torben m. andersen, a flexicurity labour market in the great recession: the case of denmark

8/3/2019 Torben M. Andersen, A Flexicurity Labour Market in the Great Recession: The Case of Denmark

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IS

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Forschungsinstitut

zur Zukunft der ArbeitInstitute for the Study

of Labor

A Flexicurity Labour Market in the Great Recession:

The Case of Denmark

IZA DP No. 5710

May 2011

Torben M. Andersen


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A Flexicurity Labour Market

in the Great Recession:

The Case of Denmark

Torben M. AndersenAarhus University

CEPR, CESifo and IZA

Discussion Paper No. 5710May 2011

IZA

P.O. Box 724053072 Bonn

Germany

Phone: +49-228-3894-0Fax: +49-228-3894-180

E-mail: [email protected]

Anyopinions expressed here are those of the author(s) and not those of IZA. Research published inthis series may include views on policy, but the institute itself takes no institutional policy positions.

The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research centerand a place of communication between science, politics and business. IZA is an independent nonprofitorganization supported by Deutsche Post Foundation. The center is associated with the University ofBonn and offers a stimulating research environment through its international network, workshops andconferences, data service, project support, research visits and doctoral program. IZA engages in (i)original and internationally competitive research in all fields of labor economics, (ii) development ofpolicy concepts, and (iii) dissemination of research results and concepts to the interested public.

IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion.Citation of such a paper should account for its provisional character. A revised version may beavailable directly from the author.


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IZA Discussion Paper No. 5710May 2011

ABSTRACT

A Flexicurity Labour Market in the Great Recession:The Case of Denmark*

Flexicurity labour markets are characterised by flexible hiring/firing rules, generous social

safety net, and active labour market policies. How can such labour markets cope with theconsequences of the Great Recession? Larger labour shedding is to be expected and thisstrains the social safety net and increases the demands on active labour market policies.This paper takes a closer look at the labour market consequences of the crisis for Denmark.It is found that employment adjustment is not particularly large in international comparison,although it has more weight on the extensive (number of employees) than the intensive(hours) margin. The level of job creation remains high, although job creation is pro-cyclicaland job-separation counter-cyclical. As a consequence most unemployment spells remainshort. This is critical since a persistent increase in unemployment will affect the financialbalance of the model severely. Comparative evidence does not, however, indicate thatflexicurity markets are more prone to persistence. Crucial for this is the design of the socialsafety net and in particular the active labour market policy. However, the larger inflow intoactivation raises questions concerning the possibility of maintaining the efficiency of thesystem.

JEL Classification: J01

Keywords: flexicurity, employment protection, unemployment insurance,active labour market policy

Corresponding author:

Torben M. Andersen

School of Economics and ManagementDepartment of EconomicsUniversity of AarhusDK - 8000 Aarhus CDenmarkE-mail: [email protected]

*Comments and suggestions from Michael Svarer, Coen Teulings and participants at the CPB-ROA

conference on flexibility of the labour market, Den Haag, January 2011 are gratefully acknowledged.


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2

1. IntroductionPriortothefinancialcrisistherewasmuchfocusontheconceptofflexicurity.Theideathatitispossibleto

ensureflexibilityforemployersandsecurityforemployers,withoutimpairinglabourmarketflexibilityand

socialbalances,

received

substantial

attention.

The

EU

commission

even

proposed

that

member

countries

shouldfollowtheflexicurityapproach,althoughthedefinitionoftheconceptwassobroadastomakethe

precisemeaningunclear.

Denmarkhasoftenbeenreferredtoasaflexicuritycaseduetothecombinationofflexiblehiringandfiring

rulesaswellasageneroussocialsafetynet. Anequallyimportantelementofthemodelisasetofactive

labourmarketpoliciesattachingconditionstotheclaimingofunemploymentandsocialbenefits,andalso

includingprogrammestoenhancequalificationsandthusjobfindingchancesforjobless(seee.g.Andersen

andSvarer(2007)).

Intherunuptothefinancialcrisisunemploymentwaslow,andthemodelwasthustakentobewell

functioning.ThecrisishasinducedaGreatRecessionwhichhasalsoaffectedDenmarkseverely.Outputhas

beenfallingbyalmost6%fromtoptothrough(2008.3to2009.4)andtheunemploymentratehas

increasedbysome34percentagepoints.Howcantheflexicuritymodelcopewithsuchlargeshocks?Since

thecrisishasastrongglobalelementandaffectedmanycountriessimilarlyatroughlythesametime,these

developmentsprovideanopportunitytodrawsometentativelessonsontheimportanceoflabourmarket

institutionsandpolicies.Despiteitsdireconsequencethefinancialcrisisproduceasemicontrolled

experimentontheimplicationsofpoliciesandinstitutionsfortheresponseoflabourmarketstoadeep

crisis.

Inaflexicuritylabourmarketwithflexiblefiringrulesitistobeexpectedthattheimmediateeffecton

unemploymentislarge.Sinceitiseasytoshedlabouritisanimmediateimplicationthattheemployment

tooutputresponseshouldbelarger,andinthiswaythemodelisvulnerabletoaggregateoutputshocks.

Figure1:Unemployment,DenmarkandOECD,1970.12010.3

Datasource:www.sourceoecd.org


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3

TheunemploymentratesfortheOECDareaandDenmarkaregiveninfigure1usingOECDdefinitions.Itis

seenthatunemploymentinDenmarkpriortothecrisiswasmuchlowerthantheOECDaverage,butalso

thatitincreasedmoresteeplywiththeonsetofthecrisis.AlthoughunemploymentinDenmarkhas

increasedmorethaninmanyothercountries,itisstilllowininternationalcomparison.Though,thereal

questionin

aflexicurity

labour

market

is

not

the

sensitivity

of

unemployment

to

the

aggregate

stance

of

the

economy,butwhetheritisassociatedwithlargesocialcosts,andwhetherittendstopersist.

Thekeyquestionisthuswhetherthesocialsafetynetiscapableofabsorbingthisincreaseinjoblessness

andalsowhetherthehighlevelofjobcreationandturnovercharacterizingthelabourmarketcanbe

maintained.Thelatterisimportanttopreventtheincreaseinunemploymentfromproducingamore

persistentincreaseinunemployment(longtermunemployment)orreductioninlabourforceparticipation.

OnecanputitinthewaythattheGreatRecessionisanultimatetestoftheflexicuritymodel.Canitcope

withthisandinduceareasonablequickreturntolowerunemploymentorwillitproduceapersistent

increase

in

joblessness

which

in

turn

via

the

implications

for

public

finances

will

make

the

situation

untenable?

Thereisnocoherenttheoreticalmodellingofallaspectsoftheflexicuritymodel,butitbringstogethera

hugeliteratureontheroleofemploymentprotectionlegislation(EPL),unemploymentinsuranceschemes

(UIB)andactivelabourmarketpolicies(ALMP)1.Itisbeyondthescopeofthispapertoprovideasurveyand

referencestothisveryvastliterature,andthereforeonlyafewselectivepointsandreferencesaremade. A

keytradeoffisbetweenemploymentprotectionlegislationprotectingjobs2 andunemploymentbenefits

providinginsurancetothoseloosingjobs.Thetwocanthusbeseenasalternativewaysofprotection

workers(BlanchardandTirole(2008)andBoeri,CondeRuiz,andGalasso(2006)),althoughwithpotentially

largeimplications

for

labour

market

performance3.

