Danish for all? No thanks, says IMF

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?

Comments

[claus vistesen]

uh oh, thanks for this; very interesting!

So the IMF is critical of flexicurity?

Rightly so, I should say. The idea of cheery picking the virtues of the Nordic model and transferring them in a single reform process always seemed a bit too unrealistic.

[Finnsense]

I don't think arguing that the British and Irish models are "alternatives" to the flexicurity model is appropriate. They are flexible full-stop. Everyone knows that if you are willing to tolerate high levels of inequality and create an underclass, you can do well on unemployment. From the Scanidfinavian perspective that doesn't solve the problem. Frightening people into doing anything to earn a living is not exactly living the good life.

It is true the Dane's spend more on retraining than anyone else but that hardly accounts on its own for the very high Danish taxes. The Danes have a very strong welfare system in all areas. The increase in taxation required to fund such a programme need not be that excessive or burdensome. Finland, for example, takes 45% of GDP in taxation and if I recall correctly spends about 2% of GDP on retraining. I think most Finns would pay 47% for 4% unemployment.

[A. PERLA]

Finnsense: "Frightening people into doing anything to earn a living is not exactly living the good life."

Frightening is not necessary. The "good life" is a paradigm that existed from the late 1950s to the 1990s and has changed.

It began changing in the early-1990s when GATT renegotiated world trade tariffs and the Chinese were let into the WTO. It's taken Europe 15 years to understand that the change has had greatly unforeseen consequences, but which were also predictable. Nobody wanted to believe that a Europe protected comfortably behind its tariff barriers would ever be any different. It was overcome by a bad case of hubris.

Without the customs protection, European economies have been left standing naked in a cold wind. And, what are they doing about it?

Lamenting the "injustice of it all" and little else. It has become inured to (around) 10% unemployment since 1985. It's a given to tell you children that they may be one of the 10% who will never be employed. Or, if employed, only sporadically. Employment has become a timeshare.

Where is the outcry against this social injustice? Nowhere to be heard as European states have preferred to incarcerate the unemployed in a survival-class existence rather than bite the bullet and lower drastically labor regulations that inhibit job creation. These labor regulations are relics of an age long since gone, like the dinosaurs. But, unlike the dinosaurs, they are still alive and well.

The Chinese are laughing at this idiocy ... all the way to the bank.

[Finnsense]

Perla,

Except of course the post was about Denmark not the EU. That's Denmark, the country with the second highest tax regime in the world and one of the highest GDPs, that also boasts about 3.5% unemployment and is routinely found to be the happiest nation on Earth.

[Tom Geraghty]

"European states have preferred to incarcerate the unemployed in a survival-class existence"

Hey, as an American, I must object. We are #1 when it comes to incarceration!

[A. PERLA]

Finnsense: "that also boasts about 3.5% unemployment and is routinely found to be the happiest nation on Earth."

Yeah, right. Is that why I see so many of them falling over one another to buy retirement properties in southern Europe (and particularly France)?

Since economic figures for the UK have been fairly similar, enjoying one of the most dynamic EU economies and consequent low unemployment rates of the past decade, ditto the Brits. The French look upon them as "saviors of their countryside patrimony" that was increasingly dilapidating until the Brits started renovating farmhouses by the hundreds.

If we introduced the number of "sunny days" into economic indices for Europe and gave it sufficient weighting, more than one index would indicate ... er, other trends worth considering. (France boasts an "other-European" resident population amongst the highest in the EU. And, Spain is probably not far behind.)

NB: Peter MAYLE, with his book "A Year in Provence", stimulated British interest in the Provence to such an extent he probably deserves the French medal, the "Legion d'Honneur".

[A. PERLA]

Geraghty : "Hey, as an American, I must object. We are #1 when it comes to incarceration!"

I stand corrected ... you're right.

There's incarceration and incarceration. In this context, both are similar. A convict in America lives behind bars.

An unemployed Arab/African (but born in France) lives in a ghetto, with at least two generations that have known only sporadic employment over the past thirty years. No bars, but neither will they ever be able to leave the high-rise ghetto. (Like America's blacks of the 50s, 60s, 70s and, lets face it, even today. Look what Katrina underscored sooooo easily.)

