The Swedish working class has very strong historical ties to the Social Democrats. But they also have very strong work ethics, and don’t like the fact that so many people are not working and living more or less permanently of the state. This insight formed the ingenious political strategy of Fredrik Reinfeldt and Anders Borg, who made the lack of jobs and high welfare dependency (rather than per capita income) the central argument in the political debate.
Because of its inability to fix this problem, in 2006 the Social Democrats were voted out of power in Sweden. The new center-right government undertook a quite dramatic range of supply side policies, including large tax cuts, reduced unemployment insurance and tighter rules for sickness insurance. People going on early retirement and sick-leave are particularly big problems in Sweden, despite the fact that Swedes are very healthy.
The goal, and the promise to voters, was to increase labor supply.
But as we all know the crisis hit Sweden in 2008, making unemployment increase dramatically due to reduce demand (both for our exports and internally). Keynesians tell us that when there are demand problems, supply side reforms have no effect.
Once again Sweden is proving this wrong.
According to new data from Statistics Sweden dependency on government welfare program was sizably lower in the first quarter of 2010 than 4 year ago.
In the first quarter of 2006, 11.7% of the Swedish population lived of government transfers in full year equivalence terms. (in this measure if you live of the taxpayers for 6 months you are counted as only 0.5 people).
In the first quarter of 2010 this number was reduced to 9.6%.
In fairness to the Social Democrats, some of this change took place before the new center-right policies had any effect. Nevertheless managing to reduce the dependency rate by one fifth while the world economy was crashing shows us the power of economic incentives, even in the archetypical welfare state.
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