Sunday, May 21, 2006

Denmark's Overrated "Flexicurity"

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Fascinated by business and economics? Check out an online PhDRecently, Denmark have become hailed as a role model for Europe, especially after the meltdown for the proposed modest liberalization of French labor markets. In Sweden, for example by both libertarian Johnny Munkhammar and social democrat Lena Askling. That both "right-wingers" and left-wingers" tries to hail a country is seemingly a sure sign it is successfull-and that it has a mixed bag of policies. Yet as we shall see, while it is true that its policies are mixed , Denmark's success is exaggerated.

Denmark pursues a policy known as "flexicurity"-combining the flexible "hire and fire" system of freer economies and the government-provided security that is traditionally associated with continental European and Scandinavian countries. While it is far easier to fire employees than in France and Sweden, unemployment benefits is in fact even more "generous" than in Sweden (Unemployed gets 90% of their previous pay in Denmark, versus 80% in Sweden).

But while "flexicurity" is certainly preferable to the pure "security" of France, there is no evidence that it is superior to the less "secure" economic systems in most "Anglo-Saxon" countries and East Asia.

While recent numbers show a relatively high GDP growth in Denmark and a official unemployment rate of only about 5%, these numbers mostly reflect a unsustainable housing bubble. If you look at Danish economic performance over a longer perspective, the numbers have been far less impressive. Between 1994 and 2004, Denmark had in fact a slightly lower growth rate than the average of the old 15 EU countries.

As for unemployment, the seemingly low numbers in Denmark reflect in fact the same kind of manipulation of statistics that the Swedish government have been using. While official unemployment in Denmark was only 133,500 or 4.8% in March 2006, there were in the fourth quarter (latest available number in Denmark's statistical data bank )some 117,600 people or 4.2% in so-called "arbejdsmarkedspolitiske foranstaltninger(="labor market political activities", what in Sweden is refered to as "AMS-åtgärder")". This means that Denmark have even more hidden unemployment in that respect than even Sweden, where "only" 3.2% (144,000) were put away in "labor market political activities" . And while the total level of hidden unemployment is still lower than in Sweden as Denmark have less people in early retirement and on "sick leave", hidden unemployment is still a lot higher than in most other OECD countries.

And while employment have increased at a healthy rate during the latest year, as Johnny Munkhammar himself showed in a recent briefing paper, performance seen over a longer time perspective have been far less impressive.In fact, employment growth between 1995 and 2003 was even lower than in Sweden, with only Germany and Austria performing worse among the "old" 15 EU countries.

It is true however that youth unemployment is relatively low in Denmark compared to most other European countries, reflecting how the ease with which employers can fire workers have made them less reluctant to hire young people with little or no work experience. Yet while this reflects the virtues of the "flexibility" part of "flexicurity", the fact that overall unemployment (including hidden unemployment is high) is high shows that it does not take away the damage created by the high unemployment benefits.

If between 1995 and 2003 Denmark performed relatively miserably, why have both GDP and employment growth picked up recently? In part, it is a result of the fact that while the burden of government spending is still far too high in Denmark, it have fallen significantly in recent years, as I pointed out in a recent post. In part, however, it is the result of a unsustainable housing boom.

While Denmark is not formally part of the Euro-zone, it have pegged its currency to the euro, meaning that its monetary policy is de fact decided by the ECB, whose monetary policy have been far too loose. Indeed, monetary conditions have been even looser in Denmark than in the Euro-zone as the robust public finances with a large budget surplus have created such confidence in the Danish currency that the Danish central bank have been
forced to expand the money supply even faster than the ECB in order to maintain the peg to the euro in the face of significant capital inflows. As a result, broad money supply growth was 16.9% in March versus 8.6% in the Euro-zone (And 10.9% in Sweden).

That in turn have resulted in house prices increasing 22% in Denmark, a clearly unsustainable rate of increase. Only Estonia had a higher increase in house prices, but in Estonia these house price increases can to a high extent be justified by the low inital prices and the double digit economic growth. When house price inflation halts or perhaps even reverses, Denmark's recent fast growth will end too.

To summarize, Denmark is not the economic role model or star performer that some people seem to think. Until recently, growth was weak and the recent upswing is mostly cyclical . And while the fact that youth unemployment differs less from overall unemployment than in the rest of Europe indicate that the "flexibility" part of "flexicurity" have helped Denmark, the high level of overall unemployment even during the current unsustainable cyclical upswing indicates that the "security" part of "flexicurity" have nevertheless created distortions.

3 Comments:

Anonymous Frithjof Danielsen said...

Thank you for an interesting article, Stefan.
However, it seems far worse in Denmark, than you describe. Due to an overcompensation for unemployed people and, according to the Danish Industrialists' Society, DI, taxes up to 70% off an average workers' income, there are around 900.000 persons aged 18-64 in Denmark, permanently living from the taxpayers money without contributing anything. They are under different arrangements, so the number of unemployed should not look as grim, as it really is. That is 25% unemployment.
So much for Danish "Flexicurity".
Yours sincerely,
Frithjof Danielsen

8:53 AM  
Anonymous Mary Jane said...

Hi, I am a person who saw your article about flexicurity of Denmark.
Well, I got your point and it was pretty convincing.. that the outcomes of flexicurity have been overblown and that flexicurity is not a perfect model to follow. But, before just bashing flexicurity, do you have any alternatives to it?
Actually, I were thoroughly analyzing the recent French riots about a CPA proposed by de Villepin and pondering what solutions could be to the "French problem." And what policies could be sound to deal with "evil" aspects of global capitalism and free trade such as so frequent laid-offs or the plight of fired workers- in social aspects. ( Actually, some people call today's globalization as CEO capitalism, which only focuses on maximizing profits of CEOs at the expense of workers.. though I don't agree with that..)
Even though I myself support market economy, capitalism, free trade, efficiency,and globalization, it is hard to overlook the dark-sides of all those things: the laid-offs, weak social security nets, and so forth. And that is why I am so attracted to flexicurity. But you are not, right?
So, I wonder that you have any alternatives or you just want to bypass the down-sides of today's globalization..
My e-mail address is jmissh3@hotmail.com , so please send your opinions :)

It would be very kind of you if you send your responses to my (actually, sort of stupid) questions via my e-mail.. and wanna exchange your opinions and debate with me onwards. And I am pretty sure that you would join "free market of ideas" with me.. ^-^ Also I assure you that I am not a stupid or clumsy student who just wanna be sound smart or be pesky or something..:)

7:37 PM  
Anonymous Anonymous said...

Thank you very much for your article. I do some research on credit crysis and I have to tell you as a conservaive liberal that it is a pleasure to do my work using such good arguments as these you provide:)

2:31 AM  

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