
2) Changes in payoffs related to the different strategies.
Player 2s beliefs
about player 1 Equilibria in the Coordination Game
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0 1
1

Cooperative
equilibrium
Initial
state
1935
Two types of changes took place:
1) A gradual change in beliefs.
2) Changes in payoffs related to the different strategies.
Equilibria in the Assurance Game
38
Partnership of
the leaders of
LO and NAF Withdrawal of the
government from the
wage negotiations
Rationalization and
increased productivity
Power balance
Growth of
fascism
Fights against
unemployment
New economic
thinking and
crisis plans
Cross class
alliances
COOPERATION
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Partnership of the top leaders:
Informal (often secret) meetings between the top
leaders of LO and NAF affected the outcome of
several of the conflicts in the 1920s.
The indirect effects of these meetings were
probably more important. They contributed to the
gradual establishment of trust between the top
leadership of the two organizations.
39
Crisis plans and fight against
unemployment:
1930s: Record high unemployment. New economic
thinking on its way. The government was
ascribed a more active role in the effort to
stimulate demand.
What would keep the increased government
spending from raising the wages of insiders in the
labor market, rather than increasing
employment?
The employers played an active role to find a
solution to this problem.
40
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Crisis plans and fight against
unemployment:
The employers wanted to take the wages out of
the hands of local unions.
Their approach was not to ban unions in order to
hold wages down. Their strategy was to give more
power to the leaders of the labor movement as a
whole, to centralize wage bargaining, and thus
strengthen unions as institutions.
This was an idea that the leadership of LO could
easily support.
41
Cross class alliances:
Centralized wage bargaining was an institutional
response to the problems that threaten the goal of
full employment.
Centralized wage bargaining was also an
institutional response to the problems facing
firms in the export sector.
Unions in the export sectors wanted to take the
wages out of the hands of militant local unions
representing workers in firms that were sheltered
from foreign competition.
42
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Cross class alliance:
Unions in the export sectors went into an alliance
with the employers (cross class alliance).
They both wanted a system where the aggregate
wage growth in the economy should be tied to the
conditions in the export sector. This called for
wage coordination and a centralization of wage
negotiations.
This was a powerful coalition since the unions in
the export sector were the largest within the
national confederation.
43
Other events that led to a shift in the parties
main strategy.
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Withdrawal of the government:
1927: The conservative government states that
they wish to withdraw from the wage bargaining
process and leave the wage settlement to the
parties of the labor market (affirmed by
subsequent governments).
Without guarantees from a powerful third party
who could enforce a particular solution, it became
increasingly clear for the parties that they had to
make a decision between continued confrontation,
and greater efforts toward cooperation. The last
option seemed to gain ground.
45
Rationalization:
During the 1920s a belief gradually spread
throughout the union movement that increased
productivity and higher earnings for the
companies could be more effective in achieving
the goals of work for everyone and increased
wages, than strikes and class-struggle.
Improved productivity implied that the cost of
production stops grew.
Strikes seemed less attractive for the unions and
lockouts seemed less attractive for the employers.
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Power balance:
1931: The most wide-ranging labor conflict in
Norway to that date took place.
The conflict ended in a draw. A power balance
appeared to have been established.
Both parties seemed to realize more and more
that labor and capital are tied to one another
whether they liked it or not.
47
Growth of fascism and totalitarian
regimes:
The interwar period: The growth of fascism
represented a serious threat to the organized
labor movement in many European countries.
It became more apparent to the leadership of LO
that cooperation over pragmatic solutions was
necessary in order to avoid ending up in the same
desperate situation that the union movements in
many other countries found themselves in.
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Conclusion:
With the start of the 1930s, a situation emerge
where external events (the governments
withdrawal from the wage negotiations, the
growth of fascism, economic crisis) and internal
events (a trust between the top leadership,
balance of power between LO and NAF and new
alliances across the two organizations) join
together with modernization and improved
productivity which make the rewards of
cooperation increasingly greater.
49
This creates a state in which the parties step
away from conflict as their main strategy and
start working for more peaceful industrial
relations.
50
1
p
0 p*
Mistrust and
conflicts
breads mistrust and
conflicts.
Cooperation
Conflict
Trust and cooperation
breads trust and
cooperation.
The signing of the Main Agreement in 1935 was one
result of this change in strategy.