Abstract
Welfare benefits in the Nordic countries are often tied to employment. We argue that this is one of the factors behind the success of the Nordic model, where a comprehensive welfare state is associated with high employment. In a general equilibrium setting, the underlining mechanism works through wage moderation and job creation. The benefits make it more important to hold a job, thus lower wages will be accepted, and more jobs created. Moreover, we show that the incentive to acquire higher education improves, further boosting employment in the long run. These positive effects help in counteracting the negative impact of taxation. Through numerical simulations, we show how this mechanism can contribute to explain the better labor market performance and more equitable income distribution of Nordic countries compared to Continental European ones. (C) 2014 Elsevier B.V. All rights reserved.