Welfare Wean

By NIMA SANANDAJI

Siamak Alian is something of a rarity in a Scandinavian welfare state -- a successful immigrant entrepreneur. Mr. Alian came to Sweden in 1989 with a degree in nuclear physics from the University of Tehran. Unable to find a job in his field, he pursued a degree in electronics and alongside his studies founded a computer equipment import company. Within six years, his firm grossed some €10 million annually.

Ryan Inzana

Mr. Alian notes that many in his surroundings initially advised against becoming an entrepreneur: "Why should one start a business?" they asked. [...]Especially for immigrants, the first signal from Swedish society is not that you ought to work, let alone become self-employed. The message is that the state will take care of you.

In the Western world, Sweden is often considered a Social Democratic paradise, the irrefutable proof that the welfare state can transform society for the better. But outsiders, and still too many Swedes, tend to overestimate the gains and underestimate the costs of social engineering.

To start with, homogenous Sweden was already an egalitarian society with few social problems before the expansion of the welfare state. It is often forgotten that in 1950 Sweden had lower taxes, fewer trade restrictions and more hours worked per working-age person than contemporary U.S. -- and yet was already blessed with essentially the same flat income and wealth distribution it has today, half a century after the expansion of the welfare state.

In the 1950s and 1960s, the integration of migrants worked quite well. The foreign-born had a 20% higher employment rate than native Swedes in 1950. Half a century later, in the mature welfare state, the picture has dramatically changed. According to the latest figures, only 48% of non-Western immigrants are gainfully employed, which is 30 percentage points below the average. For this group, originating from places such as Turkey, Chile, the former Yugoslavia, the Middle East and North Africa, welfare dependency is nine times higher than for native Swedes.

No doubt, a generous welfare system initially helps many immigrant families, cushioning the transition to a new country. However, the combination of high taxes, a regulated labor market, the world's highest union-imposed minimum wages and the lavish transfer programs effectively keeps out immigrants from the labor market.

Last year, the OECD advised Sweden to pursue labor-market and welfare reforms to tackle immigrant unemployment. The OECD recommended policies such as "substantial easing of job security rules, more individual wage flexibility and considerable reductions in benefit levels."

Sweden's powerful unions and the left-leaning intellectual elites work against such reforms. Swedish voters, though, are beginning to have mixed feelings. In 2006, they ousted the Social-Democratic government and elected a center-right coalition that promised to cut taxes and benefits. Labor-market reforms, though, were missing from their election campaign.

High unemployment among immigrants is of course not confined to just Sweden or Scandinavia. Throughout Europe, governments have found that well-intentioned social insurance policies can lead to lasting welfare dependence, especially among immigrants. Belgium is the European country with the highest difference in employment rates between the foreign-born and natives. The images of burning cars in the suburbs of Paris that were broadcast around the world illustrate the kind of social and economic problems France is facing with its restive immigrant population.

Given the high barriers to entry, many immigrants in Europe no longer start accumulating essential language and labor market skills. This is in stark contrast with the situation across the Atlantic. For example, in 2000, Iranians in the U.S. had a family income that was 42% above the U.S. average. The income of Iranian immigrants in Sweden, however, was 39% below the country's average.

Uri Harkman, a 60-year-old Iraqi who runs the fashion company "Jonathan Martin" in Los Angeles, says countries such as the U.S. and Australia, which reward work and entrepreneurship, are better fitted to integrating immigrants than "Social Europe." "In the European welfare systems," he says, "it is too easy to live off the government and there are simply not enough incentives to work."

The high unemployment rate is not only a drain on public finances. It also removes the most efficient path to integration. Permanent welfare addiction has an adverse and long-lasting effect on immigrant communities and their norm formation.

When many adults in a neighborhood no longer work for their living, the younger generation is less likely to acquire necessary work ethics. If their role models are unemployed, chances are that they'll remain on the fringes of the host society as well. This can set off a vicious cycle of social tensions.

Immigrants may interpret their lower social standing as caused by racism and discrimination. Many natives in turn may interpret the low employment rates of foreigners as a sign of their sloth. That's an explosive mix of misperceptions and social failings.

Liberalization is no panacea for integration, and it is doubtful that economic reforms alone would eradicate the high unemployment among Europe's immigrants. But it can take us a long way toward that goal.