Up in the frozen north, it's the busiest time of the year. At the world's biggest toy production and distribution centre, the workforce is under pressure to fill the long list of outstanding orders to meet the Christmas Eve deadline. Outside, the snow lies crisp and deep and even, but inside Santa's workshop the pace never slackens.

Actually, workshop is a misnomer. It was the rebranding consultants who came up with the idea of a "workshop" after a whistleblower revealed that Santa's little helpers were underpaid, overworked and suffering from a range of stress-related illnesses. The workshop is actually the world's biggest warehouse, millions of square feet of aisles filled with toy trains, books and computer games.

The idea of the elf sitting happily at a workbench carefully stitching together a teddy bear is for the history books. These days, the average member of the workforce will walk 15 miles a night collecting toys from far-flung corners of Santa's shed and can expect a rollocking if their pace slackens.

Much else has changed in this far-flung corner of Lapland in the past 30 years. Back then, the workforce was full-time, saw their pay go up each year and could look forward to a pension based on their final salary. Today, all but a handful of supervisor elves are on zero-hour contracts, pay has failed to keep pace with rising inflation for the past five years, and there are no pensions. Elves who turn down shifts to look after sick children or to attend school plays are blacklisted; pay is docked for those who turn up more than two minutes late for work.

So what are the unions doing about this? "Ho, ho, ho," roars Santa. "We haven't had unions here since the great elf strike of 1984-5. Went on for a year that dispute did. Touch and go it was at times. Fortunately, we had seen it coming and stockpiled plenty of toys. Some of the elves carried on working and we had the strong backing of the government. Unions have never been allowed in the place since."

Here then, at the northern-most extremity of the globe is the flexible labour market in practice. The company says productivity and profitability have improved as a result of new working practices. It says zero-hour contracts are vital given the seasonal nature of the business and that jobs will be lost if the government bows to pressure for curbs on their use.

Santa's critics note that higher profits and productivity have not resulted in higher pay for the elves. They were seeing their real incomes squeezed even before the Fairy Tale of Wall Street had an unhappy ending in 2008, and then took pay cuts rather than lose their jobs. With welfare being cut, most plumped for a job over the dole even if it meant a cut in living standards.

Santa accepts that the workforce has made sacrifices. But he insists these are vital to keep the company going at a time of cut-throat global competition. The elves have to understand, he adds, that the alternative to zero-hour contracts and pay cuts would be that the jobs would be outsourced from Lapland to a lower-cost grotto in the far east.

In the meanwhile, the company is stepping up its pressure on the government to build a new high-speed rail line so that travel times for Santa's Express can be cut. It also wants more money to be spent on education as a remedy for the high level of joblessness among elves under the age of 25. Santa says the large number of migrant workers employed at the workshop reflects the fact that, by and large, they are cheaper and better educated.

He is rather more tight-lipped when asked whether there is a conflict between the company's call for higher spending on physical and human capital and its resistance to paying tax. Although most of the company's sales are in Europe and North America, its registered office is 4,000 miles away in the Cayman Islands, and records show that it paid £5,000 tax on a turnover of £1tn last year. "We pay whatever the law says we have to pay," says Santa, the mask of cuddly bonhomie for once slipping. "It is a tough world out there."

Unsurprisingly, few elves want to talk on the record about life at the "workshop". But those speaking privately say that the rising cost of gingerbread, candles and sleigh bells is making it harder to make ends meet. Many rely on payday loans from a firm run by particularly aggressive goblins to top up their wages. Almost all say they would work longer hours given the chance.

"Let's face it," one of the elves says, "Santa's reindeer are better protected by the law than we are. There are much stricter rules for animal welfare than there are for us."

This is only partially true. The company may pay little heed to working time directives, to minimum wage legislation and to the right of elves to form a union, but the elves are regularly tested to ensure they have not been taking a nip of Santa's brandy and are warned regularly that the grotto is a non-smoking environment where it is illegal to light up their pipes. The premises are monitored round the clock by CCTV.

Indeed, it is hard to escape the conclusion that the state is just as intrusive in the lives of the elves as it was 30 years ago, only with a change of emphasis. Back then, the rulers of Lapland thought it was the job of the government to ensure full employment. They used their stake in the toy business to ensure that the fruits of growth were shared between Santa and his helpers.

Today, the government takes a hands-off approach to jobs, profits, wages and prices but seeks to monitor and intrude into areas of life that used to be considered personal and off limits. The state has privatised Santa and nationalised the elves.

What's more, it is bigger and more powerful than ever. Few of the children who send their letters off to the North Pole each year realise that their notes are intercepted and scrutinised by Santa's security services.

"You really can't be too careful these days," Santa says, brandishing one such letter. "This might look like a perfectly innocent request from six-year-old Jimmy asking for a new bike for Christmas, but for we all we know it could be a coded message for a suicide bomber. Some of these children are right little terrors, you know."