Following this brief comparative exposition of the changes on the Danish labour market, we now turn to the political reactions to the crisis. Which policies have been enacted in order to provide “shelter against the wind”? Do the Danish policy responses to the crisis reflect a particular “flexicurity profile” and – following that – can the responses be conceived at sustainable in the sense that there are no indications of serious barriers to the implementation of such policies? Or has the stress of the crisis lead to a dismantling of the basic pillars of the model?
This section therefore presents the major policy initiatives, which have been taken as a response to the crisis since 2008.
The policy initiatives are grouped according to the traditional division between macro-economic policy and labour market policy. After an overview of the policy shifts in the respective areas, the text goes on to discuss the issues of conformity with the Danish flexicurity model and its sustainability.
3.1 Fiscal policy initiatives
The rapid rise in unemployment during the fall of 2008 and the following winter put the issue of “growth packages” high on the political agenda. Since the spring of 2009 a number of concrete expansionary measures have been undertaken. The measures introduced during 2009 and subsequent years include access for the municipalities to increase their investments beyond the existing spending limit, a state subsidy to renovation of private and several public “investment packages” in infrastructure, energy saving etc. Furthermore, taking effect from 2010, a tax reform was introduced, which was not fully financed during the initial years.
To these discretionary fiscal policy measures must be added the fact the Danish economy due to its rather high tax level and the large share of the workforce covered by unemployment benefits, has some of the largest built-in automatic stabilisers in the EU, cf. Figure 4 (Dolls et al, 2009). Thus the effects of the economic downturn on income and unemployment are significantly dampened. The backside of this is of course that the public budgets have deteriorated rather dramatically during the crisis.
Later developments in Danish macro-economic policy have however represented a stepping back from the expansionary fiscal policy of 2009 and 2010. Triggered by rising deficits on the public budgets and a recommendation from the European Commission to restrict the deficits, the Conservative-Liberal Government in May 2010 began political negations with the Danish People’s Party, which rapidly resulted in a political agreement for fiscal recovery to be implemented in 2011 and subsequent years. Important elements in the agreement were combined savings and reallocation of public expenditure and a temporary hold on the indexation of the tax scale, which implies a de facto tax increase. The agreement also implied a cap over the yearly amount of membership fee for trade unions, which the members can deduct, when calculating taxable income and rising fees for labour market training. These elements were of course fiercely opposed by the trade unions.
However, the most controversial elements in the agreement was a shortening of the duration of unemployment benefits from four to two years and a tightening of the criteria for regaining access to unemployment benefits, once the right to benefits had been exhausted. These elements are further discussed below.
In the subsequent years the issue of “growth packages” and “kick starts” has remained high on the political agenda, also stimulated by the change of Government in October 2011. The new Government was formed by a coalition of socialists, social democrats and social liberals under the social democratic prime minister Helle Thorning Schmidt. The Government has however chosen a cautious strategy with respect to fiscal expansion putting great emphasis on the need to obey the recommendation from the European Commission.
Taking the period as a whole, according to the latest available estimates from the Ministry of Finance shown in Figure 6, fiscal policy in 2009 and 2010 contributed to the growth of GDP by 1.2 and 0.5 percentage points respectively, measured by the one-year fiscal effect. For 2011 the fiscal effect was strongly negative mainly due to a decline in public consumption of -1.5 percent in real term. Also rising taxes contributed to the tightening of fiscal policy. In 2012 fiscal policy was almost neutral, while the fiscal effect in 2013 is again estimated to be negative by -0.3 percent. Thus there is a clear shift in fiscal policy from the first two years of the crisis to more recently, where the austerity pressure has set in. Not surprisingly this development has caused a heated policy debate about, whether the Government is conducting a fiscal policy, which is overly tight and implies the risk of causing severe structural damages to the economy and the labour market. Going further into this issue is however outside the scope of present article.
3.2 Working-time and wage-flexibility
When it comes to direct intervention in the labour market a number of measures have been taken during since the beginning of the crisis. Thus, in March 2009 the existing option for employers to reduce working hours in case of a temporary fall in the demand for its products was made more flexible. The scheme operates under the heading of “work sharing” and implies that the workers alternate between periods of work and periods, where they receive unemployment benefits. Normally the maximum duration of work sharing is 13 weeks, but employers can apply for a prolongation by another 13 weeks.
