Politics could pose a threat to Denmark's unique labour market model

The Nordic welfare states are doing well in the global economy much thanks to the special Nordic labour market model – which Nordic lawmakers therefore wisely protect. But political reforms in Denmark could shake the model’s foundations in the long run and be a threat to welfare.

This warning comes from one of Denmark’s leading labour market researchers, Per Kongshøj Madsen, professor emeritus at the Department of Political Science at the University of Aalborg’s Centre for Labour Market Research (CARMA) and chair of the Economic Council of the Labour Movement. 

“There are signs in Denmark that short term political gains make politicians chip away at the foundation of the labour market model, and that is worrying. If too much is lost, it might destroy the very beauty of the model – that we can carry on being Nordic welfare societies even in a global economy,” he tells the Nordic Labour Journal.     

Nordic labour markets are different from those in many other countries because the rules of the game are largely negotiated and agreed upon by employers and trade unions without any political interference. Two things make up the cornerstone in the cooperation between the social partners in Denmark: It should be relatively easy for employers to lay off workers, compared to how that works in many other countries. In return, Danish workers should not suffer too much economically if they become unemployed.

Weakened benefits

The model is often called the flexicurity model because it balances “flexibility” and “security”. Employers have the flexibility to hire people and letting them go in more difficult economic times. Employees have the security of knowing that if they lose their jobs, economic compensation is secured through the unemployment insurance system at a level which will allow them to manage their regular outgoings until they find a new job.   

But this central balance between flexibility and security is being upset by interference from the government and parliament, argues the professor.  

"The Danish unemployment insurance has started to look a bit battered after politicians have carried out economic reforms which have cut the benefit period in half – from four to two years. The benefit amount has also been gradually reduced. In 1980, the unemployment benefit represented 63% of the average industry wage. Today, that has fallen to 47%." 

There is further legislation on the books which might weaken unemployed people’s security. Per Kongshøj Madsen points out proposed legislation that says anyone seeking unemployment benefit in Denmark must have lived seven out of the past eight years in an EU or EEA country.

"This will introduce a type of earnings requirements similar to that which already exists for cash benefits.Trade unions see this as yet another limitation to the social safety net for the unemployed – this time it hurts those who have taken the liberty to travel out of the country." 

Worst case scenario

Kongshøj Madsen believes the politicians’ current appetite to legislate is being dictated by a desire to create space in the budget for other expenses – and by the belief that more people will find work if they get less money while being unemployed. But these are short-term considerations which have pushed the Danish flexicurity model closer to the edge. The long-term consequences can be frightening, believes professor Per Kongshøj Madsen.

"The worst case scenario, according to the trade union movement, is that the flexicurity model withers, bringing about a need for more security though longer terms of notice. That would prevent flow, and create greater barriers between people within and outside of the labour market. It would become harder to adjust to changing international market demands, something that is crucial to a small, open economy." 

Kongshøj Madsen predicts that employers will use more temporary contracts in order to be able to get rid of employees again if necessary, and fewer workers will dare try to change jobs because they will become more vulnerable.

Fewer look to the north

Right now, Per Kongshøj Madsen considers Danish lawmakers to be a greater threat to the flexicurity model than the EU, even though the EU has a legislation and harmonisation tradition which in many cases goes against flexicurity. 

“Denmark has had some success in preventing EU directives being forced upon us, as we implement EU regulations via the agreements to a high degree.”

Kongshøj Madsen has himself actively contributed to the marketing of the flexicurity model in the EU, but with limited success, he acknowledges:

“A few years back, flexicurity was considered to be the next big thing within the EU. Everybody looked to Denmark and the Nordic region. But that is no longer the case. In the wake of the European economic crisis between 2008 and 2012, it has become difficult to argue for a system which makes it easy to fire workers, while at the same time you need to invest heavily in a labour market safety net. 

“As long as the economy is struggling and returns on investments only become obvious in the long run, that system will remain a hard sell.”

Kongshøj Madsen believes Denmark can thank the flexicurity model for the fact that the country got through the economic crisis with fewer scratches than many other countries. Denmark emerged with a far lower long-term unemployment figure than most other European countries, and young Danes were less hard hit than young people in other EU countries. Without the model’s contribution, the labour market would have been more divided, with more people falling outside of the labour market, he believes.