Opinion of the European Economic and Social Committee on Flexicurity: the case of Denmark
Date: 2006-05-17
Institutions: European Economic and Social Committee
Subjects: Denmark, economic and social cohesion, employment policy, labour flexibility, labour market, labour relations, organisation of work

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Opinion of the European Economic and Social Committee on Flexicurity: the case of Denmark

(2006/C 195/12)

On 14 July 2005 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of
Procedure, decided to draw up an opinion on Flexicurity: the case of Denmark.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 28 April 2006. The rapporteur
was Ms Vium.

At its 427th plenary session of 17 and 18 May 2006 (meeting of 17 May), the European Economic and
Social Committee adopted the following opinion by 98 votes to one, with one abstention:

1. Conclusions and recommendations — flexicurity: the

case of Denmark

on the one hand, to high unemployment benefits funded using
public money and the tax contributions of the whole popula-
tion and, on the other hand, to employment security — mean
that Danes do generally feel safe and content (see Appendix 2).

1.1
Danish-style flexicurity appears to provide an example
of how to achieve economic growth, a high level of employ-
ment and sound public finances in a socially balanced way.
This development is consistent with the Lisbon process, which
is designed to secure a high level of employment and sustain-
able growth and social welfare.

1.2
Danish-style flexicurity, the hallmarks of which are a
mobile labour market, achieved through elements of social
security and an active labour-market and training policy, does,
it would appear, help make the country more competitive.
Together with other facets of Danish society, flexicurity has
given the Danish labour market a strength and a flexibility that
equip the country well to face the challenges of the future. A
high level of employment, high unemployment benefits and a
sense of optimism mean that both employers and employees
accept the uncertainties and drawbacks inherent in the system,
given what each group gets in return.

1.3
The key to understanding Danish-style flexicurity is that
flexibility and security are not necessarily mutually exclusive.
Having stable and secure labour relations and a motivated
workforce can be an employer's interest, while flexible working
hours, work organisation and payment schemes can be in the
interest of employees.

1.4
In the face of globalisation and the fact of jobs being
relocated abroad, flexicurity also creates for the people a high
degree of economic and social security by means of
the
following paradigm shifts: ‘security of employment rather than
job security’ and ‘new personal opportunities brought about by
a readiness to change whilst accepting limited risks’. It is quite
true that individuals do risk losing their job but the social
security network ensures that they have enough to live on in
the short term, while,
their chances of
finding a new job are enhanced through active labour market
measures, combined with high levels of employment.

in the longer run,

1.6
If we consider Danish-style flexicurity within a European
context, it is obviously impossible to copy the system blanket-
fashion, given the cultural, structural and economic differences
involved. That said, some general features may be considered
for adoption as a political strategy in other Member States,
particularly in places where social capital — –understood as
the full gamut of standards and networks, combined with a
relationship of trust among individuals and among organisa-
tions — has developed along similar
to Denmark,
including a tradition of cooperation between the government
and the social partners and a readiness by the people to
embrace change. Geographical
flexibility can, however, also
give rise to very weighty problems for families, partnerships
and children's school and educational careers. This is particu-
larly the case in large countries and federal states.

lines

1.7
Broadly speaking, the idea behind flexicurity is that a
combination of worker flexibility and security can, together,
safeguard social security and competitiveness. Danish-style flex-
icurity provides security through a high level of unemployment
benefit (and transfer payments to cover other social contingen-
cies), and flexibility through liberal dismissal rules, including,
for instance, short periods of notice. Alongside social security
and a high degree of mobility, importance is also placed on an
active labour market policy that ensures that people are actu-
ally available for work and are honing their job skills. Danish
labour market policy, therefore, comprises both incentives and
sanctions,
for instance, compulsory employment
(known as ‘activation’), which, however, primarily
support
involves top-quality upskilling schemes. Active labour market
policy is vital to any labour market designed to function effec-
tively with high levels of unemployment benefit.

including,

Danish-style flexicurity means low job security for indi-
1.5
vidual workers, who face the prospect of
losing their job
several times during the course of their working life. Despite
this, the in-built safeguards of the flexicurity system — thanks,

1.8
That said, however, Danish-style flexicurity cannot be
seen in isolation from the overall context of the welfare state
and a strong organisational set-up. The way in which the
Danish labour market operates is contingent on a range of
other social factors. This applies, for instance, to the key role of

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the social partners in political decision-making and to the
application of labour-market and training policies, the broad-
based publicly funded welfare system, the skills level of the
population, and the macroeconomic policy mix that has been
put in place over the last few decades.