While

employment

protection

legislation

tends

to

createamoresharpdistinctionbetweenprotectedandnonprotectedworkers,generousunemployment

insuranceraisesanissueofmaintainingjobsearchincentives. However,activelabourmarketpoliciescan

beusedtocounteracttheseeffectsbyassociatingrequirementstoreceivingunemploymentbenefits,see

AndersenandSvarer(2010). Theflexicuritylabouristhusseenasacasewithlargeflexibilityforfirmsin

adjustingtheirlabourforce,relativegenerousunemploymentbenefits,andactivelabourmarketpoliciesto

maintaintheincentivestructureinthelabourmarketandtoovercomeobstaclesforemployment.Ifit

worksithassomeattractiveproperties,butitmaybeparticularlyvulnerabletosignificantdropsin

unemployment.Thiswillproduceasteepincreaseinexpendituresonunemploymentbenefitsandactive

labourmarketpoliciesandthusbringthefinancialviabilityoftheschemeatstake.Thekeyquestionis

whethertheflexicurityschemeisparticularlyvulnerabletolargenegativeshocks,andinherentlytendsto

producepersistenceinadjustment.

1DavoineandKeuchnigg(2010)isaninterestingcombinationofallthreeelementsinasettingwithsafeandrisky

jobs,andunemploymentconcentratedinhighproductiveandvolatilesectors.SeealsoBrown,MerklandSnower

(2009)2TheliteratureonEPLsuggeststhatemploymentfluctuationsaredamped(seee.g.Nickell(1986))whiletheeffecton

longrunemploymentismoreuncertain(BentolilaandBertola(1990)).3Thereisalsoaliteraturepointingtotheendogenousadoptionofindustrialstructuretolabourmarketinstitutions

andpoliciesseeCuntandMelitz(2007).SeealsoLommerudandStraume(2010)onhowlabourmarketinstitutions

affect

technology

adoption.


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Thispapertakesafirstlookattheseissuesintheperspectiveoflabouradjustmentsinresponsetothe

greatrecession.Itisobviouslytooearlytomakeafinalcallonthesequestions,butitispossibletomakea

midtermevaluationofhowtheDanishflexicuritymodelhascopedwiththecrisisinordertojudge

whetheritisonastableorunstabletrack. Thispaperattemptstodothis,andstartsoutinSection2witha

briefoutline

of

some

key

characteristics

of

the

Danish

flexicurity

model.

The

labour

market

consequences

ofthecrisisarelaidoutinSection3,andSection4turnstoamoredetailedanalysisoftheimplicationsand

adjustmentprocessesreleasedfromacomparativeperspective.Section5offerssomeconcludingremarks.

2.TheDanishflexicuritymodelThemainingredientsoftheDanishflexicuritymodelarewellknown,andthefollowinggivesabrief

overviewrelevantforthelatterdiscussion.Moredetailedaccountscanbefoundine.g.Andersenand

Svarer(2007),JrgensenandKongshjMadsen(2007),andStrbyJensen(2008).Table1summarises

countryindicatorsonemploymentprotection(EPL),unemploymentbenefitgenerosity(UIB)andactive

labourmarketpolicies(ALMP).

Table1:Employmentprotection(EPL),unemploymentbenefitgenerosity(UIB)andactivelabourmarket

policies(ALMP)

EPL UIB ALMP

USA 0.2 LUX 87 DEN 4.8

UK 0.7 NZL 72 FIN 3.6

CAN 0.8 NET 71 BEL 3.6

IRE 1.0 SPA 69 NET 3.6

AUS 1.1 DEN 68 SWE 3.5

NOR

1.1FRA

67

GER

3.1

POL 1.5 SWE 66 SPA 2.7

JPN 1.6 BEL 65 IRE 2.6

DEN 1.8 GER 64 FRA 2.6

CH 1.9 AUT 61 AUT 1.8

FIN 2.1 FIN 60 NOR 1.8

AUT 2.1 CAN 52 NZL 1.7

NET 2.4 IRE 50 CAN 1.6

SWE 2.6 JPN 45 POL 1.4

BEL

2.6

POL

42

AUS

1.4GER 2.6 AUS 42 ITA 1.3

NZL 2.7 NOR 38 UK 0.9

ITA 2.8 ITA 37 LUX 0.9

FRA 3.0 GRE 33 JPN 0.7

SPA 3.2 CH 33 GRE 0.7

LUX 3.3 UK 28 USA 0.6

GRE 3.3 USA 28 CH 0.4Source:EPLmeasuredbyOECDepl1indexmeasuredonscalebetweenzeroandthree,UIBisthefirstyearreplacementrate,and

ALMPasexpendituresonactivelabourmarketpoliciesasashareofGDP.

Source:www.sourceoecd.org

and

OECD

(2009).


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5

2.1.HiringandfiringrulesForhiringandfiringrulesthekeydistinctionisbetweenbluecollar(hourlypaid)orwhitecollar

(funktionrer)workers.

Forblue

collar

workers

dismissal

rules

are

settled

in

collective

agreements

4

.For

workers

with

short

tenure

thereisnodismissalperiod,whiletheremaybesomeforworkerswithlongertenure.Asanexample

workersinthebuildingandconstructionsectorhaveaperiodofnoticeof3weeksafter1years

employment,5weeksafter3yearsemploymentand7weeksafter5yearsofemployment5.Forworkers

thenoticeis1weekafteroneyearemployment,and2weeksafter5yearsemployment.

Thebasicruleforwhitecollarworkers6isthatthereisonemonthsnoticefordismissalswithinthefirst6

monthsofwork,andthisperiodisextendedby1monthper3yearsofemploymentuptoamaximumof6

monthsnotice(afteremploymentin8yearsand7months).Itispossibletobehiredaswhitecollarworker

onprobationforaperiodupto3monthsinwhichcasethedismissalnoticeis14days.(Funktionrlovens

paragraf2).

The

employee

can

quit

the

job

with

one

months

notice.

Incaseofdismissalofawhitecollarworkerwhohasbeenemployedinthecompanyinthelast12,15or18

years,theemployershouldcompensatetheworkerby1,2or3monthssalary,respectively.Itispossibleto

negotiateseverancepaymentsaspartofthecontract.

Foralllayoffstheemployercoversunemploymentbenefitsforthefirstthreedaysforallworkerswho

withinthelastfourweekshavebeenemployedforatleasttwoweeks(Godtgrelsesdagsbetalinger).These

aretheonlyformalseverancepayments.Notethatthishasbeenintroducedtoreducethenumberofshort

termunemploymentspells.

2.2.UnemploymentinsuranceandthesocialsafetynetTheunemploymentinsurancesysteminDenmarkisavariantoftheGentmodelwithUIfundsand

voluntaryindividualmembership.Contributionratesaredeterminedpoliticallyandarethesameacrossall

UIfunds.TheUIfundsaresubsidizedbythepublicsector(inacountercyclicalway).Accordingly,the

marginalcostsofincreasingunemploymentarefullytaxfinanced.Membershipisopentopersonswith

relevantqualificationsforthespecificUIfund,orviaregularworkwithinitsarea.Theunemployment

benefitcannotexceed90%ofthepreviouswage(calculatedoverthelastyear)oragivencap(currently

about22.300eurosannually,taxableincome),anditisindexedtogeneralwagedevelopments7.The

maximumdurationofbenefitsis4years(from2011:2years),andtheentitlementtobenefitscanbe

regainedbyregularworkforatleast6months(2011:12months)withinthelast36months.Moreover,

certainactivationrequirementsareassociatedwithclaimingofbenefits(seebelow).WhenUIbenefits

4InDenmarkthereisatraditionofhavingmostlabourmarketissuessettledbythepartiesinthelabourmarketrather

thanbylegislation.5http://www.workinfo.dk/daDK/EMNER/ID117/ID127/ID133.aspx6Inthecaseofsicknessformorethan120dayswithinthelastyeartherearespecialrulesfordismissalswithone

monthsnotice7Thecurrentindexingformulaisfromalawenactedin1990(revised2003)accordingtowhichalltransfersare

indexedonthebasisoftheannualwageincreasestwoyearsearlier.Iftheincreaseisabove2%,apartof0,3%is

transferred

to

a

fund

(satsreguleringspuljen)

which

is

spent

on

initiatives

aiming

at

improving

the

conditions

for

peopleontransfers.


