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Anyone who wonders whether a flexible labour market can exist alongside a robust social security system should look no further than Denmark. There, employment protection legislation is less rigid than in some of its neighbours, but unemployment benefits are higher than in more deregulated Anglo-Saxon countries. On the other hand, seriously hunting for work is a precondition of receiving those benefits.

The upshot is that while many workers may be affected by unemployment every year, most of them return to jobs quickly. Those who do not, must take up demanding job activation programmes to help them get back on track.

Flexicurity, a term coined by the Dutch for a (slightly different) initiative in the 1990s, is how the Danes also describe their “third way” between extreme deregulation and over-protection. It appears to deliver results. In Denmark unemployment averaged just 5.6% in 2003, half its rate of a decade earlier.

How does flexicurity work? Most insured unemployed people in Denmark receive benefits from their first day out of work, which come to some 90% of their previous income, for a maximum of four years. For low-income groups, this income and other income-related benefits go some way to replacing the kind of net earnings a job, which itself may be highly taxed, would pay. This net income replacement rate varies from 63% to 78% for an average worker, depending on the family situation, and climbs as high as 89% for a single individual from a low income group, and to 96% for a lone parent with two children. Clearly, based on income alone, the unemployed would have little incentive to find a job fast. That is where the activation rules come in.

In Denmark, recipients of unemployment benefits are required to seek a job. And a law passed in 1994 made it obligatory for adults that are more than 12 months out of work to participate in so-called activation programmes. Under 25s have only six months to find work before activation becomes mandatory. The result is that Denmark’s long-term unemployment rate, at about a fifth of total unemployment in 2003, was lower than in the UK (23%) or indeed the Netherlands (29%).

A Danish activation period lasts for up to three years and may include private or public job training, job search courses, targeted education, and the like. If, after this period, the unemployed person still fails to find a proper job, they will lose their benefit entitlement, but will still be eligible for means-tested social assistance, whose net income replacement rate is far lower.

Although flexicurity produces results, such programmes can be costly, both in administration and transfers. According to a report by Per Kongshøj Madsen, government spending on labour market programmes, including benefits and active labour programmes, comes to 5% of GDP.

Flexicurity aims not just to cut unemployment, but to boost the size of the active workforce too. Under reforms in 2003, dubbed “more people into employment”, benefits are still available for four years, but activation programmes can kick in from the very first day of unemployment. The aim is to provide faster, more direct paths into work by using focused individual action plans and leaning more heavily on public employment services. By getting people into work, flexicurity can pay its way, but whether it can bear fruit in a less favourable economic climate than that of recent years remains to be seen.

References

Madsen, Per Kongshøj (2002), The Danish Model of Flexicurity: A Paradise with some Snakes, European Foundation for the Improvement of Living and Working Conditions. 

OECD (2004), Employment Outlook, Paris. 

©OECD Observer No 244, September 2004




Economic data

GDP growth: +0.2% Q4 2019
Consumer price inflation: 2.3% January 2020
Trade (G20): -0.1% exp, -1.3% imp, Q4 2019
Unemployment: 5.1% January 2020
Last update: 11 March 2020

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