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Labor Supply, Tax Base, and Public Policy in Sweden

Labor Supply, Tax Base, and Public Policy in Sweden

(p.127) 4 Labor Supply, Tax Base, and Public Policy in Sweden
Reforming the Welfare State
Thomas AronssonJames R. Walker
University of Chicago Press

Sweden's diverse set of social insurance programs provides a high safety net for its citizens but requires a high rate of taxation. Social insurance programs create their own disincentives for market work. Historically, Sweden's programs have been robust to individual malfeasance, yet there is an emerging evidence that malfeasance is on the rise. This chapter explores studies on labor supply from crisis through recovery. The welfare state creates strong incentives to be in the labor force by making many benefits conditional on labor force participation, but it also creates strong incentives not to work many hours, which helps explain why Swedes work relatively few hours. Much of the labor supply adjustment in Sweden, however, takes place in dimensions other than contracted hours of work. The reform increased the long-term viability of the pension system and improved incentives to save and work. Here, Sweden is ahead of the United States—where the private pension system has been in crisis and where there is no national consensus on how to deal with social security—and the United Kingdom, where pension system reforms created a funding crisis. Sweden will need to increase self-insurance of small (short-term) risks and may need to increase the monitoring of benefits to limit the free riding that stems from the apparent shift in norms away from market work.

Keywords:   labor supply, tax base, public policy, Sweden, social insurance, welfare state

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