1.9
The social partners have had a key role to play in the
development of Danish-style flexicurity, both in decision-
making and in implementation in areas such as training policy
and labour-market structural reforms. In a number of fields, the
development is based on agreements between the social part-
ners, for instance the introduction of private,
labour-market-
related pensions. The social partners' role is the product of
historical development, and also of their high level of organisa-
tion. Thanks to their input. it has been possible to arrive at
creative solutions enjoying broad acceptance. To have strong
input, however,
the social partners and other civil-society
players need to be adaptable, willing to work together and
ready to address real-life situations in new and broad-based
ways. Greater involvement and input from the social partners
can thus boost society's capacity to compete and adapt. In
these processes, support, cooperation and a critical input from
other civil society organisations, such as social players and
further education bodies based on associations,
is also of
importance.

A high level of unemployment benefit requires a high
1.10
level of skills among the population at large. Otherwise, many
people would be unable to find jobs in which they earned
more than unemployment benefit.. A high level of skills and a
readiness to adapt — including among those with the least
formal training — is a key reason for the success of the Danish
flexicurity system.

In the second half of

1.11
the 1990s, when Denmark
carried through an extensive programme of structural reforms,
moves to tighten up the labour market were accompanied by
an expansive economic policy that boosted both growth and
employment. Over and above the income security provided by
the high level of unemployment benefits, Denmark also seeks
to give its people employment security. No-one has any guar-
antee that they will keep their current position, but the chances
finding a new job are very good thanks to the public
of
support services. Moreover,
it is easier to implement — and
secure backing for — structural reforms undertaken in an
atmosphere of optimism and employment-friendly growth. The
Danish flexicurity system is thus based on a macroeconomic
policy-mix that fosters growth and employment.

Danish-style flexicurity is subject to constant discussion
1.12
and change. As a system, it has both advantages and draw-
backs, and, despite the fact that flexibility, security and an
active labour market policy are undoubtedly interlinked, there
is an ongoing debate about how to achieve the right balance
between these elements.

(1) See OECD employment outlook 2005, table H.

1.12.1
High tax revenue is a sine qua non of the Danish flexi-
curity system and other factors of relevance to the way the
labour market works. For instance, public expenditure on
labour market policies was 4.4 % of GDP in 2003 — a Euro-
pean record (1). On the one hand,
the Danish people are
prepared to accept the high tax burden of around 49 % of
GDP, yet, on the other, tax is a constant subject of debate and
future cuts must be expected in the tax on labour. The high tax
in part, however, by the high level of
burden is explained,
employment, which, in itself, has a positive impact on public
finances. Boosting employment makes for further increases in
tax revenue.

1.13
The importance of Danish-style flexicurity to the Euro-
pean Union lies in the readiness to engage in a proactive
to new realities, promoted by the flexicurity
adjustment
approach;
this adjustment has been brought about by a
balanced socio-economic paradigm shift, carefully negotiated
between the stakeholders, whilst
fully respecting the basic
values set out in the European social model.

2. The competitiveness of the Danish system

2.1
Denmark has stable growth and sound public finances.
From 2000 to 2005, for instance, the average growth rate was
1.7 %, with an average employment rate of 77.5 % and an
average general government balance surplus of 1.4 % of GDP.
Overall public debt was running at 42.7 % of GDP in 2004,
with a general government balance surplus of 2.8 % of GDP.
The general government surplus is due, among other things, to
record employment levels, providing high levels of income tax
revenue.

