EXECUTIVE SUMMARY

Author: Timothy Heleniak
DATA AND MAPS: Gustaf Norlén

Photos: iStock, Unsplash, Simon Paulin/Imagebank Sweden

The Nordic countries regularly come out at the top of international rankings for quality of life, sustainability, gender equality, happiness and other measures. Although outsiders often view the ‘Nordic model’ with envy, our societies and economies are not without their problems and issues. This report summarises the current situation in the Nordic Region and points to challenges ahead.

The State of the Nordic Region provides a status update in three key areas – demographics, the labour market and the economy – all of which encompass socio-economic trends with a significant impact on the lives of everybody in the Nordic countries.

The target audience consists of policymakers and professionals in the field at the national, regional and local levels, and members of the public interested in socio-economic trends in the Nordic Region. With this audience in mind, the chapters have been kept to a digestible length and include figures and maps to illustrate the trends identified. Academics working in these areas in the Nordic Region may also find the report of interest. Although it is not intended to be an academic study, the report draws on academic research.

The State of the Nordic Region is published every two years, and this is the 20^th edition in the series. While the focus is on current developments, the report also hints at future trends. Some future social and economic trends are discernible within broad parameters. Other ‘black swan’ events are less predictable but still have a significant impact on social and economic developments. The State of the Nordic Region 2020 was published in early 2020, just as the COVID-19 pandemic was beginning, an event with significant global impact. The focus of the State of the Nordic Region 2022 was on the impact of the pandemic. It was published in early 2022, just before the Russian invasion of Ukraine. It is difficult to foresee the next endogenous or exogenous events that will affect Nordic society, but the report highlights some of the more predictable long-term trends in demography, the labour force and the economy.

The demography chapter notes that fertility rates have fallen to historic lows and population growth in many of the countries is at the lowest level in decades. These trends are likely to persist into the future. Nearly all population growth in the Nordic Region is now the result of positive net migration, a trend that will make the populations of the Nordic countries increasingly diverse.

The COVID-19 pandemic showed the potential for more remote working, further separating where we live and work. This will affect settlement patterns across the region, although the extent is not fully known as the migration patterns are still developing. Labour shortages and skills mismatches are affected by both internal and international migration, as well as population ageing, automation and the education systems. Related to this trend is the green transition of all business sectors and the retooling of the labour market necessitated by it. New climate policies and the need for a green transition are among the megatrends already having an impact on the labour market, and the rate of change will probably speed up.

The report highlights the current situation and future economic challenges at the regional, business and household levels. To achieve the goal of a green Nordic Region, the countries need to accelerate the transition away from sectors and economic activities based on fossil fuels, an objective that also applies to the high-earning consumers of the region who have large carbon footprints. Moving forward, as income inequalities between and within regions increase, the goal of a socially sustainable Nordic Region must be reiterated. In addition, ensuring good conditions for both public and private sector innovation will be key to making the Nordic Region more competitive. While urban regions often have higher levels of traditional R&D innovation, a number of the non-urban regions specialise in various other types of innovation that are important drivers of competitiveness and growth.

The Nordic Region is vast and has a diverse physical geography, stretching from the northern edge of the European mainland to north of the Arctic Circle. It consists of Denmark, Finland, Iceland, Norway and Sweden, as well as the three self-governing regions, the Faroe Islands and Greenland (both part of the Kingdom of Denmark) and Åland (part of the Republic of Finland).

The population is unevenly spread across the states and autonomous territories. In Norway, Sweden and Finland, much of the population is concentrated in the capitals and large urban areas in the south, with large swathes of the north sparsely populated. Iceland is similar, with more and more of the population concentrated in the capital of Reykjavík. The picture is the same in Denmark, with a growing proportion of the population living in the capital, Copenhagen. While the populations and much of the economic activity converge on these larger urban centres, important economic activity also takes place elsewhere.

The methodological approach taken in the State of the Nordic Region is to begin at the national level and compare social and economic trends among the countries and autonomous territories. It then makes regional and municipal comparisons and depicts them in maps. The analysis at all levels is primarily based on data produced by the national statistical offices. Significant effort has gone into harmonising data to make the indicators comparable.

The table below summarises the administrative structure in each of the Nordic countries. These structures form the basis for the Nomenclature of Territorial Units for Statistics (NUTS) classification, a hierarchical system dividing European states into statistical units for research purposes. In general, the NUTS and Local Administrative Units (LAU) classifications follow existing divisions, but this may differ from country to country. Light grey frames represent the regional levels presented in most of the regional maps in the report. There are currently 66 regions at this level. Dark grey frames show the local units represented in most of the municipal maps. There are currently 1,133 units at this level. In this edition, Nordregio has developed new grid-level maps and an urban-rural typology, which facilitates new ways of analysing the data, and it has been made available to other researchers.

