Danish Flexicurity : A Social or a Liberal Fairy Tale ?

Many things have been said about the famous Danish labour market "miracle" where generous social provisions go hand in hand with a flexible labour market. Nevertheless many people do not know the background of this success. Allow me to introduce you to Danish Flexicurity.

Translated by Camille de REDE

Today, the unemployment rate is around 8.5%. At the same time, the results of the Danish social model remain quite outstanding with an unemployment rate barely reaching 3,4%. The growth level is also not to be forgotten (2%) as it represents the world’s fifth Gross Domestic Product per capita, right after Luxembourg, Ireland, Norway and the United States. There has been a lot of fuss about the “Danish miracle” where social well-being rimes with a high labour market flexibility and generous economic welfare provisions. Besides the debate about the model’s transposition, do you really know the reasons of its success ? The “Euros du Village” brings you the main keys for a better understanding of it all.

Being a member of the European Union since 1973, Denmark is today a well-performing and an original model at the same time, just like its Scandinavian neighbours who have innovative social policies such as the Swedish policy based on equality. As a matter of fact, the Scandinavian models more often set the example than the Anglo-Saxon ones which, nevertheless, also enjoy unemployment rates below the European average.

Denmark appears to be the perfect example of a well-performing economy that encompasses a flexible workforce, low levels of state-produced and paralyzing social legislation but still upholds high levels of social protection without paralysing the labour market. Quite the contrary, this unique mix seems to be the key to the Danish success ! The mix between flexibility and security appears to render the traditional choice between liberal or social policies insignificant by elaborating a innovative and progressive complementarity, which represents a source of inspiration for national and European public makers.

In the home country of Andersen, the fairy tale that labour unions and business leaders are living is the product of an ongoing historical development that dates back to 1899. Back then the labour unions and the employers associations signed the September Compromise which outlined their respective responsibilities in the matter of settling social conflicts and organizing the labour market in a general manner. This centenary text is the key. Nowadays, 80% of the population is a member of a unique central labour union, the LO. Social dialogue between the partners of the labour market partners is often preferred to any legislative intervention. Therefore, there is no legislation in place for employment contracts, dismissal of employees, working hours, etc. This well-established way of doing things is thus based on national framework agreements that are developed within each company through salary and work conditions negotiations. Under the social-democratic government from 1993-2001, more labour market issues were added to this model, such as retirement, parental leave, professional equity and life-long training. Today, one of the main priorities is to ease the foreign workers entry on the market (2% in 1984 and 7.5% in 2003).

The intervention of the social partners gives an essential sense of pragmatism to the whole system, which aims at adjusting the Danish economy to the current economical demands of our globalised economies, which require high levels of flexibility, especially when it comes to hiring and firing employees.

In this way, the flexible labour market, which is most often associated with the strongly criticised economic liberalism, has not produced any noteworthy debates. On the contrary, a flexible labour market seems to be accepted as economic facts of life and, above all, as perfectly complimentary with high levels of social security. Hence, being unemployed in Denmark is not an economic catastrophe. Every worker who has been affiliated to an unemployment insurance fund for at least a year, and who has worked for 52 whole weeks for the past three years, is entitled to receive his unemployment benefits if laid off. This allowance is around 25 000 euros a year (2100 euros gross per month), and can, for a maximum of four years, reach a salary replacement rate as high as 90% for the lowest paid employees. The first year, the allowance is paid without any questions asked but for the next three years the allowance is dependent on the demonstration of being ”active” labour-wise whether that is the participation in competence-trainings or in courses aimed at facilitating the job search. Thus the Danish system presupposes a notion of a « collective mobilisation facilitating the return to the labour market ». Responsibility is indeed given to the unemployed during his “activity” period : not only is he aware of his large benefits that are supported by the national taxes, but he also knows he has a certain duty to accomplish.

The Danish system redistributes money from the national taxes and not from specific social security taxes. Now this is in fact putting in place a national solidarity instead of one between workers themselves. Moreover, amazingly enough, despite its record tax rate within Europe (25% VAT while the tax bracket on incomes reaches 62.9%), there doesn’t seem to be any serious tax escape abroad, which truly demonstrates the national arrangement about public policies linked to social security and employment.

While the unemployment rate peaked in 1993 at 9,6% it was 6.2% in 2004. Today, it is below 4% and could be even lower if it was not for a large number of unemployed immigrants, who have proven difficult to integrate into the labour market. The Danish labour force mobility is high, as 30% of the employees change jobs every year (although the Danish people tend to work for the same company for an average of eight years). According to a study made by the Dublin Foundation in 1999, there is a general feeling of security, no matter the competencies.

Of course, one asks if the transposition of the Danish system to other European countries would be possible. But this is exactly where the Danish model may reach its limits as the country’s population averages 5.4 million and includes a historic labour union tradition. Even so, those facts did not prevent Denmark from being recently condemned by the European Court of Human Rights because of the monopole position of the social-democratic labour union LO in Danish companies, which limited the free choice of labour union of the employee.

Denmark is most certainly both a performing and an innovative country. But its high living standards and the will to preserve these are also the reasons why the Danish electorate turned their thumps down to the euro. The country has also introduced drastic measures in order to slow down immigration which was done under Danish PM Anders Fogh Rasmussen’s government (2001- ?) from the Venstre Party (The Liberals) in coalition with the conservative party and with the parliamentary support of the extreme right-wing populist party.

Image : Danish flag by Dominique Clerc (Exposition in Lille in 1999)