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6

expire,theindividualwouldnormallybeeligibleforsocialassistancewhichisalsothecasefor

unemployedwhoarenotmembersofanUIfund.Thesocialassistanceschemeisrathercomplicatedsince

thebenefitlevelamongotherthingsdependsonageandmaritalstatus,andinaddition,therearevarious

meanstestedsupplements.Itisthereforedifficulttogeneralizeonthefallintransferincomeupon

transitionfrom

UI

benefits

to

social

assistance.

A

person

receiving

the

maximum

unemployment

benefit

wouldexperienceanincomereductionof2040%.

Itisanimplicationofthisschemethatthereplacementrateisstronglydependentonpreviousincome,

sincethecapimpliesthatthe90%compensationonlyappliesforlowincomegroups.InFigure2,the

replacementrateisdepictedasafunctionofincomeforDenmarkandotherselectedcountries.Itisseen

thatDenmarkstandsoutbyhavingahighreplacementrateforlowincomegroups,butnotforhigher

income.Hence,whentheDanishUIsystemischaracterizedasverygenerous,ithastobemadewitha

proviso,andtheflexicuritycharacterizationofDenmarkismostfittingforlowincomegroups.

Figure2: Incomedependentreplacementrates, Selectedcountries

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230

Daily wage in Euros

rateofcompensation

Denmark

Belgium

Sweden

Netherlands

Finland

Danish APW

Note:Replacementrateinunemploymentinsuranceschemescalculatedonthebasisofdailyincome,andforsinglepersonsin

countrieswherebenefitsaredependentonsocioeconomicvariables.Dailywagesaretruncatedatrelevantminimumwagelevels

(forcountries

with

no

legal

minimum

wage

the

negotiated

minimum

wages

are

used).

Source:AndersenandSvarer(2007)


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7

2.3.ActivelabourmarketpoliciesForpersonseligibleforunemploymentbenefitsorreceivingsocialassistanceorstartaid8thebasicrules

areas

follows

9

:Unemployedbelowtheageof30havetherightanddutytoanactivationofferafternolaterthan13weeks

ofunemployment.Theactivityshouldhaveanuninterrupteddurationof6months.

Forpersonsbelow25yearswithoutalabourmarketrelevanteducation(andwithoutchildren)the

activationrequirementisaneducationundernormalconditions(studygrants).Inaddition,thelevelof

socialassistanceisreducedafter6monthsunemploymenttothesamelevelasthestudygrant.

Forpersonsabove30therightanddutytoanactivationofferisnolaterthanafter9monthsof

unemployment.Though,

the

period

is

only

6months

for

persons

with

unemployment

insurance

and

above

60years.

Afterthefirstofferthereisarightanddutytoanewofferforeachconsecutiveperiodof6monthson

publicsupport,andthedurationoftheoffershouldbeatleast4weeks.

Unemployedeligibleforunemploymentinsurancewithanunemploymentperiodof30monthshavearight

anddutytoanactivationofferfortheremainingpartofthe4yearunemploymentbenefitperiod(fulltime

activation).

Theactivation

offer

can

be

in

one

of

three

forms

which

all

have

specific

rules

on

duration:

I)

counselling

and

requalification.Thisincludesshortcounsellingandassessmentprogrammesaswellasspecialprojectsand

educationintheordinaryeducationalsystem,II)jobtraining(virksomhedspraktik),thismaybeinthe

publicsectororaprivatecompany,andisusedforpersonswherethereisaneedtoclarifythepossiblejob

prospects,orforpersonswhoduetolackofqualifications mayhavedifficultiesinfindingajobonnormal

conditions,III)employmentwithwagesubsidy,thismaybeatapublicorprivateemployerandisusedfor

retrainingtoupgradethequalifications(specificskills,languageorsocialskils)ofunemployed.About2/3of

allactivationsoffersareoftypeI,andtheothertwotypesconstituteabout1/6each.

Thebasicingredientsoftheinteractionbetweenthesocialsafetynetandactivelabourmarketpoliciesin

Denmarkareillustratedinfigure3showingboththesocialsafetynet(theupperpart)andtheactivation

policies(thelowerpart)dependingonthedurationoftheunemploymentspell.Thusthereisduration

dependenceinboththebenefitlevelandtheactivationrequirements.Whilethedurationdependencein

benefitsisweak(longdurationofunemploymentbenefits),theeffectiveprofiledisplaysmoretime

dependenceduetoasteppingupoftheactivationrequirementwithdurationofanunemploymentspell10.

8Forthelattertwogroupsthisappliesiftheirproblemislackofajob.9http://www.ams.dk/Reformerogindsatser/Indsatser/Kontaktogaktivering/Beskaeftigelsesrettetaktivering.aspx.

10

It

should

be

noted

that

additional

employment

conditionalities

have

been

build

into

the

scheme.

Eligibility

for

the

fullsocialassistancethushasconditionsonpastemployment,ashaschildsupport.


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8

Figure3:Danishsocialsafetynetincaseofunemployment

Note:Diagramappliestoanindividualfulfillingtherequirementsforunemploymentbenefitsatthemomentofbecoming

unemployed.Socialassistanceiscalculatedonthebasisofthebenefitsforasingleperson.Theactivationrequirementsarethe

requirementsforpersonsabovetheageof30.APWreferstothereplacementrateforanaverageproductionworker.

3.LabourmarketconsequencesofthegreatrecessionDenmarkwasalikemostcountriesseverelyaffectedbythefinancialcrisis.Priortothecrisistheeconomy

wasbooming,

and

the

unemployment

rate

was

record

low,

cf.

figure

1.

There

were

clear

signs

of

overheating,buttherewaspoliticaldelayinacceptingtheneedtoundertakecontractionarypolicies.The

crisisimpliedadrasticandswiftchangeinthesituation,andhencetheDanishdevelopmentinrecentyears

hasdisplayedaboombustpattern.

Theincreaseinemploymentbeforethefinancialcrisiswassignificantlymorethanimpliedbythehistorical

relationbetweenoutputandemployment,cf.figure4.Thisclearlyreflectedasituationwithshortageof

labourandfirmsfacingrecruitmentproblems.Althoughtherewasanincreasinginflowofmigrantworkers,

therewereclearsignsofexcessdemand.Thismayinparthavebeenstrengthenedbyfirmshoardinglabour

inlightofthedifficultiesinrecruitingnewworkers.Thissituationrapidlychangedwiththeonsetofthe

Replacementrate

%

Activationrequirement

M

o

n

t

h

s

6 12 18 24 30 36 42 48 54 60 66 72

90

Unemploymentbenefits

Socialassistance

Fulltime

activation

Activationoffer:

rightandduty

AcActive

aastiveActivationoffer:

rightandduty

Active

job

Active

job

Lowincomegroups

APW60

RegainingeligibilityforUIB:6

monthsregularworkwithinthe

last36months


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9

crisis.Duetothehoardingoflabourtheinitialemploymentresponsewassharp,andlargerthanwhat

wouldimmediatelyfollowfromtheoutputdecline,cf.figure4. Therehasthusbeensomeexcessvolatility

Figure4: Actualandpredictedemployment,1991.4 2010.3

Note:PredictedemploymentfollowsfromanestimatedOkunsrelationforthesampleperiod1991.4to2007.4,i.e.thesample

perioddoesnotincludethecrisis.Estimatedequation:ln(et)=a+bln(yt)+cln(yt1)+dln(yt2)+eln(yt3).

