Norway: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
09 Sep 2015
eISBN:
9781513503165
Language:
English
Keywords:
ISCR; CR; price; inflation; exchange rate; labor market; OECD country; disability benefit; wage-productivity differential; labor market institution; wage compression; Unemployment; Unemployment rate; Unemployment benefits; recipient rate
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Norway: Selected Issues

Abstract

Norway: Selected Issues

The Norwegian Labor Market and Migration1

The unemployment rate has been low in Norway, but there is a large group of people who are excluded from the labor market: many people receive disability benefits with high inflow into disability and very little outflows. Sickness absence incidence and expenditure on health-related benefits are the highest among OECD countries. Moreover, Norway has been receiving a large number of non-Nordic labor immigrants in recent years, and this has added new dimensions to the landscape of the Norwegian labor market. This paper discusses labor market issues in Norway and reviews stylized facts about immigration in comparison with other OECD/Nordic countries. The paper also examines labor market implications of immigration and related policy challenges.

A. Labor Market Institutions in Norway

1. Norway’s labor market institution is often characterized as the “Nordic model.” The Nordic model has three distinctive features: (i) flexible hiring and firing of economic reasons; (ii) a generous social safety net; and (iii) active labor market policies. The purest form of this model is found in Denmark and known as “flexicurity.” While labor markets in Nordic countries share these labor market features, the relative importance and emphasis of these elements vary across countries. For example, according to OECD indicators, the degree of employment protection for regular contracts is only slightly higher in Norway than in Denmark while temporary contract employment is much more protected in Norway than in Denmark. Similarly, unemployment benefits net replacement rates for short-term employment are slightly higher while long-term unemployment benefits are slightly less generous in Norway than in Denmark (Figure 1).

Figure 1.
Figure 1.

Labor Market Institutions

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

2. Another key element of the Nordic model is the role of labor unions. The Nordic labor markets are not as heavily regulated as other European markets, and collective agreements serve the functions that legal regulations do in other European countries. Nordic countries have the highest union density among OECD countries, and Norway is no exception—although to a somewhat lesser extent than the Nordic neighbors (Figure 2). Centralized bargaining supported by high union density results in smaller wage dispersion – Norway, together with other Nordic countries, have among the lowest wage dispersion rate for OECD countries. Indeed, the wage bargaining system in Norway is considered one of the most highly centralized and coordinated among the OECD countries.2

Figure 2.
Figure 2.

Labor Market Outcomes

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

3. The collective bargaining process in Norway has supported high wage growth throughout the economy in recent years. Manufacturing—the sector exposed to foreign competition and the one that needs to be more competitive than non-exposed sectors—is the lead sector for wage negotiations and has seen strong wage growth for the past years. Manufacturing sets the stage, and other sectors follow the lead. In this way, collective bargaining ensures that high wage growth in competitive export competing sectors is shared by the entire population through high wages in other sectors as well. But if wages are set too high relative to productivity, the market will not clear, and unemployment will result. Generally in the Nordic model, flexible labor market and social safety net are expected to avoid common causes of structural unemployment by fostering adjustment, and help keeping the participation rates high; and active labor market policies play an important role to support high wage floors with low unemployment by subsidizing low-productivity workers. In Norway, however, active labor market measures are targeted for certain groups of people, and the usage of these measures (measured by spending on such measures) is relatively limited.

4. There has been tension between the generous social safety net and incentives to work in Norway. The unemployment rate in Norway is one of the lowest among OECD countries (Figure 2). However, there is a large group of people who have fallen out of the labor market: many people receive disability benefits, and there are high inflows into disability cases and a very low rate of outflows.3 Sickness absence incidence in Norway is the highest among the OECD countries, and so is expenditure on health related benefits, which is more than 5 percent of GDP (Figure 3). About one-fifth of the working age population receives income supports related to health problems or disability, which is nearly everybody who is not working. Disability benefit recipients are thus sometimes considered as “disguised” unemployment or early retirement in Norway.4 This is not surprising; there is an inverse relationship among European countries between the unemployment rates and the disability benefit recipient rates; economies with low unemployment often have high disability rates, suggesting that the two forms of labor market insurance tend to be used as substitutes.

Figure 3.
Figure 3.

Disability Benefit and Sickness Leaves

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

A03ufig1

Unemployment and Disability Benefit Recipient Rates

(Percent)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: OECD and Fund staff calculations.

