The Danish Flexicurity Model

The Nordic Model blog posted this summary of a paper by one of the grand-daddies of Danish flexicurity (blog comments in italics, followed by the text):

When Per Kongshøj Madsen, one of the fathers of the flexicurity Danish model, from the CARMA centre of the University of Aalborg, writes an excellent synthesis about flexicurity and the Danish model. You will learn what are the 4 pillars of flexicurity, and have a balanced view on the Danish model, far from the excessive views of those who worship it and those who hates it. This paper has been prepared for the European Employment Observatory, and is a Danish contribution to the EEO Autumn Review 2006 ‘Flexicurity’.

Introduction

The period since 1993 has been a ‘golden age’ for the Danish labour market. In 2006, recorded unemployment was at its lowest level since 1975, and the employment rate is now the highest in the European Union. This has attracted a good deal of international attention. Thus OECD has cited the Danish combination of a flexible labour market and high social security as a role model for other European countries (OECD, 2004, chapter 2). In connection with EU’s employment strategy, and in individual EU countries such as Germany and France, Denmark has been used as a textbook example of how a member country can combine a dynamic economy, high employment and social security. In the international debate on flexicurity – or ways of combining labour market flexibility and social security – references to Denmark abound (Wilthagen 1998; Wilthagen and Tros 2004; Madsen 2003; European Commission, 2006, chapter 3).

On the Danish political agenda, the term “flexicurity” is relatively new and only became commonly known after the stamp of approval given by OECD in the summer of 2004 (OECD, 2004; Beskæftigelsesministeriet 2005). Now the concept is frequently referred to for instance in the Danish National Reform Programme from 2005 and the National Progress Report from 2006. Also among the social partners, the new awareness of the positive interplay between flexible labour markets, social security and active labour market policies is gaining ground. Thus a common understanding is growing both among policy-makers and other actors, which underscores that the high level of social security (and thus taxation) is an important precondition for a flexible labour market. It also implies the view that retrenchments of social security will lead to a less flexible labour market.

The four elements of flexicurity in Denmark

This section looks in more detail at the four elements of flexicurity in the Danish context. Then the elements are joined together in an analysis of the so-called Golden Triangle that highlights some characteristic features of the Danish labour market.

Employment protection

In the recent exposure given to the Danish employment system, it is generally emphasised that the overall level of employment protection in Denmark is at a low level and comparable to liberal labour markets like that of the United Kingdom. Furthermore, this low level of protection is a longstanding feature of the Danish labour market dating back to the General Agreement between the social partners that was the outcome of a general strike in 1899. The so-called Septemberagreement defined the right for the employer to manage the work-place (including the right to hire and dismiss workers), while the employer on the other hand recognised the trade unions as legitimate counterparts in negotiations about wages and work conditions. One of the characteristics of the Danish labour market is that this low level of employment protection has been intact until present times.

Regulating individual employment protection and setting rules concerning dismissals is therefore largely left to the social partners. As a result of this, a closer look at the employment protection found on the Danish labour market will reveal that the level of protection against dismissals varies between different groups and between different sectors. By example, in the construction sector dismissal periods can be only one day, while other blue-collar workers have an employment protection similar to that of salaried workers (cf. below). The overall assessment of employment protection in Denmark is however that the protection level is in the lower end of the spectrum (cf. OECD 2004, chapter 2).

As an important exception, the dismissal of salaried workers is regulated by a special piece of legislation, while the rules for blue-collar workers, as mentioned, are defined as part of the general negotiations between the social partners. But even for salaried workers the term of notice is rather short, depending however on the seniority (length of time employed) of the employee. For a seniority of less than three years, the notice period is three months. The maximum notice period is six months after at least nine years of employment. For some groups the employer also must present a concrete reason for the dismissal, either based on circumstances related to the employee or the firm.

An interesting trait is that there are no special regulations for public employees, which are in general subject to the same rules as in the private sector. The exemption is the minority of public employees, which still have a special status as public servants, although the tendency over the last decades has been to phase out this category of public employees. Active labour market policy

In 2006 and 2007 the so-called “Structural Reform” will imply major changes for the organisation of Danish labour market policy. The 14 labour market regions (each headed by a director and a tripartite council) will be replaced by five labour market regions – each still with a tripartite council. The latter will however have fewer responsibilities than before. The reform thus implies that the role of local government in the implementation of labour market policy will increase and that the influence of the social partners is reduced.

