Unlocking the Social Trap: Inequality, Trust and the Scandinavian Welfare State

Abstract

Recent research suggests that economic inequality thwarts attempts to establish a welfare state. The corollary of this view is that today's welfare states had witnessed an equality revolution already before the rise of social policies aiming at redistribution. The paper brings this insight to bear on the creation of the welfare state in Sweden, for many the very model of a universal welfare state, and enquires into whether equality really predated the formation of universal welfare policies in the 1950s. We present evidence on inequality based on labor market outcomes and corroborate the view that there has been a sharp reduction in inequality during the 1930s and 1940s. Hence Sweden underwent a true equality revolution prior to the establishment of the welfare state. A leveling of incomes is a necessary precondition for the rise of the universal welfare state, we suggest, because of trust, which correlates negatively with inequality. High trust levels solve the problems associated with collective goods and boosts support for universal solutions of income security. The paper provides a narrative in which the formation of institutions, the removal of large income differentials, and the creation of higher trust levels interacted in the 1930s and 1940s to form the foundation for the welfare state in the 1950s. It adopts a dynamic view of trust by departing from the assumption that trust arises endogenously as a concomitant to changes in the underlying fundamentals like income inequality and redesigned institutional frameworks.