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Workfare and Flexicurity – The Danish Case Torben M. Andersen Aarhus University CEPR, CESifo and IZA Danish Characteristics • Low unemployment rate Unemployment rate 12 10 % • High labour force participation 8 6 4 • Low working hours 2 0 OECD Denmark 20 06 M 20 01 06 M 20 04 06 M 20 07 06 M 20 10 07 M 20 01 07 M 20 04 07 M 20 07 07 M 20 10 08 M 20 01 08 M 20 04 08 M 20 07 08 M 20 10 09 M 20 01 09 M 20 04 09 M 20 07 09 M 20 10 10 M 01 % Unemployment and the crisis Registrered unemployment 6 5 4 3 2 Structural unemployment 1 0 Flexicurity • Flexible hiring and firing rules for employers combined with social security for employees: flexicurity • Conducive for job-creation and restructuring etc. • Collective risk sharing for workers Employment protection - index 4 3.5 epl index 3 2.5 2 1.5 1 0.5 0 Strong perceived job security Perceived likelihood of respondens being able to find a job (after being laid off) 70 60 % 50 40 30 20 10 0 Some facts about the Danish case: • Flexicurity was also in place in the high unemployment period in the 1970s and 1980s • A series of supply side reforms in the 1990s made the model work better • Unemployment benefits are only generous for low income groups • Incentive structure is maintained via active labour market policy The three pillars of the Flexicurity-model • Insurance vs. incentives Flexible hiring/firing rules • The model presumes that unemployment is a temporary state • Balance between the three pillars is essential Unemployment Insurance Active labour market policy Labour market reforms in the mid 1990s • Shorter duration of the benefit period • Stricter eligibility conditions • Activation (workfare) Short term insurance maintained, but incentives strengthened Flexible hiring/firing rules Unemployment Insurance Active labour market policy Incentives and distributional constraints • Lower benefits: distributional constraint • Activation: unchanged benefits but strengthened incentives • Rights and duties • Better incentives for binding distributional constraint? Effects of activation • Ex ante – Threat/motivation effect: higher opportunity costs of claiming uib = more job search, lower reservation demands – Sorting (claiming benefits, but not interested in jobs) • Locking-in effect – less search during participation • Ex post: – Improved qualifications – More realistic/efficient job search N Den et m he a rl rk Sw and ed s Be en G l giu er m m Fr any a Fi nce n N l an or d Po wa rtu y g Sp a l Ire a in l Au an d Bu s tri lg a U ar ni Sl ted I ia ov K ta a k i ng l y R do e m C ze H pub ch un lic R ga ep ry Li u b th li c ua n La i a R tv om ia a Es n ia t G oni re a ec e % of GDP Policy regime comes at a cost! Expenditures on ALMP as a share of GDP 1,8 1,6 1,4 1,2 1 EU average 0,8 0,6 0,4 0,2 0 Some characteristics of the Danish labour market • High job-turnover • Short average job tenure • High incidence of short term unemployment Firms Industrial structure: • Few large firms, many small- and medium sized firms • Collective risk sharing • Institutional competitiveness • The scheme is an indirect subsidy to firms/sectors with high variability in production • Firms pay uib only the first two days • High incidence of unemployed workers returning to previous employer The test – can the model also cope with a large negative shock? Employment adjustment during the financial crisis •Not higher employment variability relative to GDP variations than other countries •Possible to sustain effective ALMP with much higher unemployment? Employment change relative to output change 2 1,8 1,6 1,4 1,2 1 0,8 OECD Gennemsnit 0,6 0,4 0,2 IRE NO R SL O DE N CA N CZ H UK SW E FIN JP N NE T BE L FR A ITA AU T LU X CH GE R 0 SP A US A PO R ICE •Possible to maintain active policy line when unemployment is high/increasing? Can the model be copied? – Complementarities: EPL, Unemployment benefits and active labour market policies – Industrial structure – Political support (conditioned on low unemployment?)