Source:Ownestimationbasedondatafromwww.statistikbanken.dk

ofemploymentrelativetotheoutputpath,butthelevelofemploymentisnowalignedtooutputaccording

tothe

historical

relation

between

the

two,

cf.

figure

4.

Figure5: Output,totalhoursworkedandemploymentinthegreatrecession:2008.32010.3,index

2008.3=1

Note:Employmentandtotalhoursworkedfromnationalaccounts

Source:

www.statistikbanken.dk


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10

Itisinterestingtonotethattheadjustmentoflabourinputhasmainlybeenintheextensivedimension,

thatis,therehasbeenasharpdeclineinemploymentbutonlyamodestchangeinworkinghours,cf.figure

5.The

output

drop

is

about

6%

and

employment

decreased

almost

in

the

same

order

of

magnitude

with

a

lagof12quarters.Thedeclineintotalhoursworkedisonlymarginallylargerthanthatofemployment

showingthattheadjustmentofworkinghourshasnotplayedamajorroleintheDanishcase.

Figure6:Increaseingrossunemploymentandfallinemployment:2008.4

2010.3

Source:www.statistikbanken.dk

Thelabourmarketproblemcreatedbythecrisiscanbeassessedeitherfromthefallinemploymentand

hencetheneedforjobcreationtoreturntopreviousemploymentlevels,oritcanbeassessedintermsof

theincreaseinunemployment,i.e.thenumberwhoareexplicitlylookingforajob.Thesedifferentangles

leavequitedifferentmessages.Theincreaseinunemploymenthasbeenmuchsmallerthanthedeclinein

employment,cf.figure6.Grossunemploymentincludesunemployedandparticipantsinactivation

receivingunemploymentbenefitsorsocialassistance.Roughlythedecreaseinemploymentisdoublethe

increaseingrossunemployment. Thehugedifferencemaybeattributedtothreefactors.First,

unemploymentstatisticsmayunderestimatethetruerateofjoblessnesssincenotallunemployedare

eligiblefor

unemployment

benefits

or

social

assistance.

Prior

to

the

crisis

there

was

adecline

in

membershipinunemploymentinsurancefunds,andthusanincreaseinthenumberofnoninsured.

Second,thestrainedlabourmarketsituationhasinducedincreasedenrolmentinvariousformsof

education.Thepreviouspatternorfadamongyouthofworkingforsomeperiodasunskilledbefore

commencingeducationhasbeenmoredifficultduetothestrainedlabourmarketsituation.Changesin

enrolmentcanaccountforabout1/3ofthedifferencebetweenthefallinemploymentandtheincreasein

grossunemployment.Finally,theremayhavebeenanoutflowofmigrantworkers.Therisein

unemploymenthasaffectedvariousgroupsquitedifferently.Asformostcountriesthesharpestincreasein

unemploymentisseenformales,youth,andunskilled.


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11

Figure7:Registered,grossandAKUunemployment


Thedifficultiesinassessingthestateofthelabourmarketisalsoreflectedinfigure7showingthree

differentconceptsofunemployment.Thefirstisthenumberofregisteredunemployedi.e.unemployed

receivingunemploymentbenefitsorsocialassistance.Thegrossunemploymentaddsthenumberofpeople

inactivationprogrammes,andasexpectedthedifferencebetweengrossandregisteredunemployment

has

increased

in

response

to

the

crisis.

Finally,

the

AKU

unemployment

is

a

survey

based

metric

of

unemployment.Whilethelatterisassociatedwithvariousmeasurementproblemsthewideningdifference

betweentheAKUandgrossunemploymentmayreflectthatnotalljoblessareeligibleforunemployment

benefitsorsocialassistance.

Thelowunemploymentratepriortothecrisisledtosomewagepressure.Howevertheconsumerreal

wageincreasedmorethantheproducerrealwagereflectingtermsoftradegains(figure8a).Atfirst,this

reversedatendencyforthewagesharetodecline(figure8b),andthenimpliedanincreaseintheshare

whichpeakedwhentheunemploymentratewasatthebottom.Throughthe2000stherehasthusbeena

clearcyclicalpatterninthewageshare,reflectingmainlysomevariationsinlabourproductivity.


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12

Figure8:Realwagesandwageshare,2000.12010.3(2000.1=1)

Note:(a)The

wage

is

wage

index

for

private

sector,

the

consumer

real

wage

is

found

by

deflating

by

the

implicit

consumption

deflatorandtheproducerrealwagebytheimplicitdeflatorforgrossvalueadded.(b)Thewageshareisfortheentireeconomy.

(c)hourly labourproductivityfortheprivatesector (privatebyerhverv),and (d)wagecompetitivenessmeasuredbyrelativeunit

labourcosts.

Source:www.statistikbanken.dkandwww.sourceoecd.org

Intheperioduptotheonsetofthecrisis,labourproductivitywasfallingreflectingthehoardingoflabour

(figure3).Theadjustmentofemploymenthasimpliedareadjustmentoflabourproductivitywhichisnow

almostbacktotrend(figure8c).Whilewageincreaseshavebeenrelativemoderatedespitethelowlevelof

unemployment,itremainsafactthatwagecompetitivenesshasdeteriorated(figure8c).Thisistosome

extenttobeexpectedduetotheextraordinarylowlevelofunemployment(figure1)butalsoreflectsthat

trendproductivity

has

been

growing

more

slowly

in

Denmark

than

for

its

competitors.


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13

4.AdjustmentandburdensharingTheadjustmentprocessintheDanishlabourmarketisofinterestinitsownright,butalsoinabroader

perspectiveofthelessonstobedrawnontheroleofflexicuritylabourmarketinstitutions.Thefollowing

considertheseissuesbyaddressingsomekeypointswheretheDanishdevelopmentsareseenin

comparativeperspectiveandrelatedtolabourmarketinstitutionsandpolicies.

Figure9:Adjustmentoftotallabourinputrelativetooutputchangedecomposedinhoursand

employmentadjustment.

Note:Changemeasuredfrompeaktotroughduringthe200809recession(quarterlydata).Totalchangeinlabourinputis

decomposedintochangesinhoursperworkerandnumberofemployees.

Datasource:OECD(2010).

4.1.AdjustinglabourinputItistobeexpectedthatemploymentismoresensitivetooutputinacountrywithmorelaxemployment

protection.Asalreadynotedabove,theadjustmentoflabourinputinDenmarkhasmainlybeenviathe

numberofemployees,andworkinghourshasonlybeenmoderatelychanged.Withlaxemployment

protectionlegislationandageneroussocialsafetynet,thecostsofadjustinglabouralongtheextensive

marginaresmaller,whilestrictemploymentprotectionmaymakehoursadjustmentacheapermodeof

adjustment.

Theadjustmentoflabourinputrelativetotheoutputchangeisinfigure9decomposedinthechangein

hoursandemploymentforOECDcountries.Thereisquitesubstantialvariationintheadjustmentoflabour

inputrelativetotheoutputchange,butalsosubstantialdifferencesintheroleplayedbyhoursrelativeto

employment.Denmarkdoesnotstandoutamongthecountrieswiththelargestchangesinlabourinput

relativetooutput,andmoreovertherelativelargeburdentakenbyemploymentisseenagainhere.

