Germany Web: www.cesifo.de Taxes and employment- is Scandinavia an outlier?∗ Preliminary and incomplete- first draft

A key policy question in most countries is how to ensure a high employment rate. At the same time the financing of the public sector is being challenged, in particular due to demographic shifts. The former seems to call for lower taxes, and the later for higher taxes, and hence a difficult policy conundrum is left. Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries- notably the Scandinavian- stand out as contradictions to this view since they have managed to sustain high labour force participation despite high tax rates and a generous social safety net. This paper considers the experience of European countries and Scandinavia and asks whether Scandinavian countries are outliers, and what accounts for the ability to reconcilce high taxes and a generous social safety net with a high labour force particiaption rate. It is argued that while the social safety net is relatively generous it is also very conditional in the sense that benefits cannot be claimed unconditionally and there is a substantial employment focus in the eligibility conditions underlying key welfare arrangements. ∗Paper prepared as part of the DG ECFIN Visiting Fellows Programme. Comment and suggestions made at a DG ECFIN seminar are gratefully acknowledged. 1