The Danish labour market is subject to a very high turn-
2.2
over, with more than 10 % of all jobs disappearing each year
and a similar number being created. Some 30 % of workers
change jobs every year and Danish workers have the second
lowest average length of service of any country in the EU after
the UK. This must be seen in the light both of the existing rules
and of the structure of the Danish economy, with its high
numbers of SMEs.

2.3
The impact of this policy mix of macroeconomic stimu-
lation and the structural reforms undertaken by Denmark in
areas like the labour market can also be illustrated using the
Phillips curve, which shows the relationship between unem-
ployment and rising wage costs. As the Danish curve given in
Appendix 1 makes clear, it has been possible to cut unemploy-
ment substantially since 1993 without incurring high wage
inflation; the Phillips curve has remained broadly horizontal
over this period. Labour-market and training activities mitigate
against the adjustment problems and obstacles that can other-
wise lead to wage and price increases.

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2.4
Denmark typically comes top in studies of which coun-
tries are attractive to invest in. It also ranked first in a March
2005 report by the Economic Intelligence Unit. Appendix 2
shows how Denmark shapes up against the other EU countries
on a range of different parameters.

3. Danish-style flexicurity

The term ‘flexicurity’ has become very popular over the
3.1
past few years, although what is meant by it is not always
clear, and varies from one country to another.

3.2
In the Danish version, labour market arrangements are
seen as the ‘golden triangle’ between flexible hiring rules
(leading to a high degree of numerical flexibility), a generous
support system (providing social security) and strong activation

and training measures (which both motivate the unemployed
to look for work and give them the skills they need to re-enter
the open labour market).

3.2.1
The Danish flexicurity system helps ensure that the
jobs that are created are of a high calibre and involve decent
work. A corollary of high unemployment benefits is that what
are deemed ‘acceptable’ wage rates are also high. As a result,
labour
Danes do earn enough to live on. On the formal
market, therefore, any signs of the emergence of a ‘working
poor’ are few and far between — including among Danes of
other ethnic origins.

This golden triangle is illustrated below. The Danish
3.3
system of benefits and active labour market policy is briefly
examined in Appendix 3.

The key features of the Danish flexicurity system:

3.4
However, flexibility on the Danish labour market is multi-facetted and cannot be achieved through
liberal firing rules alone; it also requires working-time flexibility whereby, under the relevant agreements,
working time may be calculated on a yearly basis and job-sharing can be introduced for relatively short
periods. More provision in collective agreements for setting final wage rates at company level also ensures
a certain degree of wage flexibility. Flexibility is also generated by the breadth of workers' skills: people are
independent, willing to change and aware of their responsibilities; as such, they are quickly able to adapt
to shifts in production or to a new job.

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3.5
The security of the Danish labour market is not due
solely to the relatively high level of unemployment support
that is provided. A measure of employment security is also
given by the high employment and turnover rate on the labour
market. Employment security is further backed up by a broad
raft of supplementary and further training measures which are
managed and administered jointly by the authorities and the
social partners. Moreover, Danish society offers families a
degree of security to combine family life and work through
attractive arrangements for paternity/maternity leave, childcare
facilities etc.

3.6
The key to understanding what is meant by Danish-style
flexicurity is that flexibility and security are not necessarily
opposites. Traditionally, employers have wanted a more flexible
labour market, clashing with workers' desire for job security
and high levels of economic compensation during periods of
unemployment and sickness.

3.7
The concept of flexicurity breaks with this antagonism.
Employers may be keen to have stable and secure working rela-
tionships and motivated staff, while workers may be similarly
keen for flexible working time, flexible work organisation and
flexible pay arrangements. These new kinds of labour markets
can thus generate a new interplay between flexibility and
security.

