In the Making

15.01.2014 HØGSKOLEN I BUSKERUD OG VESTFOLD 1

The Nordic Model:

Efficiency and Equality

From conflict to cooperation

POL-3001 and B31QD

Jon Reiersen

January 23, 2014

15.01.2014 HØGSKOLEN I BUSKERUD OG VESTFOLD – PROFESJONSHØGSKOLEN 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


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.

4



The relationship between wage inequality and the

degree of centralization of wage bargaining:

Wageinequality

Degree of centralization of wage bargaining

Why?

Source: Wallerstein (1999)

Degree of centralization

Wage inequality

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.


• 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.

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Today we will discuss the following question:

What made centralized wage bargaining

possible in Norway? Under what conditions were

the first steps taken?

18


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).

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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.

20


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

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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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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.

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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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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.

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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?

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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.

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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?

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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 , 5b , 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.

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Cooperation Conflict

Cooperation

Conflict

LO

NAF

d , b

c , cb , d

a , a

Note: a > b > c > d

��: Player i’s belief about

the probability that jwill cooperate.

Player i cooperate if :

Expected payoff from cooperation Expected payoff from conflict

Trust is reflected in the parties’ beliefs abouteach other.

�� + 1 − �� > �� + 1 − ��

�� >� −

� − � + � − ≡ ��

∗


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1

p

0 p*

Mistrust and conflictsbreads mistrust andconflicts. (Norway before 1935)

?

CooperationConflict

Trust and cooperationbreads trust andcooperation. (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 1’s beliefsabout player 2

��∗

��∗

Cooperativeequilibrium

Non-cooperativeequilibrium

Initial state

Two types of changes took place:

1) A gradual change in beliefs.2) Changes in payoffs related to the different strategies.

Player 2’s beliefsabout player 1 Equilibria in the Coordination Game


37

0 1

1

��

��

��∗

��∗

Cooperativeequilibrium

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

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Partnership ofthe 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


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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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This creates a state in which the parties step

away from conflict as their main strategy and

start working for more peaceful industrial

relations.

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1

p

0 p*

Mistrust and conflictsbreads mistrust andconflicts.

CooperationConflict

Trust and cooperationbreads trust andcooperation.

The signing of the Main Agreement in 1935 was one result of this change in strategy.

In the Making

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