While the reform allowed for increased flexibility during the 26 weeks that are the maximum duration of work sharing, it was still seen as a temporary solution that was not aimed at handling a prolonged economic downturn. Some employers called for the introduction of a longer duration of the support to work-sharing, but both the social partners and the political actors were reluctant to support this idea out of fear that this would simply introduce a permanent wage subsidy to declining branches and companies. In quantitative term the scheme has not become prominent. Thus, in mid-2009 only a total of 25.000 workers took part in work sharing. By the end of 2012, their number had fallen to about 2,000 persons.
Concerning flexible working time arrangements, the Danish collective agreements normally allow for such arrangements to be agreed at the firm level. No changes in this situation have been introduced recently.
Finally with respect to wage moderation, some employers and their organizations have aired the possibility of voluntary wage reductions as a crisis measure, but there are only few examples of actual nominal wage moderation yet. However, one can add the observation that the general negotiations in the private sector in the spring of 2010 and again in the spring of 2012 resulted in wage increases that were very modest in a historical perspective and for most groups implied falling real wages. Also the wage negotiations in the public sector in the spring of 2011 lead to fairly small wage increases, which will after correction for inflation lead to significant reductions in real wages for the public employees.
The most notable element in the collective agreements in the private sector in the spring of 2010 was the introduction of severance pay for blue-collar workers, who had been employed for more than 3 years. The actual amount was rather modest and to be calculated as the difference between one month’s actual wage and unemployment benefits with a deduction of 15 percent. After 6 years of employment the double amount is paid and after eight years three time this amount. The actual severance pay after 3 years of employment will be around between 7,000 and 10,000 DKK (930 to 1400 Euro). In the collective agreements conducted in the private sector in the spring of 2012 this new element was further enhanced. The main argument of the trade unions for demanding this new element in the collective agreements was the decline in the income security provided by the UI-system due to the declining replacement rate since the early1980s, the shortening of the duration of unemployment benefits to two years to be implemented from 2012-2013 and the tightening of the access to regain the right to benefits: As mentioned above, the latter two changes were part of the agreement for fiscal recovery from May 2010.
3.3 Changes to the content of ALMP
In February 2009, a broad political agreement was reached inspired by a proposal from the social partners. It implied a number of changes in the rules for active labour market programmes. The changes were all aimed at targeting the programmes more towards upgrading the skills of the unemployed in the light of the composition of labour demand. Furthermore one of the initiatives made by the Minister of Employment in March 2009 implied that the funds allocated to assist employees that are affected by collective dismissals are increased. Furthermore, the Minister of Employment in January 2010 announced new initiatives to assist employers that are restructuring and employees that are about to be dismissed. These initiatives were in part inspired by a joint set of proposals from the social partners, who in January 2010 published 23 concrete proposals to improve employment policy and combat long-term unemployment (LO and DA, 2010). All in all, these initiatives implied a slightly higher priority to education and training and also more intensive contact with the unemployed in the form of frequent meetings with counsellors at the job-centre.
As mentioned above, in October 2011 a new Government headed by a Social Democratic Prime Minister took office. The Government announced a number of reforms of labour market policy and retirement schemes, the latter including the disability pension and the flexi-job-scheme. The most important elements can be summarised in the following points:
The access to education for unemployed was widened and recipients of cash benefits, which have other problems than just unemployment, were now to be activated every 12 months (instead of 6) to allow for a more flexible activation of this vulnerable target group.
More effective efforts to reduce youth unemployment including more job-rotation for young persons, more young to take part in the adult-apprenticeship-scheme, targeted programmes for young persons with lack of basic education and more traineeships for graduates.
Strengthened efforts to reduce the drop-out-rate especially from the vocational education system.
Thus, while not representing a drastic break with previous policies, the many minor reforms can be interpreted as pointing toward a more flexible approach to active labour market policy and also implies the allocation of more resources to interventions.