3.8 Within the labour market, the Danish flexicurity system
combines the dynamism of a liberal market economy with the
social security of a Scandinavian welfare state through universal
public service and income equalisation. Seen in a broader
perspective, this is one result of the political objective to give
people opportunities in their working lives and to redistribute
resources via public-sector budgets and activities. This in turn
generates social cohesion through a strong policy of income
equalisation and action to head off major social tensions. It also
gives workers security to adapt and to cope with the flexibility
of the system.

4. The role of the social partners

4.1
The social partners have traditionally played a key role
in decision-making and administrative arrangements in labour-
market and training policy. Their input has helped generate
creative and balanced solutions to market and innovation diffi-
culties and to equip the country well to adapt and develop in
the ways demanded by globalisation. The social partners are,
after all, in a position to assess any needs that may be reported
and make any changes that may be necessary. Over time, close
dialogue among the various stakeholders also generates social
capital by boosting confidence,
fostering responsibility and
promoting mutual understanding.

4.2
The current situation has historical roots stretching back
more than a century. The typically Danish labour-market
model,
for instance, has its roots in the 1899 ‘September
compromise’ between the Danish Confederation of Trade
Unions (LO — Landsorganisationen) and the Confederation of
Danish Employers (DA — Dansk Arbejdsgiverforening), both of
which had only recently been set up as nationwide organisa-

tions. This was the world's first general agreement and has
served as the framework for agreement and interplay between
the social partners ever since.

4.2.1
Employers accepted the main trade union body as a
negotiating partner, while employees accepted employers' right
to hire and fire — and thus their right to manage. This basic
provision has helped form the liberal mindset that prevails in
Denmark in relation to firing rules. Another key element of the
September compromise was a commitment to good industrial
relations for the duration of the agreement. The social partners'
central
regulation and
conflict-resolution by the partners themselves remained in
place until as late as 2003. Only when the EU refused to recog-
nise independent implementation of directives by the social
partners, did additional legislation begin to be introduced in
Denmark. Appendix 4 gives more information on the historical
development of the social partners' role and the establishment
of the Danish model.

tenet of voluntary labour-market

increases,

recognised,

the social partners

After many years of high inflation and highly volatile
4.3
real-wage
from
1987/88 onwards, that agreements should also reflect overall
socio-economic conditions. Of course, employers, workers and
governments do have differing viewpoints in Denmark, but
there is also a basic culture of dialogue and consensus that
must be seen as part of social capital. The low power gaps that
exist at every level of society help maintain this consensus
culture.

the

In policy terms, Denmark has, since the 1960s, devel-
4.4
oped a comprehensive public system of vocational supplemen-
tary and further training for people both in and out of work.
This has made
adaptable.
Throughout the whole of the twentieth century, the social part-
ners also had (and indeed still have) an important role to play
in public decision-making and in putting those decisions into
practice. In contrast to developments in most other European
countries,
this role was even strengthened from 1993/94
onwards.

entire workforce more

4.5
There has been a substantive shift in labour market
policy, which used to be regulatory in approach, but is now
needs-based and tailored to providing individual solutions. The
social partners — and the local authorities — became the key
players in the fourteen regional labour market councils which
were given both the powers and the public resources to put
action on unemployment and regional labour market policy at
the top of their list of priorities.

Over many years, therefore, the social partners have
4.6
built up a broad, collective awareness of what it means to
shoulder social responsibility, while the authorities have learnt
to draw on their resources and influence. The social partners
have unique information and knowledge about
the labour
market and can thus identify needs reliably and quickly.
Through their corporatist input, they provide the authorities
with free resources, and find creative solutions
to joint
problems through discussions and decision-making forums.

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Also, the organisations are vital to ensuring that policies are
adopted, implemented and — not least — accepted. The autho-
rities are thus dependent on the social partners' cooperation in
the flexicurity arrangements.

education and public services. Confidence in the future and a
high degree of income security encourage consumers to buy
and ensure a high level of domestic demand.

5. The right policy mix

5.1
To fully understand the Danish flexicurity system, it is
important to consider the social context of which that system
is a part. Moreover, economic policy and the public sector also
have an impact on the workings of the labour market and,
together, shape the elements that may be called ‘the Danish
model’. This interplay is illustrated in Appendix 7.

