Understanding Wage Inequality in the Nordic Countries
The conference opened with a presentation by Gaute Torsvik (Professor of Economics at the University of Oslo and the Director of NFS), who examined why income inequality is relatively low in the Nordic countries. Drawing on his joint work with Magne Mogstad and Kjell Salvanes, Torsvik explored the roles of redistribution, workers’ skills, and wage-setting institutions.
A central message was that taxes and transfers explain only part of the difference. In the comparison he presented, around two-thirds of the gap in income inequality between Norway and the United States was already present before redistribution. Looking more closely at earnings, smaller differences in hourly wages accounted for more than 80 per cent of the difference in earnings inequality between the two countries.
Torsvik then considered whether this reflected a more equal distribution of skills or differences in how workers are paid. The evidence suggested that differences in measured skills explained little of the gap in wage inequality, pointing instead to the way labour markets translate worker characteristics into pay. He highlighted coordinated wage bargaining, both within and across industries, as a plausible explanation for the more compressed Nordic wage structure. Sectoral agreements can limit low pay, while coordination can moderate wage differences across industries, with local bargaining still allowing flexibility at the firm level.
Click here for Torsvik's presentation
Perspectives on Norway's Wage-setting Model
Steinar Holden (Professor of Economics at the University of Oslo) followed with a presentation on the ''Frontfagsmodellen'', in which manufacturing negotiates first and sets a norm for wage growth elsewhere in the economy. He highlighted its role in supporting competitiveness and employment, while discussing the challenges arising from a weaker NOK and high profitability in parts of industry. Holden argued that wage formation must also take account of inflation, since persistently high wage growth can require higher interest rates.
Terje Strøm (Chief Economist at SMB Norge) offered the perspective of small and medium-sized businesses. He argued that higher energy prices, wage costs, and interest rates had placed considerable pressure on firms serving the domestic market. Calling for a renewal of the model, Strøm emphasised greater room for local wage bargaining and wage growth that better reflects individual firms’ productivity, profitability, and ability to pay.
Victoria Sparrman (Economist at NHO) examined the relationship between wage formation, the labour share of income, and returns to capital. Her analysis found a stable relationship between wage growth and the labour share, while realised returns to capital added little explanatory power once the labour share was included. She also emphasised the importance of flexibility within coordinated wage bargaining, including room for local adjustments alongside the common wage norm.
The final presentation was given by Roger Bjørnstad (Chief Economist at LO), who questioned whether the ''Frontfagsmodellen'' and inflation targeting necessarily conflict. He argued that coordinated wage bargaining helps prevent wage-price spirals and called for greater weight on employment and output alongside stable inflation. Bjørnstad emphasised that monetary policy should distinguish between different sources of inflation and respond more flexibly when price increases originate abroad.
The presentations were followed by a panel discussion and debate.