The issue of reforms of the organization, steering and financing of active labour market policy has been postponed several time (following failed tripartite negotiations in June 2012). A new attempt to deal with these complicated matters was announced by the Government in February 2013. An expert committee and a committee of social partners shall work in parallel to develop solutions during 2013 and 2014.
In quantitative terms Figure 7 sums up the development in the priorities of active labour market policy during the crisis. The main message from Figure 7 is that the element of counselling, training and education in active programmes has been reduced significantly, while traineeships and subsidised employment has increased. This policy shift during times of weakening labour demand has been criticised also from leading politicians. Actually the mandate of the expert committee just mentioned call for an investigation of the potential for increasing the role of education in active labour market policy.
3.4 Reform of the unemployment benefit system for insured unemployed
The most disputed measure being part of the plan for fiscal recovery from June 2010 was a reform of the unemployment benefit system, originally to be implemented from mid-2012. The aim of the reform is to increase the supply of labour by motivating unemployed to look for work more eagerly after a shorter duration of unemployment out of fear for exhausting their benefits. It has the following elements:
Previously, an insured unemployed could receive unemployment benefits for four years out of the last six years. After the reform the maximum period will be two years out of the last three years.
The conditions for regaining the right to unemployment benefits were harmonised with the rules for qualifying for benefits for the first time. In both cases the criteria will be 52 weeks of full-time employment during the last three years. Before the reform, the requirement for regaining the right to benefits was only 26 weeks.
Not surprisingly, the trade unions have strongly opposed the reform of the unemployment benefit system, which they see as undermining the most important element of income security in the Danish model. They furthermore stress that the reform came on top of a gradual erosion of the compensation rate of unemployment benefits relative to gross wage, which had taken place since the early 1980s, and are also worried that the reform will increase the decline in the membership of unemployment insurance funds, which has also been a long-standing feature of the Danish labour market for decades. By example the share of insured employees in the workforce fell from 78.4 percent in 1999 to 73.9 percent in 2009.
When the reform was decided in May 2010, the expectation among policy-makers was that unemployment would gradually decline towards 2012. However this hope was not fulfilled. As a response the new Government postponed the implementation of the reform by extending the duration of unemployment benefits for insured unemployed by half a year for all unemployed, who would have exhausted their unemployment benefits in the second half of 2012. However, this moratorium only delayed the date, when large groups lose their right to unemployment insurance to the beginning of 2013.
In the fall of 2012, the reaction of the Government to rising criticism for cynicism towards the long-term unemployed was the introduction of a number of “acute measures” to assist the long-term unemployed, who were at risk of losing the right to benefits in the spring of 2013. The measures included more intense counselling and activation and also a subsidy to make employers give priority to long-term unemployed when hiring for vacant positions. Furthermore unemployed who exhausted the right to unemployment benefits would become entitled to a new educational benefit for up to six months, if they undertook training after dropping out of the benefit system. The new benefit is equal to social assistance and thus somewhat lower than normal unemployment benefits. In spite of these measures, the issue of the shortening of the duration of benefits was still one of the hottest on the Danish political agenda.
Apart from the direct interference with the benefit system, the now former Conservative Liberal Government also in May 2011 reformed the so-called Voluntary Early Retirement Pay, which under certain conditions allowed member of unemployment insurance funds to retire at the age of 60 years and receive a pension similar to UI-benefits until the age of 65. The new political agreement on retirement reform implied that the age for entering the in the VERP was gradually increased by half a year each year from 2014 to 2017. Also the VERP was changed into a three-year scheme compared to the existing five years.
At the same time the so-called flexi-job-scheme providing a permanent wage subsidy to disabled persons was made more restrictive by limiting the duration of the wage subsidy to five years. For persons aged above 40 years, the wage subsidy may thereafter become permanent. Also limits were put on the size of the wage subsidy. The employer, the employee and the municipality must prepare a plan aimed at having the employee return to normal employment.
In addition to the shortening of the benefit period, these reforms have added to a widespread feeling among trade unions and wage earners in general that the safety nets of the Danish labour market are under erosion.