Scandinavia hailed as success at World Economic Forum
Scandinavian countries are the most successful in the world at fighting wage inequality, a leading economist told the World Economic Forum annual meeting in Davos.
Christopher Pissarides (pictured), professor of economics at the London School of Economics and former Nobel laureate, said during an issue briefing on 22 January, that citizens around the world suffer extreme inequality. But, he added that simple wealth redistribution and “punishing people on high incomes” is not the answer.
Redistribution, he said, “takes away the incentive for lower-skilled people to acquire skills and go into the labour market, and creates disincentives for higher earners to stay in the country, work hard and look for new ventures to make money.” Instead, he said, governments should come up with “more imaginative and creative ways of redistributing incomes” – something the Scandinavian countries are “the most successful” at.
Pissarides picked the example of Sweden where tax rates can be as high as 60%. He said that the Swedish government uses tax revenues to create jobs and provide services that would not otherwise be created by the free market at reasonable prices.
He said the best example is subsidised childcare, which allows both parents to work, and creates jobs for carers. This, he said, “is boosting the income of the family, as well as the childcare worker because their salary is subsidised, and it reduces inequality”.
Couples on lower incomes, who would not be able to afford expensive childcare, can stay in the workforce while raising a family, he said. And the carers receive a decent income because their wages are subsidised by the state.
However, Pissarides added that one essential reason the Swedish model works is that citizens have faith in the state: “[In Sweden], because people have trust in the public sector to make use of the money, they pay it and tax evasion is very low.”
This, he argued, stands in stark contrast with countries such as Italy, where “citizens don’t see the results of paying their taxes in anything other than extremely highly paid politicians and civil servants.”
He added: “Taxes in Italy are almost as high as in Sweden, but the money goes to the highest-paid politicians, highest-paid senior civil servants, and a big civil service – [there is] no market-driven provision of services which will create jobs,” he said.
However, he said that Italy’s prime minister Matteo Renzi is doing a fantastic job in trying to reform this system and moving in the right direction.
Asked by a member of the audience to give his view on a report by anti-poverty charity Oxfam, which found that by next year 1% of the world’s population will own more wealth than the other 99%, Pissarides said: “It’s a shocking statistic and given the inequality it’s not difficult to construct other shocking statistics. It’s obviously something to worry about, but my view is that the real issue, and what you should really address, is poverty.
“I think we’d be doing better by emphasising ways of reducing poverty rather than by sensationalising the issue by saying how much the very rich people are worth.”