Denmark's flexicurity model: ready for export?

Some European politicians are turning to the Danish 'flexicurity model' - a combination of easy hiring and firing, generous unemployment benefits and an active labour market policy - in an attempt to reinvigorate their sluggish labour market. This week French PM Dominique de Villepin, for example, announced measures to boost youth employment that seem to have been inspired by the 'flexicurity' model.

But if it's such a great system, why haven't other European countries adopted it already? After all, the model has been around for over a decade and has been actively touted by the European Commission. Two French labour economists, Yann Algan and Pierre Cahuc, attempt to explain this puzzle. In a new IZA discussion paper, Civic attitudes and the design of labor market institutions: Which countries can implement the Danish flexicurity model?, they argue that the generous unemployment benefits that form part of the Danish model can only work in a high-trust society where few cheat the system:

We argue that the flexicurity model is hardly sustainable in countries displaying weak public-spiritedness because the unemployment insurance design raises moral hazard issues that are much more difficult to overcome in countries where individuals are more prone to cheat over government benefits.

Besides, we are also able to document that civic attitudes cannot be systematically changed quickly just by changing institutions. This result has far-reaching consequences for the policy reforms agenda. It indicates that civic attitudes impose real constraints on the choice of labor market institutions. From this point of view, it is unlikely that countries with weak public-spiritedness can implement the Danish Model without specific action aimed at changing the values of their citizens.

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

France is not such a country. The authors demonstrate that it has a much less generous unemployment benefit system than the Danes, and the French are much more accepting towards welfare cheating. On that evidence no sane French politician would want to import the flexicurity model. The authors conclude:

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

This is an interesting proposition. While it doesn't wholly resolve the policy question, it takes us some of the way there. It also helps answer the vexed debate over whether the Nordic model is exportable.

Comments

[Claus Vistesen]

During the recent spell on the Nordic model here at NewEconomist I responded over at my own blog http://clausvistesen.squarespace.com/alphasources-blog/2005/12/8/looking-to-the-north-for-a-remedy.html

I more or less agree with the basic principle of the points above; i.e. the model cannot be easily exported because of societal differences. I don't know yet whether I will go for the "public spiritedness" argument though. However, the quote below from my blog still sums up my views on this matter.

"France cannot rely on some Nordic model to come to the rescue bringing prosperity and wealth. And even if cherry picking the economic virtues of the Scandinavian countries would indeed be a solution, France has some issues to deal with which cannot be remedied by the cross-national transfer of economic ideas."

[Edward Hugh]

Yes, Claus, and there is also the 'insider' 'outsider' issue I mentioned in the French labour market context yesterday.

New Economist had a relevant post here:

http://neweconomist.blogs.com/new_economist/2005/09/denmark_doesnt_.html

From the Migration Policy Group European Civic Citizenship and Inclusion Index 2004;

New Economist:
More of a surprise were the laggards. Greece and Luxembourg did badly, but worst was Denmark - it was well below-average in all five policy strands. Third Country Nationals account for 5% of the Danish population. Their unemployment rate is more than three times as high as Danish nationals, and the gap has widened since 2002.

The report itself comments:

"The 1992 Danish opt-out in the sector of Justice and Home Affairs – coupled with an opt-out on European citizenship – affects commentary on migration and inclusion issues considerably. While the Danish Presidency of the EU made a positive reference to the economic and social inclusion of TCNs in 2002, this remains an extremely sensitive area in domestic political debate."

Don't you have really strict marriage laws, and a not very friendly attitude to Polish and other new EU member workers?

Actually, I must go and have another look at My Life As A Dog.

Meanwhile, a post on your blog about Denamark, and the limitations would be really interesting, Claus.

[Claus Vistesen]

"Don't you have really strict marriage laws, and a not very friendly attitude to Polish and other new EU member workers?"

Ohh yes ...

Actually the Danish government had to amend the "marriage with foreigner" law today because of increasing pressure from Human right watchers. Personally I support the sitting government but their attitudes and tone towards especially the muslim minorities are not something to be proud of.

Concerning Polish plumbers I don't think our attitudes are any worse than other places. Like in other countries it is the unions who, rightly or not, see cheap labour from Eastern Europe undercutting their work and living conditions.

"Meanwhile, a post on your blog about Denamark, and the limitations would be really interesting, Claus."

What limitations? Limitations of the flexicurity model? Well, the Danish economy is steaming ahead in the moment so I do not know whether I could argue that the flexicurity model is doing Denmark bad other than the fact that it is very expensive ...

However, if there is one group of countries who will potentially suffer from the classical demographic notion of "fewer young people to subsidize more old people" it is the Scandinavian countries and most notably Denmark and Sweden because their welfare systems are very expensive ... Normay is home-free because of oil reserves :).

