Introduction to applied methods for life situation calculations

The calculations used for the life situations are designed to make country specific data as comparable as possible across the Nordic countries. 

The calculations reflect the income levels for people receiving benefits in case of a social event, compared with the level of regular labour market income in the Nordic countries. That is, the level of income as compensation due to a social event is presented as a percentage of the level of income prior to the social event. 

For example, if the social event is losing one’s job, the comparison will be between how much one earns after becoming unemployed and how much one used to earn while still in employment. On this basis, compensation rates are calculated for different life situations and according to varying income levels from work before the social event.

To make sure that the calculations are comparable across countries, a few elements within the calculations are standardised. This is important to make meaningful comparisons possible, but also for understanding the results.

In general, all calculations are made according to the most recent rules and regulations. For the same reason calculations are always expressed for a specific year. The rule of thumb is that rules and regulations used are those in force by 1st of January of the year in question.

When calculating disposable income, housing benefits and payments for day-care are included. Both expenditures are dependent on household size and income, which therefore plays a substantial role when calculating the compensation rate following a change in life situation.

In the case of calculating social assistance benefits, the disposable income is calculated following the subtraction of rental costs.

Employer costs

To present a picture of overall taxation in the Nordic countries in terms of income tax and social contributions, the calculation used to include employer costs i.e., gross wages plus statutory social contributions (the assumption is that the individual concerned works in the private sector). These data are no longer available in the Nososco Hypothetical Household tool. 

Tax payment

The calculation uses average national rates of taxation i.e., average local authority rates of taxation, as well as the state tax. 

In Denmark the church tax is voluntary. However, it is paid by more than half of the population. In the calculations for couples in Denmark, it is assumed that only one person pays church tax. In all Danish calculations for couples, it is the person with the highest earning, who is estimated to pay church tax.

In Finland the church tax is not mandatory, a person may opt out of it by resigning from the church. Because of this opt-out possibility the church tax is classified as a voluntary membership fee and thus not considered in Finnish life situation calculations.

In Norway there is no church tax, and it is therefore not included in calculations.

For Sweden, the church tax (which is voluntary) is not included from year 2016 onwards, the funeral fee (not voluntary) is included for all years. Tax deductions (for example basic deduction and earned income tax credit) are included. The public service charge is also included in the tax.

Gross income

Gross income consists of income from work, and excludes e.g., child allowance and housing benefit.

Disposable income

Disposable income is calculated as:

Disposable income = gross income + child allowance + housing benefit, - income tax, - social security contributions payable by employees - charges payable for day care institutions. 

For selected cases unemployment fund contributions are included in the calculation of disposable income.

For Denmark, Finland and Sweden, the social security contributions payable by employees include contributions to the voluntary unemployment insurance scheme, in the form of membership fees paid to unemployment funds. The Danish calculations also include union contributions. 

Disposable incomes are calculated on a yearly basis, both for people in work and for those receiving various social benefits. The calculations assume that those concerned receive social benefits throughout the year, even where this is not the case (e.g., parental benefit). The listed incomes per month are the annual amounts divided by 12.

Equivalent disposable income

To enable comparisons between households of different sizes, a household’s disposable income is usually divided by an equivalent weight. On this website, the modified OECD scale (also used in EU-SILC) is applied. 

On the OECD scale, the first adult in the household is assigned a weight of 1. Any other adults are assigned a weight of 0.5. Children between 0–13 years are weighted at 0.3, whereas older children are weighted at 0.5. 

Therefore, for a couple with two young children, the equivalent weight is:

1+0.5+0.3+0.3 = 2.1. 

If the annual disposable income of a household is DKK 500 000, the equivalent disposable will be: 500 000/2.1 ≈ DKK 238 000.

Compensation rate

The compensation rate is calculated by dividing the income following a change in life situation (e.g., in the event of unemployment, income in the form of unemployment benefits), with the income one would have earned from work had the change not occurred. The calculation uses equivalent disposable incomes, with the resulting compensation rate given as a percentage:

Compensation rate = eqv. disp. income after / eqv. disp. income before.