5. The high dependency on health-related benefits in Norway contrasts with the low usage of unemployment benefits. The length of unemployment benefits and average net replacement rates (currently two years and 62.4% respectively) are relatively generous in Norway, but the use of unemployment benefit is among the lowest in OECD countries. This is partly due to stricter eligibility criteria and other requirements for unemployment benefits, including the requirement for an unemployed person to accept any job anywhere in the country. In order to receive benefits, the unemployed person is also required to regularly report his/her unemployment status (every two weeks) and job search activities will need to be reviewed every three months. Sickness pay is available for employees who are absent from work due to a health problem (certified by a physician), with a replacement ratio of 100 percent up to a ceiling. Eligibility for receiving disability insurance benefits requires that work ability is reduced by at least 50 percent. In reality, there is a large grey area between unemployment and disability, and prior research has found that a significant fraction of disability insurance claims are triggered by job loss (see e.g. Bratsberg and others, 2010).

6. A surge in immigrants into Norway over the past decade has also added new dimensions to the Norwegian labor market. There has been a long tradition of regional labor mobility across Nordic countries since the implementation of the common Nordic labor market in the 1950s. There have been steady immigration inflows from other OECD countries as well. More recently, Norway has seen a sharp increase in immigration from non-Western countries, most notably from new EU member states. On one hand, immigration can help relieve short-term overheating pressures on the economy by expanding the labor supply, as well as address longer-term issues arising from population aging. On the other, there are implications for public finance and the welfare state. Immigrants from non-Western countries are likely to have different education backgrounds and qualifications compared with workers from the Nordic neighbors or advanced OECD countries. Non-Western immigrants are more likely to face skills mismatch and only a minority of them will be job-ready on arrival. As a result, these immigrants are more likely to be unemployed—there are large differences between the unemployment rates of the native-born and the foreign-born population in the Nordics—and receive social insurance benefits. The following section examines the recent trend of immigration flows into Norway and labor market implications.

A03ufig2

Unemployment Rate of Foreign and Native-Born, 2013

(Percent; in descending order of foreign-native differential)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: OECD and Fund staff calculations.

B. Perspectives on Immigration in Norway

Stylized facts and drivers

7. The Nordic countries, particularly Norway, are seeing an increasing presence of foreign population (Figure 4). Although the stock of immigrants in the Nordics is still relatively low compared to several other advanced OECD countries, net migration inflows as a share of population have picked up significantly since the mid-2000s—with only a brief interruption during the global financial crisis. Norway has experienced the largest wave of immigration in the Nordic region—supported by robust oil prices and economic growth, followed by Sweden and Denmark, surpassing the median OECD country.

Figure 4.
Figure 4.

Characteristics of Immigration to Norway

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

8. The recent wave of new comers is changing the composition of Norway’s immigrant population. Prior to 2004, Norway’s foreign population was dominated by Nordic/Western immigrants and refugees/asylum seekers from non-Western countries. Work-related admission was rather restricted and available only through the ‘specialist’ or ‘seasonal worker’ programs, which required that the immigrant already had a job offer in hand (see e.g. Bratsberg and others, 2014a). The EU enlargements in 2004 and 2007 opened the Norwegian labor market to accession countries due to Norway’s European Economic Area (EEA) membership, and triggered a surge of labor immigrants from the new EU member states, particularly Poland and Lithuania. Meanwhile, intra-Nordic labor movement as a whole has been stable thanks to the long-standing Nordic common labor market. Nevertheless, bilateral intra-Nordic migration exhibits pronounced cyclical patterns (Figure 4), suggesting that Nordic workers tend to move to the country in the region where economic conditions and hence job opportunities are relatively more favorable.

9. The educational composition of the immigrant population has also shifted. In 2000, immigrants to Norway consisted mainly of those with ‘medium’ educational attainment—defined as levels 3 and 4 according to the International Standard Classification of Education (ISCED). By 2010, the shares of immigrants with ‘low’ (ISCED 0/1/2) and ‘high’ (ISCED 5/6) levels of education have increased (Figure 4), suggesting that the incoming migration population into Norway has become more heterogeneous in terms of skill levels. Immigrants from non-OECD countries are on average lower-skilled, whereas OECD and Nordic migrants have higher and similar skill levels. Among the Nordic countries, Norway and Denmark seem to be able to attract relatively higher shares of highly-educated immigrants, whereas Sweden’s immigrant population is dominated by the medium-skilled, and Finland by the lower-skilled.