At the level of the municipalities, the reform creates new jobcentres – one for each municipality. The jobcentres will be responsible for both the insured and the uninsured unemployed and will thus combine the tasks, which are currently the responsibility of the social assistance branch of the municipalities and the public employment service. However, apart from 14 pilot job-centres, the formal legal responsibility for the unemployed will still be divided between a state-branch and a municipality-branch of each jobcentre. The model is thus a hybrid one between a one-tier and a two-tier system (Arbejdsdirektoratet, 2006).

A major advantage of the new institutional design is that it – albeit still formally a two-tier system – allows for a much closer coordination and cooperation between the civil servants from the former public employment service and the social assistance branch of the municipalities. Thus the competences of the former PES-staff (focused on the demand for labour) and the social assistance officers (focused more on the social problems of the individual clients) will come together in the new job-centres.

The reform should also allow for a more transparent administrative system and reduce the need for sending both unemployed and firms from one public office to another. In principle the job-centres will be able to handle all labour market related matters.

A third advantage is that the new system provides a simpler line-of-command from the national to the local level. An important point moreover is that the legal basis for active labour market policy will be included in a single act compared to the present situation, where you have separate pieces of legislation for the state branch (the PES) and the municipalities.

While the reform has, not surprisingly, been strongly supported by the representatives of local government, it has met strong criticism from both the social partners and a number of independent observers. The major points raised in this connection are the following.

At the local level the hybrid character of the new jobcentres with two categories of staff (the state employed and those employed by local government) and a corresponding divided management may create problems in the implementation and functioning of the reform. Given the limited size of the labour market, which is covered by each job-centre, there is also a risk that labour market policy will become too local in its focus and not take the larger regional imbalances into account. An important task of the new regional organisation is of course to reduce this risk, but the problem is whether the new authorities at the regional level are powerful enough to overrule local interests. For the largest of the new municipalities and for lower skilled groups, the disadvantages from a narrow local focus are probably limited. However, about half of the new municipalities will have less than 50,000 inhabitants and for them – and for higher educated groups – the geographical area covered by each of the new job-centres may be too small.

The smallness of some job-centres also entails the risk of lack of specialised competences, when it comes to specific groups on the labour market. Here again higher educated groups can be mentioned as an example. In the reform, this risk is to be controlled through further extending the use of private service providers. While this may solve the problem due to lack of competences in the smaller job-centre, it also raises new questions about the specific skills needed to handle such private service providers, when it comes to defining contractual terms and the economic and legal incentives to be applied.

At the regional level, the weakening of the competences of the regional labour market boards entails the risk of dismantling the tradition for a having an overarching plan for creating a better match between regional demand for and supply of labour.

Concerning the implementation of a national strategy for labour market and employment policy, the reform on the one hand increases, as mentioned above, the potential for implementing such a strategy. But on the other hand, Denmark has a long tradition for self-determination at the level of municipalities, exemplified by having the municipalities collect their own taxes. There is therefore a risk that the new and larger municipalities will pay more attention to local political interests than to strategies formulated at the national level. On the other hand, if the response by the Ministry of Employment is to tighten the use of detailed regulations and indicators in monitoring policy implementation, one outcome could be a more mechanical and standardised use of instruments than under the present system.

A final challenge for the new system is to engage the social partners in the implementation of labour market policy. This engagement has, under the present system, been supported by the fact that the participants in the tripartite bodies at the regional level had a major influence over the allocation of economic resources for active measures. Given that this is no longer the case, one can question the enthusiasm with which the social partners will engage themselves in the new system of governance.

Life-long learning

Besides the employment security provided by active labour market policy, education policy also plays an important role in the functioning of the Danish flexicurity model. Again, the social partners are highly involved and institutionally committed to the planning and implementation of education policies, in particular continuing vocational training (CVT) policies. A specific institutional characteristic of the Danish CVT policy is that it provides services and training for both the employed and the unemployed (and thus cuts across the two corners of the flexicurity model; the flexible labour market and the active labour market policy). Under the formal responsibility of the Ministry of Labour (now Ministry of Education), but administered largely by the social partners, continuing vocational training of unskilled workers was established in 1960, and a similar system established for skilled workers in 1965.

From the late 1980s collective agreements also included agreements on education, usually entitling the employees to two weeks leave per year to participate in job-relevant education (Lassen 2002). Even if the social partners are planning and administering the system of CVT, the state is the main financer of the system, just as the case of the unemployment benefit system. This financing system externalises the costs of training and education from the firms, and indirectly serves as a government subsidy to the competitiveness of Danish industry. Partly as a result of this financing arrangement and the extensive rights of participation in CVT, Denmark has for a number of years ranked consistently among the top-performers in Europe in relation to participation in CVTactivities. Since the CVT-system is predominantly financed by the public budget, CVT-activities are more likely to provide general rather than firm-specific skills, which are transferable on the external labour market, and improve the functional flexibility of internal labour markets. Also, by allowing unemployed workers to improve their general skills during economic downturns, firms are in a better position to compete once the economy improves.