5.2
In the second half of the 1980s and the first half of the
1990s, the Danish economy was in crisis. Between 1987 and
1993, for instance, the average annual growth was running at
0.8 %, while unemployment rose from 5 % in 1987 to 9.6 % in
1993. The crisis was the result, among other things, of the
economic constraints that had been introduced in the wake of
the big government deficits of the previous years.

5.3
From 1993 onwards, active labour market policy was
being strengthened just at the time the economy was also being
boosted by low interest rates and an expansive economic
policy. As a result, at the start of the growth period from the
mid-1990s onwards, the Danish public deficit was so big that
the stability and growth pact rules, had they existed at the
time, would not have been met. Property funding rules were
also changed (allowing longer loan repayment periods and the
possibility of refinancing), thereby giving people more dispo-
sable
and
burgeoning optimism made it easier for people to accept more
stringent labour market rules.

income. High growth,

falling unemployment

5.4
The extra public spending was used, among other
things, on major schemes to expand childcare cover so that
women with small children were genuinely available for work.

5.5
The increased focus on labour market policies also
meant more emphasis on training and further training, with
the state providing massive support
training
measures for people both in and out of work. The support was
given not only to fund training but also, to some extent, to
offset loss of earnings. The number of training posts for young
people was also increased at every level.

further

for

5.6
In broad terms, it has to be said that the Danish system,
involving high levels of unemployment benefit and thus a high
‘acceptable’ wage, does require a skilled and productive work-
force. If a large pool of low-skilled people is allowed to develop
who are unable to match the wage levels obviously required by
the high unemployment benefits, excessively high unemploy-
ment is bound to ensue.

5.7
From the mid-1990s onwards, an investment-based
economic strategy was successfully introduced, with growth
being generated through proactive reforms and investment in

5.8
The current economic strategy was a response to the
economic crisis Denmark experienced from 1987 onwards,
when the government reduced the large public and balance-of-
payments deficits
through savings and cuts. The savings
strategy did sort out the imbalances, but, in turn, resulted in
low growth and increasingly high unemployment. The current
strategy appears to safeguard growth and employment while
balancing public finances and securing a sound balance-of-
payments position. This, incidentally, is a combination unseen
in Denmark since before the oil crises of the 1970s.

6. Current challenges

6.1
Even although Danish-style flexicurity has had positive
results over the past few years, there are of course still chal-
lenges that need to be addressed.

6.2
Globalisation and technological change are, broadly
speaking, putting pressure on the Danish labour market.
Unskilled workers in particular are coming under pressure as
they face competition from lower-wage countries and auto-
mated production.

So far, Denmark has dealt with this pressure by redu-
6.2.1
cing the number of unskilled workers on the labour market,
since more older unskilled workers are leaving the labour
market than young ones entering it. As things stand, however,
many young people do not receive skills training — something
which, in the long run, may undermine the Danish flexicurity
system. Thus, unless the supply of skilled workers is kept fairly
much in sync with demand, public expenditure on unemploy-
ment benefits and other transfers will simply be too high.

6.2.2
Some firms in Denmark are closing and relocating all
or part of their production operations to lower-wage countries.
This is a challenge — especially in remote areas that are very
sensitive to the closure of individual companies. The Danish
labour market, which is structurally dominated by small and
medium-sized enterprises,
is, however, viewed as a dynamic
entity, so that, instead of trying to hold onto these jobs, policy-
makers, working together with the social partners, are seeking
to create new and more competitive ones.