And the French get all bent when the rioters, of a summer evening, light up a few hundred cars and throw stones at the white firemen/policemen who come to put them out. But, this miffed and vengeful youth DO NOT go to prison ... because there's no room. So, the state threatens to "remove" the subventions from their families ... but does not have the courage since that would only worsen the situation.

They remain incarcerated in their ghettos, with no jobs and no hopes, festering.

Any jail space left to rent in the US? The French might be interested. ;^)

[A. PERLA]

"But how many other European politicians would dare follow his brave example?"

Schroeder, on the German left, had the unions over a barrel. Germany was seeing both unskilled and semi-skilled jobs fleeing daily for points east.

The same has been happening in France and Italy and to a lesser extent in Spain and Britain - despite the fact that these countries have lower average labor rates than Germany.

But, Latin countries do not take job destruction in stride and the unions tend to get vocal. Even if, as in Germany, the Latin countries tend to expect their government to intercede in labor disputes (which is not the case in Britain since Thatcher), it is VERY difficult to get beyond public opinion. Meaning this: the unions have very minor membership percentage of the total workforce - but they have a disproportionately larger media impact upon the population as a whole.

It takes a very courageous government indeed to get "ahead of the people". After really significant swings of political leadership, from left to right and back again, is it sinking in to the European mentality that there is NO way that the state alone can relaunch the economy to create jobs. As I have stated often, unemployment at around 10% for more than a quarter of a century is systemic. I have come to doubt that even Keynsian economic stimulation can affect any real change.

To root out systemic unemployment only drastic measures will do. The EU is not ready for such measures, since most of its citizens are quite prepared to accept higher unemployment as long as it does not get much beyond 10%. They remain convinved that labor regulations "protect thier jobs". Which is true - the penalities for separation are prohibitive in France, as in many EU countries.

This is not the case in the US, often cited as that bastion of liberalism that maintains low unemployment (rarely over half the EU numbers for more than a quarter of a century). But, the Europe is NOT the US.

The EU, in numbers, is a greater economic entity than the US. More GDP, larger market size, as much disposable income, etc. But, in terms of employment it is hamstrung by local (national) labor markets.

If an American loses their job in Boston or New York, they find one elsewhere in a geographically larger labor market. If a Frenchman loses his job in Bordeaux, he doesn't go looking for one in Berlin or even Barcelona.

Only between 1 and 2% of EU-nationals look for jobs in other countries and these tend to be the university educated working for multinationals, and not the poor farmer from Italy going to Germany to work on an assembly line for BMW. Those days are gone forever.

[Arthur Eckart]

The U.S. and Finland have the same per capita GDPs (in 2005) of $42,000. However, the U.S. has 295 million people and Finland has 5 million people. Also, Finland has an older population. A minor technology shock, for example, can have a more powerful effect in a small country than in a large country. That's one reason why countries with small populations can have higher per capita GDPs. A relatively large social program is likely to have a negative effect. However, positive effects can more than offset that negative effect.

[happyjuggler0]

The U.S. and Finland have the same per capita GDPs (in 2005) of $42,000

Uh, no they don't. Finland's in 2005 was about $30,000 in 2005 (PPP) and about $25,000 unadjusted.

I suspect you are thinking about oil rich Norway whose 2005 per capita GDP (PPP) is about the same as the US.

Interesting factoid about Norway: It has been worried about the day that its oil runs out, and has therefore been investing a national pool of money outside the country called The Government Pension Fund. As of January 2006 this fund was worth about 70% of its GDP! It looks like Norway won't be in trouble as it retires as in most industrialized countries with major demographic problems related to their poorly structured national pension schemes.

[A. PERLA]

happyjuggler0 : "It looks like Norway won't be in trouble as it retires as in most industrialized countries with major demographic problems related to their poorly structured national pension schemes."

And, which is (perhaps) a good reason for Norway to stay outside the EU. Aside from farming and fishing, Norway hasn't much else to trade with the EU, so ... why bother sending people to Brussels for endless palaver?

Norway does adopt some key EU provisions to remain compatible (thier word), but the "blue eyed Arabs of the north" are content to determine their own fate.

Who can blame them? And flexicurity be damned.

Unfortunately, Norway is also one of the most expensive countries in which to live on earth and most certainly in Europe.

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