Children’s age and use of day care

Child allowances and charges payable for day care is calculated based on the following households: 

• A single parent with an infant of 0 years i.e., childbirth as a life event 
• A single parent with a child aged five attending day care. 
• A couple with two children aged five and eight i.e., one child attending day care and one child attending school but in need of after-school care.

For Denmark charges payable for day care are calculated based on average charges and the national rules governing payments. 

For the Faroe Islands, calculations are based on the rates that apply in Torshavn. 

In Finland, it is assumed that other children of preschool age also make use of day care facilities, albeit on a part time basis only. The rates used are the ones applied in Helsinki.

For Iceland, calculations are based on the rates that apply in Reykjavík.

In Norway, it is the rates that apply in Oslo.

For Sweden, calculations are based on rates that apply in Örebro, as an approximation of an average municipality.

In most of the calculations of life situations, except for the new-born child, 

it is assumed that the children are attending day care. In Sweden, the children are not allowed fulltime day-care if you are unemployed, therefor the charge is not calculated for unemployment.

For child allowances, the calculation includes child maintenance payments for single parents (corresponding to the amount of the contributions payable in advance by the public authorities), in addition to the actual child allowance to single parents and couples with children.

Housing costs and housing benefits

In all calculations, it is assumed that the families live in rented accommodation. 

The amount of the housing costs/rent depends solely on the household and is independent of income level. Housing costs include rent payments. For the life situation involving social assistance, heating costs are also included. 

It has not been possible to determine the amount of rent for the individual households in a manner that is consistent across all the countries. 

In some countries, the rent is based on an estimate of the amount spent on rented accommodation per household, as well as the national average rent per square metre. In others, it is based on survey data of rents for various households in certain local authorities. 

Except for the life situation involving social assistance, the rent for the 

individual households are merely used to calculate the amount of any housing benefit – the rent itself is not included in the calculation of the disposable income.

For the Danish calculations, the rents are based on the national average rent per square metre. It is assumed that a single person without a child, or with a newborn, lives in a 70 sqm space, and that single parents with one child live in 85 sqm. Couples with no children or with a newborn are estimated to live in 85 sqm, whereas couples with two children are estimated to live in 100 sqm. These housing sizes are also applied when calculating housing benefits.

In the Faroe Islands the rent is based on a typical home with the Faroese housing association in Torshavn.

The rents in Iceland are based on data that applies only to Reykjavik. 

For Norway, the rents are based on the data for Oslo in the first quarter of the relevant year. In this case, the assumption is that the rent depends on the size of the household. Furthermore, housing benefits are estimated by means of Husbanken’s housing benefit calculator. It also uses the Oslo rates.

The rents in Finland are national averages for the recipients of housing aid within the specific household composition in question.

For Sweden, data from the microsimulation FASIT is used. The rent is based on data for people applying for housing benefits and then imputed for similar apartments. The median for each household type is used. The rents are adjusted to current year’s rent level with statistics from a survey.

To measure different levels of income across countries, the standard OECD concept of Average Worker (AW) is used. Definition of AW is the average income for a full-time waged worker in the private sector. Four different percentages of AW are the basis for the calculation of compensation rates: 50, 75, 100, and 125 per cent of AW. 

The working group have investigated the dispersion of employees with income proportional to the AW-level in all Nordic countries. The graph demonstrates the rate of employees between the age of 18-67 years in each country who receive salary from employment.

Previously the working group assumed that there would be a similarity between the average wage (AW100) and the most frequent income among employees in a Nordic country. Testing this hypothesis gave new understanding of the dispersion of income and resulted in a change in the use of AW-level to illustrate the most common level of income. 

In the calculations, it is therefore the income of 75 per cent of AW that is considered to represent the most frequent income level. The working group consider AW 75 a better representation of the wage income of average wage worker, based on the overall level of income for the Nordic countries. 

The purpose of life situation calculations is to examine the dissimilarities among all the similarities, as the Nordic countries are defined by an elaborate social safety net and a universalistic welfare state. 

The Nordic social protection systems can as such be seen as variations of the same model, and therefore there is much to be learned from comparing the countries.