World's Most Generous Welfare State Leaves 20% on the Dole

(Bloomberg) -- Norway, we have a problem.

Unemployment may be hovering below 3 percent, but the oil crisis that has hammered Scandinavia's richest nation could be leaving a permanent mark. More than a fifth of its working age population relied on unemployment or sick-leave benefits throughout 2016, according to a study by the Norwegian Labor and Welfare Administration, or NAV.

With welfare payments up 3 percent in 2016, the growing dependence will likely make it harder for Norway to wean itself off oil and gas production. While the discovery of petroleum 50 years ago has turned the country into a modern-day Croesus -- and has helped make the world's most generous welfare system possible -- declining resources and a shift to greener energy means that the country will need to find other legs to stand on to keep up its standard of living.

That's something that the stewards of the system readily admit. The agency's acronym has even become a verb, to NAV, which means `being on benefits.'

“To uphold the Norwegian welfare system we need more people at work and not on passive benefits," said Sigrun Vageng, the head of NAV, in an emailed answered to questions.

The economic distress is to a large extent found in the usual areas: rural communities hit hard by the closing of mines and other key businesses. In the Arctic municipality of Ballangen, unemployment first took hold in the 1960s as a sulfur and copper mine shuttered. Now almost 40 percent of its dwindling population receive monthly benefits from the state, the country's highest proportion.

"It's historical,” said Knut Einar Hanssen, a local councilor, in an interview. "Those with competency and mobility are the ones who can most easily find a job and move.”  Ballangen is now working hard to attract businesses, including a potential data storage site, according to Hanssen. Another change that should help it lose top spot in the welfare-dependency list is that in 2020 it will cease to exist after a merger with some of its neighboring municipalities.

Similar scenes are being played out around the world in places such as the U.S. state of West Virginia and northern France. And like in the U.S. and France, growing distress in communities such as Ballangen is also having a political impact. The Center Party is surging in the polls ahead of elections in September amid calls for a devolution of power from Oslo and claims that the Conservative-led government has forgotten rural Norwegians.

But dependency on state handouts now runs deeper. It also spread to the nation's richest regions after the plunge in oil prices caused an estimated 50,000 job cuts in the petroleum industry, which before the crisis accounted for more than 20 percent of economic output. Welfare payments in Rogaland, the regional center of the oil industry and home to Statoil ASA, rose a whopping 13 percent last year. Some 19 percent received benefits on average each month in Rogaland. In Oslo, it was 15 percent, while the lowest proportion was in Baerum, a wealthy suburb of the capital, where 12 percent collected benefits.

Conservative Prime Minister Erna Solberg, fighting for reelection against the Labor Party and Center Party this year, has said that transitioning the economy away from a dependence of oil will be the key challenge in the years ahead. 

But with an increasing share of its working age population on welfare benefits instead of paying taxes, the desired changes could prove a difficult task for whoever is in power. And many are also pulling out of the workforce altogether. The percentage of people of working age in employment fell to 70.6 percent in 2016, a 21-year low, according to Statistics Norway.

"This comes as a big cost for the society, both through lost tax revenues and the direct expenses from social benefit payments," said Jeanette Strom Fjaere, an economist at DNB.

For now though, the costs are something that Norway can take. It has over the past 20 years built up a sovereign wealth fund that is fast approaching $1 trillion -- or almost $200,000 per Norwegian -- even as the government last year started withdrawing cash for the first time.

The welfare agency paid out 174 billion kroner ($21 billion) last year in welfare benefits, but that means the system is working as intended. It "shows that the welfare system manages to secure those in a challenging situation," said Vageng, the welfare agency head.

To contact the author of this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net.

To contact the editor responsible for this story: Jonas O Bergman at jbergman@bloomberg.net, Nicholas Rigillo