Thus, the unemployment benefit and adult vocational training system seems to be mobility enhancing by creating numerical and functional flexibility in the labour market. In this case, welfare benefits and services can actually be perceived not as impediments or barriers, but as investments in a mobile and flexible labour market.

The most recent political development in this area is related to the general negotiations between the social partners in the spring of 2007, where continuous vocational training and life long learning is a major issue at the central level of negotiations. The Government has promised to support a reform of the CVT-system by 1,000 million DKK, if the social partners can agree on a reform for boosting CVT, which will also imply increased financing of CVT from employers and employees. Social security

A characteristic feature of Danish social security and labour market policy is the development and stability of a two-tier system – one for the employed and unemployed – and one for those groups with no attachment to the labour market (Damgaard, 2003). Both systems had until the end of the 1800-years social security as their focus. The municipalities were in charge of a public system that took care of those in need, while the guilds supported sickness insurance for the craftsmen and provided work for the unemployed members. Over the last hundred years those two systems grew into the present day two-tier system.

The Danish system of unemployment insurance is based on the so-called Ghent-system. It consists of 31 state recognised unemployment insurance funds. Ten of them operate within specific occupational fields, which means that only employed people from specific occupational fields can become members. Thirteen of the unemployment insurance funds operate within specific occupational fields, but also admit self-employed people working within the occupational field as members. Three of them are cross-occupational unemployment funds, which mean that they admit employed people from all occupational fields as members. Four of them are unemployment funds for both employed and self-employed people. One unemployment insurance fund only admits selfemployed people as members. When a person moves from one unemployment fund to another, either due to a shift in occupation or because s/he decides to do so, the right to unemployment benefits is transferred at the same time.

Most of the unemployment insurance funds are affiliated with one or more trade unions. While membership of an unemployment insurance fund is independent of being a member of a trade union, most workers will conceive the membership of the trade union and the affiliated unemployment insurance fund as a package. This is probably due to the long historical bonds between the two institutions and to the fact that trade unions do little to advertise the formal difference between the two kinds of membership. Also, of course, membership of a trade union offers some advantages, which are unrelated to receiving unemployment benefits like support in wage negotiations and conflicts with the employer.

The present version of the system for economic support for the unemployed dates back to the last large reform of the unemployment benefit system in 1970, where the state took over the responsibility for financing the extra costs of unemployment benefits that were caused by increases in unemployment (the principle of public financing “at the margin”). The members of the unemployment insurance funds will therefore only be obliged to pay a fixed membership contribution, independent of the actual level of unemployment.

This mechanism for financing unemployment insurance implies that the share of public funding depends on the total number of unemployed. In periods of high unemployment as in the early 1990s, the Government’s share rises to 80 percent, while it falls to less than 50 percent during economic upswings.

Apart from those having exhausted their right to unemployment benefits, the group of “noninsured” unemployed consist of those unemployed, which do not fulfil the criteria for becoming eligible for unemployment benefits in the first place. This group of unemployed must apply for cash-benefits administered by local government (the municipalities). Cash benefits are means-tested and the amount depends on the family-situation of the unemployed.

Relations between unemployment insurance, employment protection and ALMP

The balance and interplay between unemployment insurance, employment protection and ALMP are often summed up as being the main characteristics of the Danish flexicurity model in the following configuration: · A flexible labour market with a high level of external numerical flexibility indicated by high levels of worker flows in and out of employment and unemployment; · A low level of employment protection, allowing employers to adapt the workforce to changing economic conditions, makes the high degree of numerical flexibility possible. · A generous system of economic support for the unemployed · Active labour market policies aimed at upgrading the skills of those unemployed, that are unable to return directly from unemployment to a new job

It is important to emphasise that while the term “flexicurity” has only recently been associated with the Danish employment system, its basic characteristic has a long history. Thus while the current attention paid to the Danish model is caused by the significant reduction in unemployment since 1993 and the high employment rate, one should not confuse this recent success with the creation of a fundamentally new version of the Danish employment system during the last decade. To the contrary one of the fascinating elements of the story about the Danish labour market is the fact that the model has been able to survive since the founding of the modern Danish welfare state in the 1960s in spite of the economic turmoil of the 1970s and 1980s. Furthermore it has been successful in supporting the ongoing structural changes in the economy, which has kept Denmark in a position among the most affluent countries in the world (Madsen, 2006).

