# **<mark>Box 2 - Balancing Flexibility and Protection: Denmark’s Flexicurity</mark>**

<mark>Every year, one out of five Danes loses his or her job. But they don’t lose their incomes. Unemployment benefits replace close to two thirds of their earnings, and the government helps them find work. This combination of flexibility for employers and income security for workers is called “flexicurity”. The arrangement has been in place since at least the 1970s. But it has evolved over time, principally in that the active labor programs component has been strengthened. It seems to work well. Between 1995 and 2008, Danish unemployment rates averaged 4.9 percent, while the rest of the EU15 suffered rates close to 8.5 percent. Danish employment laws have evolved from a system in which unemployment benefits were paid by labor and trade unions, not the government. In the 1970s and 1980s, unemployment rates remained high, while those without jobs got good incomes.</mark> <mark>The arrangements were reformed in the 1990s. The OECD Employment Protection index for Denmark has fallen from 2.4 in 1983 to 1.5 in 2009. Unemployment insurance financed from contributions and taxes covers around 80 percent of the labor force. Benefits last up to four years, replacement rates cannot exceed 90 percent of wages. After four years, recipients have to switch to social assistance which means a reduction of between 20 and 40 percent of benefits. Active labor market programs, like job search assistance and training nudge the unemployed back to work. The unemployment rate dropped from 10 percent in 1993 to 3.3 in 2008. The incidence of long-term unemployment—those without work for more than a year—fell from a third of total unemployment in 1994 to one tenth in 2009.</mark> <mark>Despite liberal firing and hiring practices, employment has not fluctuated too much in response to output variability. But the spending on active labor programs is sizeable: in 2010, it was almost €10 billion. Denmark spent 4.5 of GDP just for all labor market programs in 2008 (a good year). So the main drawback is the high fiscal burden, which can become enormous in a protracted slowdown. The Danes have flexicurity because of their history, and can afford it in part due to high participation rates of 81 percent. Those wishing to learn from the Danes should note this too.</mark> <mark>Although flexicurity has been praised for keeping unemployment low in Denmark, some reservations need to be mentioned. Andersen and Svarer (2007) point out that this model is not automatically leading to low unemployment. On the contrary, changes in the labor market may cause unemployment, and the transfers offered by the welfare state may become an absorbing state. Essentially, this is a variant of the well-known finding that if there is a passive player in a tripartite relation, the passive player ends up carrying all the costs. This was the case in Denmark from the mid of the 1970s to the mid of the 1990s with high and persistent unemployment and a growing ‘‘transfer’’ obligation on the part of the welfare state. Further, it is difficult to assess how much flexicurity contributed to the improved performance of the labor market, since other factors like macroeconomic performance count as well. Bredgaard and Larsen (2007) underline that competitive labor markets may exclude certain groups of employees, which fail to meet expectations of employers. Finally, spending a lot on active labor market policies become less effective if there are not enough jobs to go around—a likely problem in a protracted recession.</mark> <mark>Source: World Bank, forthcoming; Andersen and Svarer (2007); Bredgaard and Larsen (2007)</mark> 25