Flexicurity: a modern Danish Fairy-Tale?
the country of the blind the one-eyed man became king.
European countries continue to face chronical unemployment and slow
growth. Meanwhile the rest of the world enjoys the advantages and
opportunities of globalisation and is booming as seldom before. Denmark remarkably
mainland Europe as to its participation rate. So the rest of Europe
plans to fight unemployment with the recipes of the Danish flexicurity
model. At first sight the
Denmark does indeed combine high
participation with decent social protection and a flexible labour
But economists of the IMF and the Itenera
Institute caution the Danish reality is bleaker than it appears.
The most fundamental warning for the flexicurity-hype has come from
Institute for Economic Research. In the latest edition
of their bi-annual study of
Westen social models
they analyse the effectiveness of public policy and found Danish
performances deplorable. Obligate employment in low-productive jobs
ruins productivity and leads to social regression. They warn
flexicurity is a painfull and totally useless exercise and that the
social cost is high. Flexicurity means late retirement, early school
leave, loss of job security, shrinking leisure and time for a decent
family life and lacking opportunity for the children's education.
Flexicurity is not an economic miracle nor the social paradise some
want us to beleive. The institute found the Irish model by far the best
Europe's key question: More or
less government ?
European stagnation lasts for over a
decade now. None of Europe's great projects have yielded the benefits
promised at the launch. The anticipated boosts from the Lisbon Agenda,
the Enlargement and the Common Currency all fail to materialise. The
opinions as to the causes and the cures for Europe's stagnation differ
most widely between economists and politicians.
The political elite
Europe's poor growth and the failure of earlier plans must be remedied
by even more government action, and that new and better plans are
needed to save Europe from its existential crisis. Europe's politicians
have not learned the lessons from history. They fail to understand that
central planning such as the Lisbon Agenda are only likely to make
things worse, and that freeing the economy from government interference
is the better way to achieve prosperity and happiness.
the publication of a number of
economists increasingly realise
Europe's slow growth is related to its
oversized public sector and the excessive public interference with the
economy. Among economists the consensus is growing that Europe's
pampering welfare state and its
demotivating tax structure are killing
incentives, undoing the economy from the motor of progress. In doing so
Big Government is excluding Europeans from the massive productivity
gains globalisation brings about. Economists also caution that Europe's
outdated social models are unsuitable for coping with ageing
populations and warn for a possible collapse of the unfunded pension
the choice of a new social model for Europe is
at the centre of the political debate. Despite contrary indication and
massive evidence of poor Scandinavian performance, Europe's political
elites continue to push the Nordic Model
which stands for big government, coercive redistribution and central
planning. On the other side of the political spectrum free market
economists call for an Anglo-Saxon social model based on Adam Smith's free market principles of laissez-faire,
either on the pure American version or on the softer moderate European
version thereof typically found in Great Britain and Ireland.
Let's compare the key economic Indicators.
Although today both the
Anglo-Saxon models have moderated their earlier versions, very
substantial policy differences subsist between both types of policies
as the table below clarifies. The most obvious and central
characteristic of the Scandinavian model is indeed the huge size of its
public sector and its poor economic performance. Scandinavian growth of
prosperity is indeed slow, and so is their job creation rate. Over the
last 20 years Scandinavian governments spent on average 56.9% of GDP.
Danish governments spent 56.6%, Finish 52.1% and Swedish no less than
62.14% on average from 1985 to 2004. No wonder that the Scandinavian
economy came close to standstill in the early nineties and on average
booked the slowest growth of Europe over the last 20 years.
slow Nordic growth is remarkable as
Scandinavians work and think hard. Not only do they have the highest
research budgets of Europe, they also have the longest working hours.
Scandinavians work on average 767 hours/Year per inhabitant, as opposed
to only 695 hours in continental Europe and 706 hours in the UK and
Ireland. This is due to Scandinavians having the highest participation
rate in Europe. Following the near-collapse of their economies in the
early nineties Scandinavians introduced non-indulgent retirement rules
as well as very strict limitations on unemployment benefits, resulting
in late retirement. The high tax burden on family income also
necessitates two wage earners per family, resulting in the highest
participation in Europe (48,4%) as opposed to 42,6% on the European
continent and 40,9% only in Ireland and the UK.
Anglo-Saxon tax structure, both Scandinavian
and Continental European tax revenues rely predominantly on direct
taxes. Scandinavia gets 65,4% of its total tax revenue from profits,
income, and social security contributions. This is more than 11,1% in
excess of the Anglo-Saxon countries with 54,3% direct taxes only. The
Scandinavian tax structure has undoubtedly succeeded in topping-off
incomes of the highest income groups better than the UK and Ireland,
who put more emphasis on consumption taxes. The Scandinavian wealthiest
20% earn indeed only 36.4% of total income as opposed to 40.4% in
continental Europe and 43.6% in the Anglo-Saxon countries. However the
effectiveness of the Scandinavian redistribution system in transferring
the tax revenues to the poorest has proved extremely limited as the
poorest 20% Scandinavians earn only 9.0% of total income; merely 2.6%
in excess of the 7.4% the continental European poor earn.
The Importance a choosing the right Social Model.
overwhelming importance of choosing the right
social model is most evident when we compare the long-term growth
differentials under the different social models. Let's compare the
evolution of prosperity and new job creation of Scandinavian countries
with Ireland, and with a typical continental European country: Belgium.
1970, Sweden's wealth level was 25% above the
Belgian. Sweden then occupied 4th place in the OECD ranking, just
behind Switzerland, the US and Luxembourg. By 2004 Sweden had fallen to
the 13th place, one rank behind Belgium. In 1970, Denmark was the 5th
most prosperous economy in the world. By 2004, Denmark had fallen to
the 10th rank. Finland did badly as well. From 1989 to 2004, while
Ireland climbed from 21st to 4th place, Finland fell from 9th to 15th.