The report is in four parts: three topical sections on demography, the labour market and the economy and a fourth presenting the Regional Potential Index (RPI). The first three are the same in every edition of the State of the Nordic Region, although the content of the chapters changes each time to reflect topical issues.

Population change beyond the pandemic – The COVID-19 pandemic had a pronounced impact on demographic trends in the Nordic countries, influencing every component of change -morbidity, mortality, nuptiality, fertility and internal and international migration. The Nordic Region demonstrated relative resilience during the pandemic compared to other parts of Europe. In 2022, the number of deaths exceeded births for the first time, and the population continued to grow only because more people immigrated than emigrated. The fall in the population in 2022 and 2023 was due to a rapid decline in births after the pandemic and an increase in the number of deaths that surpassed even the pandemic years. The ageing populations in the Nordic countries and territories also contributed to the decline.

Fertility decline in the Nordic Region – Over the past decade, the fertility rate in the European Union has been low but stable. However, since 2010, the rates for the Nordic countries and territories have been declining and have reached the lowest recorded levels. The fertility rates in the Nordic Region are well below replacement level, the level necessary for a population to replace itself in the long run. Demographers are puzzled by these falls but have identified declines in first births and overall increases in childlessness as the reasons behind the overall declines. Young people seem to be foregoing parenthood because of uncertainty about the future, and low fertility rates appear to be here to stay.

The Nordic geography of diversity – High levels of immigration in recent decades have substantially increased the proportion of the Nordic population born elsewhere in the world, which is now at a historically high level and has gone up in nearly all regions and municipalities. Newcomers have faced greater segregation, and spatial segregation is often associated with other aspects, such as segregation in schools, workplaces and social activities. Migration and integration are challenging social and policy issues and have triggered contentious political debates.

The Nordic labour market after the pandemic – Like the rest of the world, the Nordic labour markets were severely hit by the effects of the pandemic. While COVID-19 was a shock to the labour market, its impact was much shorter-lived than that of the financial crisis. In terms of employment rates, recovery was quick, and the rate for the Nordic Region reached its highest level in at least twenty years in 2022. Sectors badly affected by the pandemic, such as accommodation and food service, bounced back, but employment rates in others have also gone up, e.g. the information and communication, public administration and defence sectors. One of the pandemic’s most visible effects on the labour market was the greater opportunities for remote work. While remote work has continued since the pandemic, most workers (63%) have still never worked from home.

Challenges of labour shortages and skills provision – This section focuses on ‘skills matching’ and ‘skills provision’ from a perspective of educational planning, as well as demographic and generational differences in a labour market characterised by megatrends and rapid change. While the differences in labour shortages are spread across sectors, ages and geography, the Nordic labour markets all have very high employment rates.

The report identifies three factors that cause skills’ mismatches’. Factor 1: In the last three decades, the Nordic system of post-secondary education attainment has changed significantly. University degrees used to be the almost exclusive preserve of a small, often elite and primarily urban group, but over 40% of the population are now graduates. Factor 2: Demographics or an ageing population – the ‘greying of Europe’. An ageing population also means increasing healthcare needs and more support jobs. Factor 3: Automation, digitalisation and technological adaptation are three of the most important drivers behind changes to the labour market in the Nordic Region and globally. The Nordic Region is at the forefront of efforts to maximise the potential for digitalisation and digital integration. Accessing the skills and employees necessary for this transition is crucial for national and regional development.

Green transition of the labour market – New climate policies and the need for a green transition are among the megatrends impacting the labour market. This involves transitioning from jobs that contribute to high levels of greenhouse gas emissions and negative environmental effects and emissions towards jobs that support the environment and promote social equity. During this transition, new jobs will be created, others in sectors dependent on fossil fuels will be reformed or phased out. This section looks at the effects of the green transition on the labour market from a geographical perspective. It begins with a discussion of how the green transition affects the labour market and the concepts of green and brown (polluting) jobs. In 2021, 25.2% of total employment in the Nordic Region was classified as green. This is higher than the OECD average of 17.6%. Although higher than the European average, there are differences at the regional and municipal levels among the Nordic countries. The Nordic Region has a higher proportion of green and brown jobs than the EU average, which indicates that the Region is competitive in terms of green innovation, but there is still a need for structural change.

The economic analysis in this chapter uses three different types of indicators – economic, social and environmental – for each of the three aggregated levels of analysis – regional, business and household. The point of this approach to the economy is to achieve a holistic understanding of the Nordic economies.