Asnoted,therelativeburdenoflabourinputadjustmentbetweenhoursandemployeesdependsonthe

relativecostsofchangingalongtheintensiveandextensivemargin.Thestrictnessofemployment

protectionlegislationisimportantforthesecosts,andhoursadjustmentsarelikelytoberelativemore

importantthe

more

strict

the

EPL

regulation

is.

However,

in

the

case

of

sufficiently

large

changes

in

output


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14

andthusneededlabourinputitmaybeinevitabletoadjustthelabourforce,evenifitiscostly.Itisseen

fromfigure10thatthereisatendencythatcountrieswithmorestrictEPL,alargeradjustmentburdenfalls

onhoursthanonemployees.TheexceptionsaretheoutliersSpainandPortugalhavinglargechangesinthe

numberofemployeesrelativetotheoutputchangedespiterelativestrictEPLregulation.

Figure10:ShareoflabourinputadjustmentviahoursandEPL

Note:Seenotetofigure9.

Datasource:OECD(2009)

Asimpleregression,cf.table2,showsasexpectedthatthehighertheEPLindexis,themorelabouris

adjustedviachangesinworkinghoursratherthaninthenumberofemployees.Unemploymentbenefit

generositytendstolowertheroleofworkinghoursasanadjustmentmechanism.Thelargertheoutput

change,thelessthehoursshare,reflectingthattheneededadjustmentscannotbeachievedwithoutalso

changingthenumberofemployees.However,theexplanatorypowerisweak,andalargeunexplained

variationintherelativeroleoftheintensiveandextensivemarginoflabourinputremains.

Table

2:

Share

of

hours

in

labour

adjustment

EPL UIB ALMP Outputchange Constant R2

0.20

(0.27)

0.02

(0.92)

0.11

(0.37)

NI 4.07

(3.36)

0.05

0.24

(0.26)

0.31

(0.91)

0.07

(0.39)

0.15

(0.11)

5.55

(3.41)

0.18

Note:allvariablesinlogsNI=notincluded.Shareofhoursinlabouradjustmentasinfigure9,EPLasintable1,andoutputchange

isthenumericalvalueofthechangeinoutput.Estimationfor17OECDcountries.

Thesmallerthechangeinlabourinputrelativetotheoutputdecline,themorelabourproductivityfalls.

Thishasimplicationsfortheadjustmentovertime.Ifoutputrecoversthereareidleresourcesmakingthis


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15

possibleuptosomelevelwithoutincreasinglabourinput.Ifoutputdoesnotrecover,adelayedlabour

inputadjustmentistobeexpected.

Figure11:Jobcreationanddestruction,OECDCountries,200005

Note:Percentageratesadjustedbyindustrycomposition

Datasource:OECD

(2009)

4.2.InflowandoutflowfromunemploymentInalabourmarketinwhichitiseasytodismisspeopleitistobeexpectedtofindalargeinflowinto

unemployment.Atthesametimeflexibilityisassociatedwithahighlevelofjobturnoverandthusexit

fromthepoolofunemployed.ThisisanimportantcharacteristicoftheDanishlabourmarket,andfigure11

showsthatthegrosslevelofbothjobcreationanddestructionishighincomparativeperspective.

Grossflowsarethuslargeinthelabourmarketimplyingthatmanyareaffectedbyunemploymentbutin

mostcasesonlyforashortperiod.Figure12showsthesurvivalrateforthegroupofunemployedattwo

differentdates,

at

the

peak

prior

to

the

crisis

(2008.2),

and

in

the

midst

of

the

recession

(2009.3).

As


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16

Figure12:Survivalfunctionunemploymentincludingactivation.2008.2and2007.3

Note:Survivalrateappliestothegroupofunemployedandinactivation

Source:www.jobindsats.dk

expectedtheexitfromunemploymentisquickerintheboomthanintherecessionperiod,reflectingthat

thejobfindingrateisprocyclical.However,eveninthemidstofthefinancialcrisistheexitratefrom

unemploymentisstrikinglyhigh.After13weeksabout60%haveleftthegroupofunemployed,andafter

26weeks80%.Hence,evenduringtherecessiontherearelargegrossflowsinandoutofjobsandmany

areaffectedbyunemploymentonlyforashortperiod.Thelargeincidenceofshorttermunemployment

remainsdespitetheincreaseinunemployment.

Figure13:Unemploymentintensitynumberaffectedbyunemploymentdependingondurationand

fulltimeequivalents(2009q3)



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17

Theanatomyofunemploymentrevealedbyconsideringthenumberofpersonsaffectedandfulltime

equivalentsisshowninfigure13basedondatafrom2009.3.Intermsofthenumberofpeopleaffectedby

unemploymentwithintheyearabout1/3areunemployedforlessthan30%oftheyear,andintermsof

fulltimeequivalentsthiscontributesonlyabout10%tototalunemployment.About22%ofthoseaffected

byunemployment

within

the

year

are

unemployed

for

at

least

80

%

of

the

year,

and

in

terms

of

full

time

equivalentstheyaccountforoftotalunemployment.Inshort,thenumberofpeopleaffectedby

unemploymentwithintheyearismorethantwicetheunemploymentinfulltimeequivalents,duetothe

highincidenceofshorttermunemployment.Manyareaffectedbyshortspellsofunemployment,butthe

burdenofunemploymentrestsonasmallgroupoflongtermunemployed.

Thehighgrossflowsinthelabourmarketarealsoreflectedintheperceptionpeoplehaveconcerningthe

possibilitiesoffindingajobifbeinglaidoff.InEurobarometersurveyscloseto70%answerthattheyare

fairlyorveryconfidentthattheycanfindajobiftheyarelaidoff.ThisisthehighestrateforanyEUcountry

(Eurobarometer(2010)).Thisshowsthattheriskassociatedtoaparticularjobisnotassociatedwitha

generalperceivedriskconcerningthepossibilityoffindingajoborbeinginemployment.Thisisconsistent

withthelargegrossflowsandthehighjobfindingrate,cf.above.

Figure14:EPLandshortandlongtermunemployment

Note:Shorttermunemploymentisdurationlessthan3months,longtermunemploymentisdurationlargerthan6months.


Thehighincidenceofshorttermunemploymentandrelativelyfewlongtermunemployedisrelatedto

labourmarketinstitutions.Figure15belowshowstheshareofshorttermandlongtermunemployment

andtheEPLindex.ItisseenthatalabourmarketwithlowEPLtendstohaveahighincidenceofshortterm

unemployment,butalowleveloflongtermunemployment.Thisreflectsthelargergrossflow,andthus,a

smallerconcentrationofunemploymentonamarginalizedgroupoflongtermunemployed.Thisis


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18

consistentwiththeevidencereportedinfigure13thatshorttermunemploymentisadominanttypeof

unemploymentinDenmark.

Table3:Shortandlongtermunemploymentandlabourmarketcharacteristics

EPL

UIB

ALMP

Constant

R2

Shortterm

unemployment

0.31

(0.13)

0.28

(0.47)

0.07

(0.19)

2.64

(1.72)

0.27

Longterm

unemployment

0.36

(0.14)

0.57

(0.49)

0.02

(0.20)

5.70

(1.80)

0.29

Noteestimationsfor21OECDcountries.Shareofshortandlongtermunemploymentmeasuredasinfigure14,andEPL,UIBand

ALMPasinTable1.Allvariablesareinlogs.Standarddeviationsinparenthesis.

