Behind the scenes, two Swedes helped to shape the country’s economy during the post-War decades. In the early 1950s, Gösta Rehn and Rudolf Meidner were researchers at LO, the blue-collar union federation we met in Chapter 2. They had learned their craft in Stockholm as pupils of Gunnar Myrdal, who went on to win a Nobel Prize for economics in 1974. Both were members of the Social Democratic Party, Rehn on the right – he volunteered to fight the Soviets when they invaded Finland in 1939 – and Meidner somewhere in the mainstream of a party that had long since rejected talk of social revolution. Meidner came from a German Jewish family that had fled the Nazis in 1933; later, his radical ideas about evolutionary roads to socialism would place him on the far-left of the Social Democrats. Neither man was a self-publicist, preferring to address questions of practical economics in trade union and party newspapers.
The problem Rehn and Meidner tackled was this: how, with labour in short supply, could Sweden’s rapidly expanding economy continue to grow without generating an upward spiral of wages and inflation? In 1951, at LO’s national congress, they presented their solution, now known – mostly to a narrow circle of economists – as the Rehn–Meidner model.
In a traditional market for labour, employers compete with each other to hire workers, driving up wages in those sectors where profitability, and therefore the ability to pay those wages, is higher. This creates pockets of high and low pay across the economy, and sows strife within the unions as members in one sector see their wages rise while others lag behind. To prevent this from happening, Rehn and Meidner made the following proposal: wages should be set centrally, on the principle that workers doing broadly similar jobs should get roughly the same wages – regardless of a company’s ability to pay them. Such a system automatically favours profitable firms for which the wages are affordable, meaning they can invest their profits into further expansion instead of having to fight off wage demands from workers wanting a bigger slice of the pie. Simultaneously, companies – even entire sectors – with low profitability are forced either to raise their game to pay higher wages, or to shut down altogether.
The system is deliberately designed to secure a shift in employment from lower- to higher-productivity enterprises. In this way, Rehn and Meidner argued, the overall productivity of Swedish industry would be boosted, as non-productive industry would have to adapt or die. Companies with low productivity would be denied the lifeline of cutting wages to survive. Moreover, if wage levels were set by those sectors that were competing on world markets, productivity would be driven by global manufacturing standards, ensuring that Swedish companies stayed internationally competitive. At the same time, competitive businesses would generate tax revenues to continue funding a generous welfare state.
Sweden’s employers were receptive to this idea. Collective agreements and central coordination of pay increases, they reasoned, would dampen wage pressures arising from competition for workers and local trade union militancy. The country’s export-oriented corporations already faced fierce competition from their global counterparts, so they had to keep their wage costs below the level dictated by the domestic market. To be able to do this, they needed to control the process of wage formation. Since their famous truce of 1938, union and business leaders had established a degree of mutual trust, which would be essential for a wages system such as that proposed by Rehn and Meidner. Even more attractive to business was that unions would agree not to launch any strikes once pay negotiations were concluded, which meant industrial peace was hardwired into the model.
Workers, however, would need to accept losing their jobs as global market forces drove Swedish industry to constantly restructure itself. To sugar this pill, the Social Democratic government agreed to generous unemployment benefits and ‘active’ labour-market policies, helping workers between jobs to retrain and reskill themselves to enter expanding, profitable sectors. The traditional trade union demand for job security was replaced by security of transition into new jobs. The system therefore encouraged rationalisation and efficiency, but demanded public investment in education and training in return.
This unusual aspect of the Swedish model is almost tailor-made to accommodate the ‘creative destruction’ that liberal economists describe as the fundamental dynamic of capitalism, believes Thomas Carlén, a descendant of Rehn and Meidner at the economics research department of LO. ‘Because the Nordic model is focused on managing labour transitions,’ he says, ‘security lies in the notion of employability, rather than in the protection of existing jobs. The model is designed to facilitate restructuring. The state, unions and employers ensure that there are measures available to support displaced workers in finding new jobs.’
Some unusual consequences followed from this. First, the Swedish trade unions became pro-market and pro-globalisation. They saw the value of milking the capitalist cow rather than trying to slaughter it, but decided that they had to keep it healthy to get the most milk. Consequently, there were many examples in the 1960s of union representatives at both national and local level agreeing to job losses in stagnating low-wage industries such as textiles, where they would refer to the need for a mobile workforce and structural change. To this day, LO says it regards globalisation, structural transformation, technical advances and openness to the world as ‘opportunities rather than threats’, and it backs free trade instead of protectionism.
This attitude has taken root in Swedish society. In an official EU survey in 2017, 86 per cent of Swedes – the highest among all EU countries – agreed with the statement that ‘globalisation is an opportunity for economic growth’, compared to an EU average of 62 per cent. Regarding automation and new technology, 80 per cent of Swedes expressed positive views about robots and artificial intelligence, according to a recent survey by the European Commission. By contrast, a survey by the Pew Research Center found that more than 70 per cent of Americans were worried about a future in which robots and computers carry out work in place of humans.
The Rehn–Meidner framework also created a powerful moral climate that discouraged workers from sitting back and enjoying their unemployment benefits. Payment of compensation was often conditional on accepting job offers or retraining schemes, and it came to be seen as verging on the criminal not to relocate and take jobs in other cities. There was a ruthless pragmatism behind the encouragement of the workforce to move to where it was needed. ‘There was a lot of pressure on the unemployed, precisely because we had these training programmes, which essentially forced people to move to other cities to get work,’ says Johannes Lindvall, professor of political science at Lund University. ‘It is a mistake to think that the model was a cushy, collectivist system that emphasised only rights and not responsibilities – but there was also a lot of investment when people made the transition to new jobs.’
The system of centralised wage bargaining also gave rise to a remarkably flat society in terms of earned income, with minimal differentials between workers’ wages. Wages for the lowest paid were – and still are – higher than the salary that the market wants to pay, while wages for higher-paid workers were similarly lower than a level set by a free market in labour. For this reason, this was known as a policy of ‘solidarity wages’. From the early 1960s to the early 1980s, the wage distribution for blue-collar workers was compressed by a whopping 75 per cent, so that a pay rise of 30 per cent was enough to carry a worker from the lowest 10 per cent all the way to the highest.
In a more conventional labour market, this might be seen as destroying incentives for workers to improve their productivity – how can managers encourage their staff without the carrot of financial reward? In sharp contrast with the United States, Sweden showed a weak relation between the value added per worker – their productivity – and their wages. Nevertheless, this unusual set-up seemed to deliver a sharp boost to Sweden’s overall economy, at least in its early stages.