Regional perspective on the economy – GDP in the Nordic countries grew by 3.5% between 2021 and 2022. However, the per capita GDP in the Nordic Region was much higher than the EU average – $80,406 compared to $57,098, with Norway having by far the highest figure. Intra-regional inequality quantified by Gini coefficient is growing in the Nordic countries, both between and within regions. While Denmark’s urban regions have higher growth in per capita GDP, the regional patterns in other Nordic countries are less related to urbanisation, e.g. Finland’s northern and less populated regions have the highest growth. Throughout this period, Sweden and Greenland had the highest levels of income inequality, Norway and the Faroe Islands the lowest, with Denmark, Finland and Åland in the middle. Research has argued that the high Gini coefficient in Greenland reflects both the small size of the population and the relatively large proportion employed in the informal economy and that the increase in inequality in Sweden was due to the diminished significance of social transfers within the working-age population and the resulting decrease in relative income levels experienced by the lowest quintile. The highest municipal income disparities were observed in the capital city regions of Denmark, Finland and Sweden, each of which had Gini coefficients around 0.6. These municipalities also have some of the highest income levels in their respective countries. Data on territorial GHG (greenhouse gas) emissions from 1990 to 2021 was collated for each Nordic country. While emissions have surged in Iceland, a contrasting macro trend is evident in Denmark, Finland, and Sweden, where reductions have been consistently observed, the pace of which has been accelerating since 2010. Norway initially registered an increase, but it started to taper off in 2020. All the Nordic countries have exceeded the EU’s overall climate goals, with several of them on track to achieve carbon neutrality between 2035 and 2045.

Business perspective on the economy – This section adopts a business-level perspective to analyse important economic, social and environmental indicators. SMEs form the backbone of the Nordic economy, comprising about 90% of companies and over half of people in work. Innovation measured by expenditure on both R&D and non-R&D innovation by SMEs shows regional variations. While urban regions have higher concentrations of SMEs involved in product innovation, more non-urban SMEs are involved in process innovation than in product innovation in the Nordic Region. The rate of business bankruptcies is a core indicator of the robustness of the economy from a business perspective and also since Nordic and international businesses have been impacted by the COVID-19 pandemic and rising inflation in recent years. Despite challenges during the COVID-19 pandemic, the Nordic countries fared relatively well in terms of bankruptcy rates. However, when job-retention schemes ended, the number of bankruptcies went up, as did inflation and interest rates.

Territorial GHG emissions vary at regional level because the countries and regions have different resources, energy mixes and production structures and, therefore, different emission patterns and climate goals. From 2017 to 2021, the Nordic regions cut their per capita GHG emissions by 11.3% on average, with an overall average fall of 8.7% over the same period. This trend is evident in Denmark, as well as in southern Sweden and southern Finland – densely populated areas that have taken steps toward expanding district heating and reducing carbon intensity. In regions historically reliant on fossil fuels for heat and power, emissions have continued to fall. Regardless of past trends, coal, oil and gas are still major components of primary energy consumption structures in the Nordic countries. Even if significant progress has been achieved in terms of generating renewable energy, substantial decarbonisation challenges remain in all of the Nordic countries because of fossil-based energy mixes (Sweden, Finland and Denmark), oil production (Norway) and industrial processing (Iceland).

Household perspective on the economy – This section looks at economic, social and environmental indicators from a household perspective. As far as purchasing power is concerned, Norway still has the highest income, although the differences between the countries have changed. Since 2015, Denmark has had a steady increase in household income, while Finland, Sweden and Åland have seen no increase – and in the last year, even a decrease – in purchasing power. The Faroe Islands and Greenland were slightly higher, reaching the level of Finland in 2022. Iceland’s purchasing power increased in 2022 but was still at the lowest level among the Nordic countries. All the Nordic countries have cut their consumption-based emissions significantly by around 30–50% since 2000. The results also show significant variations between municipalities when it comes to the composition of emission sources. Urban municipalities have a higher-than-average carbon footprint due to air travel, people in rural areas use more cars, and in the northern part of Sweden, a larger proportion of the emissions is caused by heating. The highest carbon footprints are in urban municipalities, followed by those with high levels of tourism, while the lowest are in municipalities within commuting distance of a small town.

Nordregio’s Regional Potential Index (RPI) makes it possible to conduct cross-regional comparisons of development potential and illustrates the regional balance between the Nordic countries. The multidimensional index is designed to summarise the current and past performance of the regions across major policy domains. It helps identify ones with high potential and those needing further support to boost their potential and meet existing challenges. It provides policymakers with a comparative learning tool to inform the design of effective regional development strategies at Nordic level.

Nordregio’s RPI is a multi-item measurement scale incorporating information about the demographics, labour market and economic output of the Nordic countries’ 66 administrative regions. It highlights the role of the biggest cities and city regions. The top performing region in 2022 was Oslo, the Capital Region of Norway, followed by Stockholm County and the capital regions of Denmark and Iceland. On the other end of the RPI spectrum, we find regions such as Greenland, the Eastern Region in Iceland, and South Savo and Päijät-Häme in Finland, all of which are sparsely populated, have rural economies and, in some cases, are remote.