Why Is Labor In Norway So Expensive?

Last Updated on April 26, 2022 by Rational thinking

Norway is an expensive country, I guess most tourists can agree on that. But why?

One of the main reasons is the financing of the welfare state. Let me give you an example of how taxes make prices go up:

Let’s assume I make 100 EUR per day in my job as an accountant. I need to paint my house and I hire Christian to do the job. He charges 100 EUR per day. There are no taxes and Christian estimates it will take five days to paint my house (500 EUR). That means I need to work five days to pay Christian 500 EUR for this job.

But before Christian starts, the newly elected government implements a new income tax: 40% tax on all income. Christian still needs 500 EUR in net income for this job, and this means I need to make 833 EUR before taxes to pay him 500. This obviously means I need to work 8.33 days to pay Christian. Unfortunately, Christian is also liable to taxes of 40%, thus he requires 833 instead of 500. This means I need to make a net 833 EUR to pay him, resulting in 13.88 days of work (1 388 EUR).

I make a deal with Christian. But again, the government implements a 25% VAT on all services. Christian is self-employed and needs to add VAT on top of the 833 EUR: 1 041 EUR. Thus, I need to make a gross of 1 735 EUR. I end up working 17.35 days instead of the original five days.

What is the lesson to be learned? All taxes ultimately end up being paid by the consumer.

Of course, in the real world we could see the following also happen because of the new taxes:

  1. I paint the house myself to save money.
  2. I pay Christian cash and no taxes.
  3. We agree on a lower amount, for example, Christian accepts just 400 EUR net profit, but this is unlikely.

This is of course a very simplified construction of events. The marketplace is complex, and it’s very hard to foresee exactly what will happen.

The Norwegian government estimates the “efficiency loss” is about 20-30% due to taxation. Personally, I think it’s a lot higher but this is of course impossible to prove because this cost is “hidden” and not observable.

Another aspect of taxation is corruption. The more taxes we pay, the more corruption (all other things being equal).