In a country that has been ruled by the Social Democrats for 65 out of the past 76 years, opportunities for fundamental economic reform do not come often. It is for this reason that one has to regret the very tepid pace of reform in Sweden since Frederick Reinfeldt took office as head of a center-right coalition government in September 2006. With Prime Minister Reinfeldt’s popularity now declining rapidly, and with global economic conditions souring, the prospects for reform look even dimmer. 

The need for basic economic reform in Sweden would appear to be self-evident. As the Organization for Economic Cooperation and Development frequently reminds us, the gap between Sweden’s level of GDP per capita and those of the world’s other advanced industrialized countries remains larger today than it was before Sweden’s economic crisis in the early 1990s. Indeed, despite relatively rapid economic growth over the past few years, Sweden’s GDP per capita has remained over 20 percent lower than that of the United States. 

A cursory glance at the dysfunctional state of the Swedish labor market provides further indication of the need for reform. Sweden stands out as the advanced industrialized country with the highest rate of unionization; a staggering 90 percent of its labor force is unionized. As a consequence of Sweden’s labor market rigidity, the International Monetary Fund estimates that almost one-fifth of Sweden’s working-age population is economically inactive. 

The International Monetary Fund estimates that almost one-fifth of Sweden’s working-age population is economically inactive.

Closing Sweden’s economic gap with other advanced industrialized countries will require far-reaching measures to improve labor utilization and productivity performance. It will also require bold initiatives to promote new business formation, another area in which Sweden lags far behind other European countries. At the root of Sweden’s shortcomings is its crushing tax burden, which is needed to support a generous welfare system. With social security contributions and income taxes combining to produce a marginal tax rate of more than 60 percent for those with incomes only slightly above the average, it is no wonder that Sweden’s labor productivity rates are so low. 

The Reinfeldt government has vocalized its concern about gross abuses of the Swedish welfare system, especially in relation to sickness benefits. It has also drawn increased attention to the very heavy burdens that an aging population will impose on the welfare system in the years and decades ahead. Still, Reinfeldt has gone out of his way to make clear that he does not intend to unravel the system or radically alter the Swedish safety net. Rather, he has limited himself to tweaking the system: for example, he has introduced measures that tighten the rules for qualifying for sickness and disability benefits. 

Instead of taking on the welfare system, Reinfeldt’s government has focused most of its energy on improving incentives to work and on making it easier for non-unionized workers and immigrants to join the labor force. Sweden’s strong public finances have allowed for the introduction of an “in-work” tax credit and for some reduction in marginal tax rates for lower- and middle-income workers. Unemployment benefits have been cut, and the labor market has been made somewhat more flexible through the introduction of longer “temporary work” contracts (lasting 24 months instead of 12 months). 

Laudable as Reinfeldt’s labor market reforms might be, when all is said and done, by the time that Sweden’s 2010 general election rolls around, its bloated welfare system and high tax rates will still be very much in place. Reinfeldt has embraced some positive reforms, but Sweden still needs its own Margaret Thatcher, whose bold leadership helped to transform and modernize the British economy in the 1980s. 

Desmond Lachman is a resident fellow at the American Enterprise Institute.