The article on public sector wages by Mette Ejrnæs and Astrid Würtz Rasmussen focuses on wage setting in the Danish public sector, which they argue resembles the situation in the other Nordic countries. They present interesting descriptive empirical results showing, among other things, that hourly wages vary between different groups; hourly wages vary within some groups; groups with higher levels of education and longer experience receive higher pay; parts of the wage rate (of groups) cannot be explained by either education, work experience, or management tasks, etc.
According to the authors, this Nordic model links public sector wage growth to average wage growth in the private sector, which is set by productivity in the export-oriented segment (and the inflation rate). Among the benefits of this link are that it secures the long-term competitiveness of private companies, contributes to stable public finances, and provides a balance between the private and public sectors. This has been largely true for Denmark, Sweden, and Norway in recent decades (Calmfors, 2025; Stern, Karlson and Uddén Sonnegård, 2021). However, in Finland, the public sector has been setting the wage norm in several bargaining rounds in recent decades, with catastrophic consequences for the competitiveness of the private sector (Jonker-Hoffrén, 2020; Karlson and Björklund, 2021).
This Nordic model of pattern bargaining to coordinate wages has several advantages but also several shortcomings. First, the wage setting becomes excessively centralised in both the public sector (which the authors acknowledge) and the private sector. As noted by the authors, “all groups receive the same wage increases”. This is a major problem that would have deserved more in-depth discussion in the article.
The demand and supply of labour in different industries and sectors thus have a very limited effect on the actual wage setting. In Sweden, even in sectors where the collective bargaining agreements allow for a fully individual and local wage setting, the central wage norm dominates (Karlson et al., 2014; Calmfors et al., 2019). Supply and demand do not meet. The situation is likely to be the same in Denmark. Notably, in contrast to Denmark, the collective agreements in the Swedish public sector are more decentralised than in the private sector (Medlingsinstitutet 2024), but the centralised wage norm still makes wage increases largely uniform.
Second, since wage formation in these models is determined by cartels on both sides of the market, where one side (the employers’ organisations) does its best to keep wage costs down, and the other (the trade unions) does its best to keep wages up (in particular minimum wages), the bargaining process tends to make the wage schedules extremely compressed (Karlson and Lindberg 2008/2013). As a result, the Nordic countries have among the lowest wage differentials in the OECD (2024).
The fact that the wage schedule is more compressed in the public sector than in the private, as the authors note, is probably because membership on the employers’ side is 100%, which is substantially higher than in the private sector. Notably, the employers’ cartels have higher levels of organisation than the trade union cartels in both the private and the public sectors, just as in the rest of Europe (Karlson and Lindberg 2012).
Third, as a combined consequence of all the above factors, shortages of labour and skills are prevalent in both the public and private sectors. Not only is wage setting overly centralised and the wage schedules compressed, but it is also difficult to adjust relative wages between different occupations and groups and difficult to promote and motivate high achievers. In addition, the high minimum wages generated by the models make it hard for outsiders to gain a foothold in the labour market, which leads to high youth unemployment and makes it difficult to integrate immigrants.
These kinds of problems are thus not as unique to the public sector as the authors seem to suggest, which also means that their proposals at the end of the article for ways to address the perceived shortcomings of wage setting in the public sector may not work very well. They suggest that wage setting should be made more transparent, adaptable and flexible, more legitimate, should better reflect individual qualifications and be more supportive of task completion. This all sounds very well, of course, but it is unclear how such proposals would mitigate the effects of the strong centralising and wage-compressing tendencies in the Nordic labour market models.
Let me end by adding three factors largely missing from the article that I think make wage formation and wage setting in the public sector more difficult than in the private sector. The first is the fact that the budget or financial restrictions are different. The Nordic countries already have among the highest tax rates in the world, and in the globalised world of today, it is hard to raise them further without running the risk of financial and human capital leaving the countries. Consequently, no matter how many doctors, nurses, childcare workers, etc., are needed in the public sector, it will be hard to finance the required increase in the budget. Public sector bargaining is largely a zero-sum game, whether anybody likes it or not. By contrast, in private firms and sectors with high demand, revenue and income grow, and so does the ability to recruit the labour they need.
Second, large parts of the public sector are affected by what is called Baumol’s Law or Baumol’s Cost Disease (Baumol and Bowen, 1965), the tendency for wages in jobs that experience little or no increase in productivity – typical for many public welfare services such as health and childcare – to rise in response to rising wages in jobs in private sectors that do experience high productivity growth. Hence, the low productivity of many tax-funded services has led to a structural increase in the costs of public welfare that is probably not sustainable in the long run (Baumol, 1993; Mahon, 2007). The Nordic model of wage formation may even exacerbate these problems.
Third, industrial disputes in the public sector, and thus public sector bargaining and wage formation, follow a different logic than in the private sector. The reason is basically that strikes have totally different economic effects in the two sectors. In the private sector, industrial disputes have severe negative effects on employers – falling revenue, disrupted supply chains, negative effects on buyers and consumers, and potentially the risk of bankruptcy. In the public sector, the economic situations of the employers – the local governments, the regions, and the state –improve when employees go on strike. Since wages are not paid and taxes are, the public finances improve. Consequently, strikes in the public sector are likely to last longer and making media appeals to the general public has become the dominant strategy deployed by trade unions in the public sector (Moberg, 2006).
The combined effect of these three factors makes public sector wage setting very difficult, conflict ridden, and will probably require more radical solutions than the ones proposed by the authors of the article.