There are those who believe that Sweden has a low level of unemployment. This is far from the truth. The combination of high taxes, generous government benefits and a regulated labor market has led to many Swedes to rely on handouts rather than work. The system does succeed in one thing: hiding the true unemployment.
A few years ago, the Swedish economist Jan Edling noted that the number of people on sick leave and early retirement tended to correlate strongly with unemployment figures. The reason, Edling explained, was that many of the unemployed were hidden from the statistics through these measures.
Far from being a right-leaning economist, Edling at the time worked for LO – an influential labor union with strong official and unofficial ties to the then-ruling Social Democratic party. The claim that the Swedish welfare state hid actual unemployment through various measures was unpopular among Swedish socialists. So unpopular in fact that Edlings report was not published, causing him to resign after 18 years faithful service.
Four years ago a center right government was elected with the promise to reduce visible and hidden unemployment. The government has had some success in this, at last before the financial crisis hit and again raised unemployment. Tax cuts and reduced generosity of government benefits have promoted work over dependence. However, among one group reliance on government has not decreased: young people who are relying on early retirement for their living.
The concept of relying on early retirement among the relatively youthful might sound a bit strange. Swedish politicians have even changed the term “early retirement” into “activity and sickness compensation” to make it sound more acceptable. And it has oddly enough become more or less an accepted fact that many young Swedes who cannot find a job instead rely on early retirement – often on a permanent basis.
Since 2004 close to 70,000 Swedes in the ages 20-39 have been supported by early retirement. This represents close to three percent of the total population among this age group living in the country. In the Stockholm region, where the labor market is strong, two percent of the young population is living on early retirement. In regions where jobs are scarcer, the figure is four percent. Even among the youngest group – those between 20-24 years – more than two percent of Sweden’s population is being supported by early retirement.
One reason for the popularity of early retirement is because of the increasing troubles for young Swedes to find employment. According to Statistics Sweden, the unemployment amongst those between 15-24 years was fully 24 percent in the beginning of 2009. Although Sweden does not have minimum wages set by the government, the vast majority of the employers have to follow labor union contracts and the contracts in turn include very high effective minimum wages.
Not only is the price of youth labor set too high for demand to meet supply, but employers find it too risky to hire inexperienced youth since rigid labor market regulation make it difficult to fire those who do not perform well on their job.
The high unemployment amongst youth is not only an economical, but also a social issue. Many young people feel depressed since they cannot find a meaningful purpose and cannot contribute to society. This feeling, strong among the youth who are not even officially employed, but rather hidden from the statistics through early retirement, sick leave or other systems.
The OECD measures the percentage of those who are officially declared to be outside of the workforce but view themselves as being unemployed. This group is referred to as “discouraged workers”. In countries such as Denmark, Germany and the United Kingdom only 0.1 percent of the labor force of 15-24 year olds is composed of discouraged workers. In Sweden, the figure is almost a hundred times higher.
The Swedish welfare system is seen as many as a role model. When it comes to creating opportunities for the youth however, Sweden could learn much from free-market systems. Or for that matter it could learn from neighboring welfare state Denmark, which has combined welfare mechanisms with a dynamic labor market. The combination, coined by previous Social Democratic Prime Minister Poul Nyrup Rasmusson as “flexicurity”, is far superior to the system of high effective minimum wages and rigid labor regulations introduced by the Social Democrats and their labor union allies in Sweden.
Nima Sanandaji is the CEO of Swedish think tank Captus, and author of a report on early retirement among the youth for the think tank Timbro.
Photo: by Claudio.Ar