6.3
The high degree of labour market turnover means that
employers are less inclined to pay for further training as they
do not know how long the staff will remain in employment.
This applies in particular to the unskilled, since employers do
more to keep and train hard-to-come-by specialist workers, and
also because unskilled workers are not always motivated to
engage in further training. For that reason, there is a compre-
hensive, publicly subsidised system of
training and further
training for both unskilled and skilled workers, with compul-
a well-trained
from employers,
sory contributions

since

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workforce is vital to the workings of the Danish flexicurity
system, and it is politically desirable to pursue a broad-based,
proactive approach to upskilling.

that

to the fact

6.4 Many immigrants find it difficult to gain a foothold on
the Danish labour market, thereby also limiting their chances
of integration. The labour market difficulties are due, among
other things,
immigrant groups and their
descendants do not have the skills required to attain Denmark's
high levels of unemployment benefit and wages. Immigrants
and their descendants are, for instance, less well-educated than
ethnic Danes; they have, on average, a lower participation rate
on the labour market and suffer from higher unemployment
than the rest of the population. Difficulties may be linguistic,
social or educational.

is falling,

6.4.1
This may be explained in part by cultural differences
and ingrained habits. Experience shows that unemployment
fluctuates more among these than among other groups. When
unemployment
for instance, employers are more
inclined to explore new avenues and take on people from a
different ethnic background. A high-employment, low- unem-
ployment environment can thus, in itself, provide immigrants
and their descendants with better access to work, without,
however solving the integration issue as a whole. Demographic
developments mean that Danish jobs face having to open up
more fully to immigrants over the coming years.

The Danish welfare model

6.5
is underpinned by a high
percentage of working women — in order both to provide the
requisite public services and to maintain high tax revenues. On
the one hand, this means that women are more economically
it presents challenges in
independent, while, on the other,
terms of reconciling family life and work. Compared with
many European countries, Denmark has made substantial
progress in this area but there is still a long way to go to
achieve, among other things, equal career opportunities for
men and women.

6.6
The Danish system is expensive for the state, which
pays a substantial proportion of the wage-replacement benefits
to the unemployed. Spending on passive labour market poli-
cies, for instance, made up 2.7 % of GDP in 2003 — an EU
record. The funding of the Danish welfare society is set to
come under pressure in future from a number of sides. To
maintain welfare state funding without
tax hikes requires
higher employment rates among people of working age.

Brussels, 17 May 2006.

6.6.1
At around 49 %, the Danish tax burden is among the
highest in the EU, where the average is around 40 %. Consumer
taxation is particularly high, although the country does not top
the list for tax on labour. Income tax is high and very progres-
sive, but employers are not, broadly speaking, subject to social
security charges. The Danish tax structure is set out in greater
detail
in Appendix 5. Because of globalisation, some tax
revenue may come under pressure in the future.

rise

the welfare society,

Demographic developments mean a

6.6.2
in the
number of older people and a fall in the number of those who
are economically active. This is due to the fact that the youth
generations are small, the post-war generations are big, and
In the debate about possible
people are also living longer.
reforms of
labour market policy —
including unemployment benefits — also comes into play. The
Danish pension system is, however, to some extent ready to
meet these changes (cf. Appendix 6). There may be a labour
shortage and, since women, who constitute the labour reserve,
are already to a large extent part of the workforce, new ways
will have to be found of boosting employment. These may
include raising the retirement age or increasing the numbers of
immigrant workers with the requisite skills.

6.7
Around a quarter of the population of working age is
without a job and in receipt of some form of public support
(for unemployment,
‘activation’, early retirement etc.) Around
half of these people have withdrawn permanently from the
labour market as a result of physical wear-and-tear, unemploy-
ment or of their own volition, while the other half are only
temporarily out of employment. The fact that such people are
given public support is a basic tenet of the welfare state, but
this does represent a challenge for future welfare society
funding. To safeguard the long-term funding of the welfare
society,
it is essential to bring down the percentage of the
population leaving the labour market early.

Bit by bit,

labour market policy is increasingly being
6.8
regulated by EU rules and practice. Conditions on the Danish
labour market have traditionally been a matter for the social
partners themselves rather than for legislation.
If EU rules
become too detailed, there is a risk that public acceptance will
dwindle and that developments will pull in a different direction
from that desired by the social partners. The EU's open method
of coordination appears to offer a way to allow traditional
Danish practice to continue to develop, while synchronising
European employment and labour market policy.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND