Denmark’s trouble with Flexicurity

Flexicurity, the combination of generous unemployment compensation and flexibility on the labour market, has been causing troubles for Denmark. The government has no decided to cut the duration of benefits down, as the NYT reported on Monday:

For years, Denmark was held out as a model to countries with high unemployment and as a progressive touchstone to liberals in the United States. The Danes, despite their lavish social welfare state, managed to keep joblessness remarkably low.

But now Denmark, which allows employers to hire and fire at will while relying on an elaborate system of training, subsidies for those between jobs and aggressive measures to press the unemployed into available openings, is facing its own strains. As a result, it is beginning to tighten up.

Struggling to keep its budget under control after the financial crisis, the government in June cut into its benefits system, the world’s most generous, by limiting unemployment payments to two years instead of four. Having found that recipients either get work right away or take any job as their checks run out, officials are also redoubling longstanding efforts to move Danes more quickly out of the safety net.

So, while the German inflexible labour market has mastered the crisis pretty well, the state of Denmark is dire. The lesson of this probably is that what matters is not just flexibility or unemployment insurance, but also international competitiveness. Your job market can be as flexible as you want – if you lack efficiency (the combination of productivity and wage) jobs will not be coming up if there is a country next to you which lets wages decline relative to productivity. It is maybe a bit to early to get some data on this point, but it is interesting to note. This topic should not go under the radar.