Table3confirmsthathighEPLtendstoimplythatshorttermunemploymentconstitutealessershareof

totalunemployment,whilelongtermunemploymentconstitutesalargershare.Unemploymentbenefit

generositytendstohavetheoppositeeffect(thoughnotsignificant).Thiscanbeinterpretedasshowing

thattemporarylayoffsaremosteasywithbenefitgenerosity,andthatthisdominatespossiblelongterm

disincentiveeffects(seebelow). Activelabourmarketpoliciesdonotinfluencethesplitofunemployment

betweenshort andlongtermunemployment.

Figure15:Burdenofunemploymentfallingonyouth,2009

Note:Thefiguresshowtheshareoftheincreaseinunemploymentbetween2008and2009whichisduetoanincreaseinyouth

unemployment.


Itisastylizedfactthatanincreaseinunemploymentisassociatedwithadisproportionatelargeincreasein

youthunemployment.Thisreflectsprocyclicalhiringsrates.Inlabourmarketswithlargergrossflowsitis

thustobeexpectedthatyouthunemploymentislessstronglyaffected.Figure15showstheshareofthe

unemploymentincreaseduetothecrisiswhichisfallingonyouth(belowage25),anditisseenthat

Denmarkis

among

the

countries

with

arelative

low

share

of

the

unemployment

increase

carried

by

youth.


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19

Thismaybeattributedbothtothelargergrossflowsinthelabourmarketandthushigherjobfindingrates

andtothestrongrequirementsonunemployedyouth,cfsection2.

4.3.Persistenceandthesocialsafetynet11A

concern

in

the

present

situation

is

that

the

increase

in

unemployment

becomes

persistent

as

was

the

caseinmanycountriesduringthe1970sand1990s.Possiblecausesofpersistenceinthelabourmarket

includedepreciationofhumancapitalincreasingwiththelengthofunemploymentspells,changesinthe

wagesettingmechanismifitisprimarilyaffectedbyinsiders(theemployed)withlittleweightgiventothe

outsiders(unemployed),orareductionofproductioncapacityasaresponsetothecrisis.Thekeyquestion

hereiswhetherthesesourcesofpersistencearestrengthenedbythesocialsafetynet. VanderNoord

et.al.(2006)findaweakpositiverelationbetweenpersistencemeasuredbythehalflivesofoutputgaps

andsocialexpendituresasashareofGDP.

LjungqvistandSargent(1998)describeagenerouswelfarestateasatimebombinthesensethatitmay

operateefficiently

in

tranquil

times

but

be

vulnerable

to

turbulence

which

easily

translates

into

persistent

unemployment12.Thelatteriscausedbyweakenedjobsearchactivitiesandhigherreservationwagesdue

toageneroussocialsafetynet. Inparticular,shockstendtodepreciateskillsandthusrequireworkersto

acceptawagecuttofindanewjob,butunemploymentbenefitsdependingonpastwagestendtocreate

inertiaintheadjustmentofreservationwages.Asaconsequencethesafetynethinderstheprocessof

restructuringtheeconomy.Itisalsoanimplicationofageneroustaxfinancedsocialsafetynetthatthe

levelofmobilityacrossjobsislowered(LjungqvistandSargent(1995)).Thismaycontributetoreduce

frictionalunemployment,butinducehigherstructuralunemploymentinasituationwithturbulence.

Adifferentexplanationofpersistencehasbeenadvancedbypointingtotheroleofnormsincounteracting

theincentive

effects

of

agenerous

social

safety

net

(see

e.g.

Lindbeck

(1995)

and

Lindbeck

et.al

(2003)).

A

strongnormtobeselfsupportingcounterstheeconomicincentivescreatedbyagenerousscheme.

Allowingforthenormtobeendogenousanddepending(possiblywithalag)onthenumberofindividuals

beingselfsupportingimpliesthatageneroussocialsafetynetcanbemaintainediftheemploymentrateis

high.However,ifemploymentfallsduetoe.g.aseverebusinesscycledownturn,normsmaybeeroded,

andthewelfarestateiscaughtinasituationwithpersistentnonemploymentandfiscalproblems.

Whilethereisavoluminousempiricalliteratureaddressingtheroleofvariousinstitutionalfactorsincluding

thesocialsafetynetforlabourmarketperformance(seee.g.Blanchard(2006)forasurveyanddiscussion),

thereareveryfewstudieswhoexplicitlyaddressesthepersistenceissue.Twodifferentconceptualissues

areat

stake

namely

on

the

one

hand

the

structural

unemployment

rate,

and

on

the

other

hand

the

responsivenessofthelabourmarketstoshocks.Thelatterinvolvesboththeimpacteffect(volatility)and

theadjustmentprocess(persistence).Theseissuesareclearlyhighlyrelevantinthecurrentsituationwhere

therehavebeenlargedecreasesinemployment.Thesechangesareirreversible,butitiscrucialtominimize

theextenttowhichthistranslatesintopersistentreductionsinemployment.Accordinglythefollowing

11ThissectionbuildsonAndersen(2011)

12Apossibilityofmultipleequilibriaalsoariseswhentakingintoaccountthefinancingofthesafetynet.Similarlyif

incentiveproblemsarecounteredbycostlymonitoring,theeffectivenessofsuchmonitoringislargeatlowlevelsof

unemployment

reinforcing

this

situation,

and

oppositely

in

a

situation

with

high

unemployment

(Ljungqvist

and

Sargent(1995)).


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20

takesacloserlookattheempiricalsupportforthesocialinsurancesclerosishypothesis,whichisvery

importantforaflexicuritylabourmarket.

Itisnotstraightforwardhowtomeasurepersistenceintheadjustmentprocess.Ideallyonewouldwantto

separateexogenous

persistence

(driven

by

persistence

in

shocks)

from

endogenous

persistence

(driven

by

adjustmentmechanismsinthesystem).Obviouslythisisverydifficultandwillinvariablyrelyonidentifying

assumptionswhichmaybeopenfordebate.Itisbeyondthescopeofthispapertogointodetailswiththis,

andratheramoresimplisticapproachispursuedbypresentingvariousmetricsofpersistence.

Fortheperiod19702007figure9givesboththeautocorrelationandasignmetricofpersistencein

unemploymentfor24OECDcountriesfortheemploymentrate(agegroup1664).Variousothermeasures

ofpersistence,alsoappliedtounemploymentandemploymentratesarereportedinAndersen(2011).

Whiletherearesomevariationsacrossthedifferentmeasures,theyarestronglycorrelated.Thesedifferent

measuresleavethesamerelativerankingofthecountriesandhencetheparticularchoiceofmetricisof

lessimportance.

It

is

an

implication

that

there

is

strong

persistence

for

anumber

of

countries,

that

is,

the

adjustmentprocessislonglasting,cf.figure16.

Figure16: UnemploymentpersistenceOECDcountries

Note:

Data

is

for

23

OECD

countries

1970

to

2007.

The

sign

metric

of

persistence

is

calculated

based

on

formula

in

Dias

and

Marques(2005).Bothmeasuresarecomputedfortheunemploymentrate.Thecorrelationbetweenthetwomeasuresis:0.61

Data:www.sourceoecd.org

Itisacrucialquestionwhetherthereisanyrelationbetweenthevolatilityandpersistenceinthelabour

market.Isitthecasethatlabourmarketsexposedtovolatileshocksalsodisplaymorepersistence,orthe

reverse?Figure17presentstwomeasuresofvolatilityinthelabourmarket,namely,thestandarddeviation

ofunemploymentandthegrossjobflows(sumofjobseparationsandcreations).Forbothmeasuresthere

isaweakpositivecorrelationwiththepersistencemeasure.Hence,itdoesnotseemthatcountrieswith

lowvolatilityaremoreexposedtopersistenceintheadjustmentprocess,neitherisitclearthatmore

volatilityis

associated

with

more

persistence.


