We know that the European Commission, the OECD, the World Economic Forum and the World Bank all think very highly of Denmark. But what about the IMF? The Executive Board are quite positive in their latest Article IV consultation with Denmark. Yesterday's Public Information Notice states:
Directors noted that the Danish flexicurity model has worked well, contributing to Denmark's low unemployment. At the same time, they observed that it involves costly benefits and active labor market policies, which may make it less applicable to countries with high unemployment and weak public finances. Nonetheless, the model merits study by other countries, as a possible way to increase labor market flexibility.
However the accompanying report, Denmark: Selected Issues, is not quite as fulsome. It contains a 22 page paper by IMF economist Jianping Zhou entitled Danish for All? Balancing Flexibility with Security: The Flexicurity Model. The concluding remarks start off pleasantly enough:
The Danish flexicurity model has been widely praised for its association with a low unemployment rate and a high standard of social security for the unemployed. The model combines a high degree of labor market flexibility with a high level of social protection. While most European countries are facing chronically high unemployment rates and the needed labor market reforms often face strong political opposition, the flexicurity model looks increasingly attractive to policymakers in Europe. (emphasis in the original)
But then point out some of the potential problems in adopting the flexicurity model:
However, whether the Danish model should and can be adopted by other European countries to reduce unemployment is not obvious. First, Denmark has traditionally had a combination of a flexible labor market and a high level of income protection. Economic performance under this system has varied, as demonstrated by the economic crisis during the early 1980s and the remarkable labor market performance in recent years. Second, other countries have been able to reduce their high unemployment rates to low levels with rather different social models (e.g., Ireland, Sweden, and the United Kingdom). Finally, generous unemployment benefits often raise moral hazard issues that might hinder effective implementation of the Danish model. In this regard, a strict job search requirement and tight eligibility criteria for unemployment benefits are key.
The Danish model is costly. The tax burden in Denmark is heavy because of the need to finance the country’s high spending on labor market programs and unemployment benefits. As most countries that are tempted to adopt the Danish model will typically start from a high unemployment level, a move toward the Danish model will, in the short run, trigger a sharp increase in the cost of unemployment benefits and active labor market policies, thereby widening the tax wedge, with an adverse impact on labor demand and supply. This implies that the Danish model may not be suitable for countries facing high unemployment and budgetary difficulties. Using a calibrated model for France, the paper finds that implementation of the flexicurity model could be costly, and reduction in structural unemployment during the first few years might be limited.
Nonetheless, certain key aspects of the Danish model could usefully be studied and considered by other countries...
So the countries which could benefit the most from a more flexible labour market - those with high unemployment - would face high up-front costs and at best modest short-term reductions in unemployment were they to move to the Danish model. That's why the Danish (or Swedish or Dutch) model has not spread more widely - few politicians are prepared to bear the short-term fiscal and political cost for medium-term gains that may not occur until after they've left office. Gerhard Schroeder is a notable exception - and Germany is now starting to see unemployment rates fall. But how many other European politicians would dare follow his brave example?