10. Econometric analysis helps explain the forces shaping bilateral migration flows to the Nordic region. The economic determinants of both intra-Nordic labor movements and immigration from non-Nordic sources are examined using a panel regression framework that allows for both “push” and “pull” effects.5 Factors considered include, among others, differences between host and source countries in economic and labor market conditions, the existing immigrant stock to capture “network” effects, and attractiveness of the benefit system in the host country.6, 7 The model is estimated using data on bilateral net migration flows to the four Nordic countries during 1995–2012.

11. Results support the push–pull hypothesis (Table 1). Consider first intra-Nordic migration. A large part of labor movements within the Nordic region can be explained by the relative business cycle positions across the countries: countries tend to attract more Nordic workers at times of higher GDP growth and real wages and lower unemployment. For example, a one standard deviation increase in the unemployment rate in Sweden relative to Norway would trigger a 0.01 percentage point—or 1½ standard deviation—reduction in the net migration rate from Norway to Sweden. Similarly, availability of economic opportunities in the Nordic countries also plays a crucial role in attracting migration flows from outside the region; however, the magnitude of the elasticities is smaller than for intra-Nordic migration. In contrast to the intra-Nordic results, there is a strong network effect: immigrants from outside the region tend to “follow” each other. In addition, they respond to the generous unemployment insurance regime in the Nordic countries. The free labor mobility that comes with EU membership has also facilitated migration flows, and made migration flows even more sensitive to differences in cyclical conditions.

Table 1.

Drivers of Net Migration Flows to Nordic Countries

article image
Source: Fund staff estimates.Note: Dependent variable is bilateral net migration flows to each Nordic country. Panel regressions with a full set of country pair and year fixed effects. Robust standard errors in brackets. Statistical significance at 1% ***, 5% **, and 10% *.

12. The framework explains migration patterns for workers from Nordic and advanced OECD countries well, but it works less well for migration from the new member states. For Polish workers in Norway, the model indicates that the large real wage differential, demographic factors, and attractive Norwegian unemployment benefits have always been important, but that the surge in immigration flows after 2004, when Poland joined the EU, is mainly driven by increasingly stronger network effects (the fact that the rising Polish immigrant population in Norway encourages more Poles to migrate) and EU membership. However, the surge predicted by the model still falls short of that observed in the data, and cyclical differences do not seem to explain the crisis-related reduction in net migration flows from Poland during 2008–09.8

A03ufig3

Historical Contributions to Net Migration from POL to NOR

(Percent of NOR population)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: OECD and Fund staff calculations.

Labor market outcomes

13. Immigrants to the Nordic countries have generally experienced less favorable labor market outcomes compared to natives. Unemployment rates among the foreign-born population are higher, and employment and participation rates lower, relative to the native-born. While the foreign-native employment rate gaps are smaller for Norway and similar across the skill spectrum (as measured by educational attainment), the gaps are more pronounced for Sweden and Denmark. Immigrants from non-OECD countries often experience lower employment rates and higher unemployment rates than their Nordic and OECD peers.

A03ufig4

Employment Rate by Educational Attainment, 2012

(Percent)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: OECD and Fund staff calculations.
A03ufig5

Immigrant Stock by Source and LF Status, 2010

(Percent of total)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: OECD and Fund staff calculations.

14. A recent 2010 survey conducted in Oslo and other Nordic cities looked at the labor market profile of labor immigrants from Central and Eastern Europe, particularly Poland.9 It shows that Polish migrants to the Nordics are often young; most have limited local language ability10; and the majority are ‘medium-skilled’, i.e. having secondary education with vocational training or technical college (although vocational credentials acquired in Poland are often not recognized in the Nordics). The vast majority of Polish migrants in Oslo take jobs in construction and cleaning services; there is a heavy concentration of Polish males in construction (85%) and Polish females in cleaning services (76%). As a result of the large concentration of new member states’ labor migrants in these sectors (also agriculture and ship building), Norway has imposed the mandatory extension of the minimum wages provisions of the collective agreements to these sectors.