The Danish labour market model is often described as a ‘golden triangle’, cf. figure1. The model combines high mobility between jobs with a comprehensive social safety net for the unemployed and an active labour market policy. In fact the mobility (measured by job mobility, job creation, job destruction and average tenure) is remarkably high in an international comparison. The high degree of mobility from employer to employer is definitely linked to the relatively modest level of job protection in the Danish labour market. Another reason could also be higher risk willingness among workers due to the comprehensive social safety net. Despite one of the lowest levels of job protection among OECD-countries, Danish workers have a feeling of high job security among all subgroups of workers (Auer and Casez 2003). Also a recent Eurobarometer reported that a majority of more than 70 percent of the Danes found it a good thing to change jobs every few years (Eurobarometer, 2006)

Lifelong learning

The Danish flexicurity model (Madsen, 2006)

The arrows between the corners of the triangle illustrate flows of people. Even if the unemployment rate is low in an international perspective (3.8 percent in 2006), about 20 percent of the workforce is affected by unemployment every year and receive unemployment benefits or social assistance. But the majority of these unemployed people manage to find their own way back into a new job. Those who become long-term unemployed end up in the target group for the active labour market policy, which – ideally – helps them find employment again. The model illustrates two of the most important effects in this connection. On the one hand, as a result of the active measures, the participants in various programmes (e.g. job training and education) improve their qualifications and therefore their chances of getting a job. On the other hand, the measures can have a motivational effect in that unemployed people who are approaching the time when they are due for mandatory activation may intensify their search for ordinary jobs, in case they consider activation a negative prospect.

The social safety net in the shape of unemployment benefit and social assistance for the unemployed together with the high flexibility form the main axis of the model, in the sense that both elements have been characteristic of the Danish labour market for many years. On the other hand, active labour market policy in its present active form dates back to the series of labour markets reforms initiated in 1993.

Both in the international as well as in the Danish debate there has, from time to time, been a tendency to jump to the conclusion: that the success of the last decade is solely a result of the flexicurity model just described. It is, however, essential to point out that the positive development in the Danish labour market since the early 1990s is not attributable exclusively to the Danish flexicurity model. Without a successful balancing of the macroeconomic policy and the trends in the international business cycle, the growth in employment and the falling unemployment would not have been possible. The coinciding of low inflation and a halving of registered unemployment rates is also a by-product of a new agenda for collective bargaining and wage formation, which helped the labour market adjust to the shift from high unemployment to full employment while keeping wage increases at a moderate level and not departing from the international trend towards low inflation. This agenda developed gradually during the 1980s and was formalised by a joint declaration of the social partners in 1987, where they stated that they would take the international competitiveness and macro-economic balance of the Danish economy into account during wagenegotiations.

Governance

As it is evident from the description in the previous section, the Danish version of flexicurity is peculiar in the sense that it is a fully integrated element in the Danish employment system on a nation-wide scale. Also, it has been developed through a process lasting several decades, which has been characterised by the kind of consensus bargaining and compromising that is an integral feature of the Danish system of industrial relations. Therefore both the social partners and Government have played a crucial role in the historical development that has lead to the present state of affairs on the Danish labour market.

Also, one should mention that the flexibility of the Danish labour market and the high employment rate is supported by a number of welfare state arrangements like a general provision of child care and a system of life long learning that supports the transitions of workers between different jobs and occupation Conclusions

The Danish experience points to the feasibility of a “hybrid employment system” combining on the one hand the traditional virtues of a liberal labour market with few restrictions on the employment contract with – on the other hand – a reasonable level of economic protection of the individual wage earner. The Danish model therefore fits the picture of a possible positive interplay between a very flexible employment relation and a social protection system combined with active labour market programmes, which defends the individuals from the potential costs of a low level of employment security. In this respect the model represent an interesting alternative to the common idea of making the firms more responsible for employment by developing a high level of individual employment protection at the company level.

However, one should remember that the Danish model of “flexicurity” itself is the outcome of a long historical process involving a series of negotiations and compromises between the social partners, the evolution of the welfare state and – in recent years – a gradual development of a more active profile of labour market policy. The model is thus a prime example of the specific Danish version of the negotiated economy. Also the model is not immune to the challenges of globalisation. However the Danish way of configuring the balance between flexibility and security has been an important factor in keeping Denmark in the top rank of the OECD-countries measured both by living standard and by international competitiveness.

You can find the full version of this paper on the following website: http://www.eu-employment-observatory.net/resources/reports/Denmark-FlexicurityAR06.pdf