One of the primary dilemmas facing social democracy in the 1990s is that governments have to increasingly choose between equality and employment. This marks a critical change from the 1960s and 1970s, when social democracy offered a viable political strategy to simultaneously promote equality and employment for all. The old strategy - epitomized by the Scandinavian countries - was premised on a combination of centralized and solidaristic wage bargaining, flexible monetary policies, and expansion of a labor-intensive and redistributive welfare state. In this chapter I argue that this strategy has been undermined by two broad developments.

First, the rise of new technology and growing competition from newly industrializing countries have caused a diversification of the unemployment risk structure and a bifurcation of the labor force into a highly qualified, secure, and world-market-integrated segment, and a less-qualified, insecure, and sheltered segment. This has shattered the consensus underpinning solidaristic wage policies and the universalistic welfare state. Second, capital market integration has constrained the capacity of governments to run deficits and pursue inflationary monetary policies, thus limiting the incentives for employers and better-paid workers to agree to centralized controls on wage increases. As a result of these changes, pressure is mounting on governments of all stripes to adopt nonaccommodating monetary and social policies with the purpose of deterring wage—price militancy and inducing wage flexibility. Such policies engender greater inequalities, however, leaving social democracy with the difficult dilemma of having to chose between more inequality and lower employment.

During the “golden period” of social democracy, the trend across partisan divides and advanced democracies was to strengthen institutions and policies that facilitated a coordinated accommodation of worker and business interests, thereby forging convergence around a social democratic model of economic and social policy-making. In the 1980s and 1990s, by contrast, convergence in Northern Europe appears to occur around a conservative or “Germanic” model of capitalism, by which wages are set below the peak level (“industry bargaining”), macroeconomic are tied to a strict nonaccommodating policy rule (“monetarism”), and social policies perpetuate status differentials and labor market dependence (“commodifkation”).

The rest of this chapter is an attempt to substantiate these claims both theoretically and empirically, with a focus on Northern Europe and especially the changes that have occurred in Denmark and Sweden since the early 1980s.