15. The crisis has put labor migrant adjustments and Norway’s generous welfare system to the test. The recent cohort of Eastern European labor migrants in Norway were initially not dependent on social insurance transfers and received no transfers at all during the first years after arrival (Bratsberg and others, 2014a). However, the financial crisis hit these immigrants particularly hard, partly owing to their concentration in the highly cyclical construction industry. As a result, unemployment benefit claims among this group of immigrants rose markedly during 2008–09, and some decided to return to their home country. The propensity to out-migrate in response to an adverse earning shock is found to be substantially higher among those ineligible for unemployment insurance (Bratsberg and others, 2014b). Thus, there is a tension between providing social insurance and facilitating labor supply adjustment in response to a negative shock. In the case of Norway, the generous unemployment insurance regime contributed to a higher immigrant unemployment rate during and after the crisis. The recent decline in oil prices has contributed to slowing net immigration inflows and unemployment has edged up, but it remains to be seen to what extent labor supply from immigrants will adjust to the new, more difficult economic condition. More flexible labor supply adjustment would help relieve pressure on the unemployment benefit system. In terms of health-related benefits, while the recent labor immigrants from Eastern Europe have not made it onto the disability insurance rolls, micro data show a steady rise over time in the disability program participation rate among earlier cohorts of refugees and labor migrants (Bratsberg and others, 2014a).

A03ufig6

Unemployment Rate of Immigrants and Natives During and After the Crisis

(Percent, 4-quarter moving average)

Citation: IMF Staff Country Reports 2015, 250; 10.5089/9781513503165.002.A003

Sources: Statistics Norway and Fund staff calculations.

16. More generally, labor market institutions play an important role in determining immigrants’ labor market outcomes. Effective integration programs (e.g., language and vocational training, creating the right incentives from social benefits) can help support the transition of newly-arrived immigrants to fruitful labor market participation. The Nordic countries have had integration programs since the early years, but these are usually more geared toward supporting the asylum seekers and their families. Existing labor market institutions also matter. For example, active labor market policies (ALMP)—a prominent feature of the Nordic labor market model—can greatly benefit immigrants and their children, who are often overly represented among the lower-skilled segment of the workforce. On the other hand, the wage compression resulting from high collectively-bargained minimum wages could hurt immigrants’ job finding prospects by creating the need to subsidize the wage-productivity differential to maintain employment.

17. Empirical evidence from a sample of 28 OECD countries over 2001-12 supports the importance of labor market institutions (Table 2). In particular, boosting ALMP spending per unemployed is associated with a lower gap between foreign-born and native-born unemployment rates. Reducing wage compression also helps significantly. As an illustrative example, other things constant, increasing the 90th/10th percentile wage ratio from Norway’s level (2.4) to OECD average (3.4) is estimated to narrow the Norwegian unemployment gap by 3.8 percentage points—or about three quarters of the observed gap in 2013.

Table 2.

Explaining Foreign-Native Unemployment Gaps

article image
Source: Fund staff estimates.Note: Dependent variable is foreign-native unemployment rate gap. Estimated with panel fixed effects estimator on a sample of 28 OECD countries over 2001-12. Statistical significance at ** 5% and *** 1%.

C. Conclusion

18. Labor market outcomes have been rather robust in Norway, but there are also challenges. Dependency on sick leave and disability benefits continues to be high, which could be seen as “disguised” unemployment. A surge in non-Western labor immigrants in recent years, particularly from new EU member states, has created new challenges, including potential increase in welfare costs in the case of economic downturns and employment gap between native-born and foreign born workers. These issues are also intertwined with labor market institutions in Norway. For example, the compressed wage structure tends to generate a wage-productivity differential, which is likely to prevent some groups of people (e.g., low-skilled Norwegian youth or newly arrived immigrants) from entering the labor market if the incentive to work is not well balanced against social safety net.

19. Some reforms and initiatives have been implemented to address these labor market issues in Norway.

  • The Inclusive Workplace Agreement (IA) was signed in 2001 between the government and the social partners to reduce sickness absence and increase the employment of disabled people. Despite the limited success of the agreement, it has been renewed many times.

  • In 2011, reforms were introduced to enable closer monitoring of sick leave with the aim of facilitating a more rapid return to work.

  • The 2011 pension reforms introduced an adjustment of pensions for changes in life expectancy, flexible retirement starting at age 62 based on actuarial principles, and new rules for indexation of pensions. The full impact of reforms is yet to be known, but preliminary data suggest some increase in labor participation in older workers.