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21

Figure17:Labourmarketvolatilityandpersistence

Note:Persistenceistheautocorrelationforunemploymentovertheperiod19702007.Volatilityisthestandarddeviationofthe

unemploymentrateovertheperiod19702007.Grossjobflowsisthesumofhiringandseparationratesovertheperiod200007.

Data:www.sourceoecd.org

Thepersistencemeasuresreportedaboveareopentovariousinterpretationproblemsandanalternative

waytoapproachthesameproblemwouldbetolookatcasesoflargeunemploymentcrises.InAndersen

(2011)alargeemploymentcrisesisdefinedasafallof3percentagepointsormoreintheemploymentrate

withinathreeyearperiod,andthisleaves18sucheventsamongOECDcountriesovertheperiod1970

2007.Allthesecasesdisplayverystrongpersistenceinthesensethattherearenocaseswhere

employmenthasrecoveredwithinfiveyearsandonlyfewinstanceswhereitisthecasewithintenyears

aftertheonsetofthecrisis.Thereisthusevidencethatdeepemploymentcrisestendtobehighly

persistent.

Thenextstepistoconsiderwhetherthereareanyempiricalregularitieslinkingpersistencetopolicydesign

andinstitutionsinthelabourmarket.Thisisadifficultendeavoursincethemetricsofpersistenceare

impreciseandsinceitisdifficulttocharacteriseandsummarizepoliciesandinstitutionsinafewsimple

measures.Thefollowingtakestwodifferentapproachestothisissuebothconsideringautomaticstabilizers

asasummarymetricoftheextentofthesocialsafetynet,andbyconsideringvariousindicatorsrelatedto

policiesandinstitutions.

Automaticstabilizersplayanimportantroleinthemacroliteraturesincetheymeasuretheextenttowhich

incomevariationsareabsorbedbythepublicbudgetandinthiswaycushionsincometoshocks.The

quantitativesizeoftheautomaticstabilizersreflectsinasummarywaytheconsequencesofhowthesocial

safetynetanditsfinancingisarranged.Hence,itcanbetakenasasimplesummarymeasureoftheextent

ofthesocialsafetynetinthewidemeaningofincludingthestatedependenciesoftransfer,taxesand

expenditures. Figure17givesacrossplotofautomaticstabilizersandunemploymentpersistence.Thereis

noclearrelationbetweenthetwo.Interestinglythegroupofcountrieswiththestrongestautomatic


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22

stabilizers(DEN,SWE,NET)hasalowerlevelofpersistencethanalargegroupofcountrieswithmiddle

sizedautomaticstabilizerssuggestinganonlinearrelationship13.

Figure18:Automaticstabilizersandunemploymentpersistence

Note:AutomaticstabilizersmetricsarefromvanderNoord(2000),Unemploymentpersistencemeasuredbytheautocorrelation

overtheperiod19702007,cf.figure9.Regressionline: y=0.25+0.33x,R2=0.26.

Source:www.sourceoecd.organdvanderNoord(2000).

Table

4:

Simple

correlation

measures

of

persistence

and

policy/institutional

indicators

Measureof

persistence

EPL UIB ALMP Constant R2

Autocorrelation 0.10

(0.02)

0.06

(0.05)

0.01

(0.02)

0.08

(0.18)

0.66

HP

autocorrelation

0.14

(0.05)

0.13

(0.14)

0.02

(0.06)

0.03

(0.51)

0.31

Signmetic 0.07

(0.02)

0.03

(0.06)

0.04

(0.02)

0.02

(0.21)

0.47

Note:Firstorderautocorrelationcoefficientforunemploymentrate,HPfilteredunemploymentrate,andthesignmetricfor

persistence.Datafor21OECDcountriesEPL,UIBandALMPmeasuredasinTable1.Standarddeviationsonparanthesis.

Source:www.sourceoecd.org

Findingthatpersistenceisonlyweaklyrelatedtothesizeofautomaticstabilizersmayreflectthatthelatter

isatoosummarymeasure,andthataclearerpictureemergesbyconsideringindicatorsoflabourmarket

institutionsandpolicies.Inthefollowingtheroleofemploymentprotectionlegislation,generosityofthe

unemploymentinsurancescheme,andactivelabourmarketpoliciesareconsidered.Table4showsthe

13Therelationbetweenpersistenceandtheautomaticstabilizersmaybenonlinear.Estimatingunemployment

persistence(y)onautomaticstabilizers(x)inlevelsandsquaredyields(tvaluesinparanthesis)yields:

y = 0.67 +0.92x 0.77x2

;R2=0.26

(0.11)

(0.45)

(0.49)


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23

resultsofasimpleregressionusingdifferentmetricsofpersistenceinunemployment.Itisseenthatmore

strictemploymentprotectionlegislationtendstoproducemorepersistence,consistentwiththefinding

thattheEPLtendstoincreasetheshareoflongtermunemploymentintotalunemployment,cf.table3.

TheeffectofUIBissomewhatsurprisinglytoreducepersistence(thoughnotsignificant),andactivelabour

marketpolicies

have

an

unclear

effect.

Importantforthepresentdiscussionthereisnoevidencesupportingthatcountrieswithamoreextended

welfarestatesufferfrommorepersistence.Nonethelessasnotedabovethisisnotimplyingthat

persistenceisunimportantforcountrieswithextendedwelfarestate.Quitethecontrarythestrong

automaticbudgetresponsesimplythatpersistentdeclinesinemploymentrateswillhavedramatic

consequencesforpublicfinances.Itisinterestingtonotethatthecountrieswithextendedwelfarestate

areamongthecountrieswhichpriortothefinancialcrisisdidmosttoconsolidatepublicfinancesand

undertakereformstoaddressfiscalsustainabilityproblemsarisingfromageing14.

4.4.MinimizingpersistenceachallengeforALMPActivelabourmarketpoliciesareextensivelyusedandareanintegralpartoftheDanishflexicuritymodel.

Theactivationrequirementsservetomaintainfocusonjobsearch,strengthenjobsearchincentives,and

contributetoovercomequalificationbarriersforemployment.TheALMPisthusimportantinensuringthat

asteepincreaseinunemploymentdoesnottranslateintopersistentunemployment.However,ALMPis

alsostrainedwhenunemploymentincreases,thereisalargeinflowintoprogrammes,andtheymaybeless

effectiveinarecession.

Itisdifficultempiricallytodiscernthepreciseeffectofactivationpolicies.Moststudiestendtofocusonthe

directeffectintermsoflockingineffectandpostprogrammeeffectsintermsofemployment.Whilethese

areimportant

elements,

activation

has

also

crucial

indirect

(general

equilibrium)

effects,

see

Andersen

and

Svarer(2010)). Activationispartoftheeligibilityconditionsforsocialtransfers(unemploymentbenefits

andsocialassistance)andthusservestoattachstrongerrequirementstoreceivingbenefits,cf.figure3.

Thismayinturnbothhaveanincentiveeffectloweringthereservationrequirementstojobs(typeofjob,

location,employer,wageetc).Thisissometimestermedathreatormotivationeffect.Thereisarelated

screeningeffectsinceitismoredifficulttoclaimbenefitswhilenotbeinginterestedinworkorworkingin

theblacksector.Relatedtotheabovetheremayalsobeawageeffect,sinceactivationnotonlyhasa

directeffectonparticipantsbutalsoaffectsthefallbackpositionofemployediftheybecomeunemployed.