[Edward Hugh]

"What limitations? Limitations of the flexicurity model?"

Yep, I think nothing can be 100% good. There must be downside aspects somewhere. I think it is important to look at everything.

Let's be clear, I think the idea behind your system is excellent, changing jobs frequently and re-training in-between (at least this is how I understand it).

But then I don't understand this:

"Their unemployment rate is more than three times as high as Danish nationals, and the gap has widened since 2002."

The system should be working for these people too.

"Concerning Polish plumbers I don't think our attitudes are any worse than other places."

Well they do seem to be worse than in the UK and Sweden, for eg.

"At the moment, only the UK, Ireland and Sweden have fully opened their labour markets to workers from the post-communist countries that joined the EU in May 2004".

http://euobserver.com/9/20684

Also the system seems to rely closely on Trade Union support and participation (which you note in your quote from Le Monde in your piece on Denmark and France). This does lead to downside situations like these:

http://more.fistfulofeuros.net/archives/001942.php

What follows comes from (the Danish-run) EU Observer

"Danish trade unions have accused the Polish embassy in Copenhagen of encouraging Polish construction workers to ignore the collective agreements that regulate the Danish labour market...."

"They argue that the Danish labour model is being undermined but their opponents believe that the Danish trade union model itself undermines the EU principle of freedom of movement."

"The Polish embassy website had informed Polish workers interested in coming to Denmark that they should comply with regional and national agreements on salaries and working conditions, but also points out they are not under legal obligation to do so."

"This would mean that Polish workers could technically work for under the agreed minimum wage - making them more attractive than Danish workers."

[Lyle Scruggs]

While I am sure that values count for something, the main problem with the "values" premise in Algan & Cahuc's paper is that it simply ignores the facts:
1. the current Danish system has considerable enforcement mechanisms in place to stop cheating and encourage "reactivation".

2. Before "flexicurity" (i.e., prior to the early 1990s) Denmark had virtually unlimited unemployment benefits and comparatively little in place to activate people. From 1980-1993 its average unemployment rate was around 8.5% (it was 9.5% in France). (Note that this contrasts with Sweden where "activation" type labor market programs are more long-established)

3. After "flexicurity" was implemented (circa 1993) the regime shifted to were greater time restrictions on benefits, more stringent conditions to receive benefits. For most people with wages greater than say 80% of the average full time wage, benefit levels were cut considerably. (The nominal rate of wage replacement remained high, but the maximum benefit level lagged full time wages, with the effect that a wage earners effective replacement rate as a portion of his/her work income is considerably lower now than 10 years ago). Given all of this, and the differences from past practice, it is perhaps not surprising that Danish unemployment came down considerably, and is now 5% or so.

Thus, one hardly needs to appeal to Danish virtue to explain its change in unemployment. Presumably Danes were no less virtuous in the 1980s than they were in the 1990s; and if the opinion polls are to be believed, they were not.

If one really believed that Nordic values were driving this, one would be hard pressed to explain why the Finns found it so necessary to crack down on unemployment benefits for so long after 1989, and why the Swedes reined in its UE benefit generosity when the state gave up on full employment in the early 1990s. Presumably such changes would not have been necessary to get Nordic people to work more.

What the French and many other Continental Europeans also have that the Danes don't is much more legal job protection. The lack of job security is the "flex" part of flexicurity. (Denmark has comparatively low rates of job tenure.)

So the question of whether the model is exportable hinges a lot more on whether you plan to export the whole thing, the "flex" part or the "security" part. It seems like much of the sympathy for the Danish "model" is that its reduction in unemployment did not massively increase income inequality, something definitely NOT true in other countries that reduced or maintained low unemployment (i.e., UK or US). Different people (and you can probably predict their economic positions) tend to advocate just one of the "partial" solutions-- more "flexibility" or more "security"-- without biting the other side of the apple.

As an aside (I do not recall if it is in their paper), it seems that a "cultural" view would perhaps look for culturally similar cases for France to emulate. Spain, anyone?

[old Danish economist]

A decade ago, the Danish umemployment rate was equal to that of present day France and Germany. What has changed? Flexibility, security or both? Neither, actually.

Two things are worth noting.

First, generosity of benefits have drastically decreased for young unemployed, leading to a similar drastic reduction in youth unemployment.

Second, while unemployment benefits to older unemployed have grown at a lower rate than wages, they are still quite generous. However, "active labour market policies" have been implementet that require the unemployed to be "activated" and work effectively as a tax on the unemployed. Not an income tax, though, but a tax on time and utility.

[Jim Tressor]

Here is another interesting article on flexicurity - discusses some potential negative impacts

http://www.mindreign.com/en/mindshare/Global-Economics/Flexicurity-and-European-Unemployment/sl35291137bp292cpp10pn1.html