  • Starting from January 2015, the disability pension was replaced with disability benefits. All disability pensions are now recalculated as disability benefits which are taxed as wage income and not as tax-preferred pensions. The new system aims to create incentives to work while receiving disability benefits.

  • Collective bargaining has also evolved over time to take account of new aspects of employment conditions in response to a growing number of immigrants. For example, there is now mandatory extension the minimum wages provisions of collective agreements to certain sectors where labor migrants are more concentrated, including construction.

20. Further reforms to sickness and disability benefits will be crucial to prevent people from dropping out of the labor market. Such reforms would help maintain the participation rate in the face of an aging population. At the same time, reforms would help to prevent potential dependency on these benefits among immigrants in the future.

21. Greater wage variation could also facilitate the adjustment towards a new growth model. Wage formation may need to allow for greater differentiation in compensation across sectors to better align wage developments with productivity in the private sector, especially if the transition costs in terms of lower growth and higher unemployment turn out to be greater than anticipated.

References

  • Bratsberg, B., E. Fevang, and K. Roed, 2010, “Disability in the Welfare State: An Unemployment Problem in Disguise,” IZA Discussion Paper Series No. 4897.

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  • Bratsberg, B., O. Raaum, and K. Roed, 2014a, “Immigrants, Labor Market Performance and Social Insurance,” The Economic Journal, Vol. 124.

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  • Bratsberg, B., O. Raaum, and K. Roed, 2014b, “Labor Migrant Adjustments in the Aftermath of the Financial Crisis,” Center for Research and Analysis of Migration Discussion Paper Series No. 19/14.

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  • Duell, N., S. Singh, and P. Tergeist, 2009, “Activation Policies in Norway” OECD Social, Employment and Migration Working Paper No. 78.

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  • Ho, G. and K. Shirono, 2015, “The Nordic Labor Market and The Role of Labor Mobility and Migration,” forthcoming.

  • Loken, E. and T. A. Stokke, 2009, “Labour Relations in Norway,” Fafo-Report.

  • Nordic Council, 2013, “State of the Nordic Region.”

  • OECD, 2013, “Mental Health and Work: Norway.”

1

Prepared by Giang Ho and Kazuko Shirono.

2

Tripartite framework agreements decide on major parameters. At the national level, the union confederations and national employers associations set the framework for collective bargaining through the basic agreements, which are negotiated every four years. Collective bargaining takes place at the sectoral level, with manufacturing (the tradable goods sector) setting the norm for the wage growth in the rest of the labor market (sheltered sector). See e.g. Loken and Stokke (2009).

4

See Duell and others (2009). They note that an important share of the population outside of the workforce due to illness and disability in Norway would be classified as unemployment benefit recipients or social assistance recipients in other OECD countries.

5

For more detail, see Ho and Shirono (forthcoming).

6

EU rules on social security coordination ensure that entitlements are transferred to the country of employment. This means that, for example, Eastern European labor immigrants to the Nordic countries immediately gain access to the same welfare transfers and insurance programs as natives. See e.g. Bratsberg and others (2014b).

7

Time-invariant bilateral migration costs such as linguistic/colonial links and geographical distance are captured by country pair fixed effects, and common shocks by year fixed effects.

8

This suggests the inclusion of a more targeted variable that better captures the cyclical employment conditions of these immigrants (e.g., performance of the construction sector, which employs a disproportionately large share of lower-skilled immigrants).

10

While refugees in Norway have a right and duty to language training and other integration programs, labor migrants from within the EU generally do not.

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Cover IMF Staff Country Reports
Norway: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 250
Publisher:
International Monetary Fund
ISBN:
9781513503165
ISSN:
1934-7685
Pages:
48
DOI:
https://doi.org/10.5089/9781513503165.002

Labor Market Institutions

Labor Market Outcomes

Disability Benefit and Sickness Leaves

Unemployment and Disability Benefit Recipient Rates

(Percent)

Unemployment Rate of Foreign and Native-Born, 2013

(Percent; in descending order of foreign-native differential)

Characteristics of Immigration to Norway

Historical Contributions to Net Migration from POL to NOR

(Percent of NOR population)

Employment Rate by Educational Attainment, 2012

(Percent)

Immigrant Stock by Source and LF Status, 2010

(Percent of total)

Unemployment Rate of Immigrants and Natives During and After the Crisis

(Percent, 4-quarter moving average)