Understandardassumptionsthisleadstowagemoderation.Hence,aproperassessmentoftheeffectsof

activationisverydifficultandcareshouldbetakeninmakingconclusionsfrompartialanalysis.

VariousassessmentshavebeenmadeofALMPinDenmarkandthegeneralfindingsarematchingfindings

fromstudiesforothercountries,seee.g.Kluve(2006)andCardet.al.(2010).InRosholmandSvarer(2008)

itisshownthatingeneralactivationhasalockingineffect.However,privatejobtrainingandeducation

improvesqualifications,whilethereisnostatisticalsignificanteffectfrompublicjobtrainingandother

formsofactivation.Thisstudyalsofindsathreat/motivationeffectfromallformsofactivationwhichtends

toshortenthedurationofunemploymentspells.Overallitisassessedthatactivationwhentakinginto

14

In

European

Commission

(2009)

on

fiscal

sustainability

the

Scandinavian

countries

are

found

to

be

among

the

countrieswiththesmallestsustainabilityproblems.


26/30

24

accountthelockingin,thequalificationandthemotivationeffectcontributestohigherjobfindingrates

andthuslowerdurationofaverageunemploymentspells.

PositivelongrunemploymenteffectsfromprivatejobtrainingarealsofoundinJespersenet.al.(2008),

whilethere

is

no

such

effect

from

public

job

training

or

educational

activation

programmes.

DanishEconomicCouncil(2007)considersthemotivation,lockinginandqualificationeffectofallformsof

activation. Ingeneralactivationhasalockingineffect.Thereisapositiveemploymenteffectdueto

improvedqualificationsfromprivatejobtrainingbutanegativeeffectfromotherformsofactivation.In

additionapositivemotivationeffectisfound.Thestudyisnotabletofindanypositiveeffectsof

educationalactivation,notevenafter56yearsafterparticipation.

EducationalactivationprogrammesareanalysedinChristensenandJacobsen(2009)withparticularfocus

onthelockinginandmotivationeffect.Thereisnoshort orlongrun(5years)positiveemploymenteffect

fromordinary

education

for

persons

becoming

unemployed

in

2002.

However,

positive

effects

are

found

forpersonswhobecameunemployedin1995.Forbothgroupstherearepositiveeffectsofprivatejob

training.Itisalsofoundthattheeffectsofallformsofactivationarebetterwhenunemploymentislow

(lesslockingin),butthedirecteffectoftheprogrammeisnotdifferentacrossbusinesscyclesituations.

TheprogramEarlystart(Hurtigtigang)hasmadeitpossibletomakeanexperimentaldesignofthe

effectsofactivelabourmarketpolicy.Inthisprogrammehalftheparticipantsreceivedtheactivationoffers

asprescribedbyexistingruleswhiletheotherreceivedanearlyandmoreintensiveintervention.The

programwasfirstlaunchedin20056andlaterrepeated200809toallowforamorespecificevaluationof

theappliedactivities.Thegeneralfindingisthattheearlyinterventionhascontributedtoenhance

employmentprospects,

corresponding

to

ashortening

of

unemployment

duration

spells

by

3weeks

(see

Graversenet.al.(2007),Rosholm(2008),andRosholmandSvarer(2009)).Costbenefitanalysesshowthat

theincreasedemploymentcancoverthecostsofrunningtheprogramme.

Itisaparticularchallengetomaintaineffectivenessofactivationpoliciesinaperiodwithincreasing

unemployment.First,theeffectsofactivationpoliciesmaybebusinesscycledependent,andlesseffective

inadownturn.Second,thereisavolumeincreaseinparticipantswhichmayleadtodifficultiesinboth

meetingthetimingrequirements(seeSection2),andalsoatwisttowardslesseffectiveprogramme

activitiesduetoshortageofrelevantopenings.Finally,thecompositionofthegroupofunemployed

changesandtargetingbecomesmoredifficult.Amongnewlyunemployedthereisalargegroupwhichis

likelytofindanewjobquickly,andthereareotherswhichareatriskoflongtermunemployment.Ahigh

levelofactivationmaythuscarryahighdeadweightcost.

TheseproblemsarepresentinDenmark.Therehavebeenproblemsinmeetingtherequirements

stipulatedintheruleswithregardtothedeadlinesforofferingofvariousinitiatives.Moreover,thevolume

increasehasledtoincidenceswherethecontentand/orthequalityoftheactivityhavebeencalledinto

question.Figure19showsthatthenumberofparticipantsinactivationhastripledsince2008,andthere

hasbeensomedeclineintheaveragedurationofprogrammeactivities.


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25

Figure19:Activationdegreeandaverageduration

Source:www.jobindsats.dk

Therearealsosignsthattheeffectivenessofactivationislowerduetothepresentsituationinthelabour

market.Figure20displaystheshareinemploymentaftervarioushorizonsforparticipantsinactivation

programmes.Itisseenthatthereisacleardeclineinrecentquarters.Thisisthedirecteffectoflowerjob

findingrates,anditisaconcernsinceitincreasestheriskthatalargergroupbecomeslongterm

unemployed.

Figure20:Shareinemploymentafteractivation

Datasource:www.jobsindsats.dk


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Note,thatthechallengeofmaintainingextensiveactivationpoliciesduringarecessionhastwosides.One

istheeconomicarisingfromfirstacostincreaseandeventuallyfromtheproblemsarisingiflongterm

unemploymentincreases.Theotheristhatthepoliticalsupportforactivelabourmarketpoliciesmay

weakeninaperiodwithlowlabourdemandandexamplesofnotwellfunctioningactivationprogrammes.

5.ConcludingremarksTheDanishlabourmarkethasbeenseverelyaffectedbytheGreatRecession.However,incomparative

perspectivetheperformanceisstillcharacterizedbybelowaverageunemployment,largegrossflows,and

nostrongertendenciesforunemploymenttobecomepersistent.However,openissuesremains,in

particularconcerningtheeffectivenessoftheactivelabourmarketpoliciesinadeeprecession.Balancing

thecostpressurewiththevolumeincreaseandmaintainingefficiencyofprogrammeactivitiesisnotan

easytaskinaperiodwithalowerjobfindingrate.Howeverthisiscrucialinpreventinganincreaseinlong

termunemploymentwhichbothhassocialcostsbutalsowillaffectpublicfinancesseverely.Itistooearly

tomakeacallonthesequestions.

IncomparativeperspectivetheDanishcasefitsintoapicturewherecountrieswithlaxEPLtendstocarrya

largeburdenofadjustmentoflabourinputviathenumberofemployeesratherthanworkinghours.

Unemploymentbenefitgenerositytendstogointhesamedirection.LessstrictEPLregulationalsotendsto

implythatshorttermunemploymentconstitutesarelativelylargershareofoverallunemploymentthan

longtermunemployment.Youthunemploymentalsotendstobelessaffectedbyrecessionsincountries

withlaxEPL,andchangesinunemploymentingeneraltendtobelesspersistent. Theevidenceonwhat

characterizesthesuccesscasesislessconclusive.Whilethereissomeindicationthatgenerous

unemploymentinsuranceincombinationwithactivelabourmarketpoliciesmakesitpossibletoachieve

betterrisksharingwithoutimpairinglabourmarketflexibility,theevidenceismuchtooinconclusiveto

makestrongstatementsonthis.Tosettletheseissuemoreresearchisneeded.

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