The three Scandinavian EU-members are together with Italy the worst
performing economies in the entire Union.
does the political elite not learn from the
poor Scandinavian records and the undisputable success of
Ireland? From 1970 to 2004 Sweden and Denmark lost 9 and 5 places
in the prosperity ranking. Ireland gained no less
than 18.Rather than taking Scandinavian countries as an example, we
should shun their recipes, and look at the policies of best
pupils of the OECD class: Ireland.
Flexicurity: the Nordic Road to
there is anything Danes are good at it
is fairy tales. It is indeed impressive how the Danes succeed in
keeping alive the myth of their social paradise when so much evidence
testifies of their social regression. Their poor economic performance
is indeed not limited to slow progress of prosperity. The Danish
stagnation also resulted in extremely poor job creation over the last
two decades. While The EU-15 created 24% new jobs on average between
1981 and 2003, Sweden and Finland could hardly create any jobs at all.
Denmark performed marginally better with 12% new jobs in this period.
improved its employment record through
activating its labour market by means of a strict flexicurity
policy. Flexicurity includes measures such as easing hire-and-fire and
unemployment benefits being restricted time. Some of the measures were
really hard to swallow by the Danish
workforce. For workers in the
construction industry for example the term of notice was reduced to no
more than five days. Young people as well as the long-term unemployed,
also are excluded from benefits if they dare to decline a job offered,
however unproductive, low-paid, and far below their level of education
it may be.
these measures certainly added to the
much-needed flexibilisation of their rigid labour market and have
indeed helped to lift Danish participation rate above the European
average. Much of the Danish participation however is window-dressing,
concealing the huge hidden unemployment. Danish participation rates are
blown up by the creation of no less than 240.000
new government jobs
between 1996 and 2005 (+37%). High numbers of partially employed also,
and non-profit jobs in numerous activation programs and heavily
subsidized employs in the social sector
efforts and exertion.
engaged in all these symbolic
pseudo-employs obviously do no longer figure among unemployment
statistics, but they do hardly contribute anything to the wealth of the
Danish nation. Despite flexicurity Danish growth remains among the
lowest of the EU, and productivity and wage growth is now lagging far
behind the rest of the continent. Flexicurity may have helped in curing
the symptoms of Denmark's chronic unemployment disease.
Regression: the social Cost of Big Government.
A closer look at the
reveals the harsh reality behind Danish flexicurity, and how much the
overall participation rate has gone
at the expense of obligate
employment of the very old and very young age groups. Danish employment
rate in the 15-24 year olds stands at 62.3% as opposed to 39.8% only
for the EU-15 average. The social
decline behind Danish flexicurity is
indeed agonizing. Their high overall participation rate is the result
of very late retirement, unnaturally high proportion of two-wage-parent
families, and early school leavers Danish compulsory attendance at
school is in fact limited to a mere nine years of education whereas
Danish legislation allows to employ children as young as 15 years in
It did however not remedy the
deeper cause of the Scandinavian illness,
which is deep frustration over the exorbitant tax burden and profound
de-motivation among both employers and employees. The high Danish
participation rate hides the deficient private initiative and
investment from the overtaxed and over-regulated private sector and
conceals the lack of productive jobs on offer. Private investment
lacking, flexicurity has turned out to be nothing more than useless
occupational therapy, however remorseless for the workforce and however
ruthless for the young and the elderly its measures may have been. The
obligation to accept low productive jobs leads to low job satisfaction,
high sickness absenteeism and poor motivation on the work floor. As a
consequence flexicurity in practice has gone at the expense of labour
productivity and labour satisfaction, resulting ultimately in lower
than proportional GDP growth. Hours per employed person are already
significantly lower in Scandinavia (1590 hours only vs. 1644 in
continental Europe), whereas Danish productivity per hour worked is
lagging far behind Europe's average.
Danish flexicurity model is far from being the social paradise
socialists want us to believe. Late retirement, early school leave,
loss of job security, shrinking leisure and time for a decent family
life and lacking opportunity for the children's education are the
social cost to pay for the oversized parasitical sector and all the
excessive Government overhead. This social regression is the price to
pay by the Danish workforce for all the excessive and wasteful public
spending and for the expenses for all the superfluous public
interference with their private affairs.
Denmark’s 2002-New Deal: a strict
participation rates through public
employs and legal enforcement obviously is not the way to boosting
growth and productivity. The main reason behind Denmark's failure was
the un-employment and un-investment trap caused by the lack of positive
incentives. Decades of over-taxation and over-regulation have indeed
deeply demoralized both Danish employers and workers alike. The
excessive tax burden and the detrimental business climate have deterred
the private sector from investing and creating the productive jobs
providing the indispensable non-inflationary finance for progress.
has recently warned
against the Danish window-dressing and cautioned against the
flexicurity euphoria. Even the Danes themselves finally realized that
social regression through labour enforcement is not the way to proceed,
and that Big Government and the excessive tax burden were the true
causes of the Scandinavian Disease. In 2002 Danish policy makers
finally decided to reduce their oversized government and introduced a strict
implying that taxes, whether expressed in fixed nominal krone terms or
in percentage terms, cannot be raised. An important element in the new
fiscal strategy was to set strict targets for the growth of public
consumption. Under the new fiscal strategy, the key target variable for
public consumption was set at a maximum growth of 0.5% per year from
2005 to 2010, markedly lower than the projected growth of the economy.
Under a nominal tax freeze, the effects of growth and inflation
gradually but steadily reduce the tax burden, both in real terms and as
a share of GDP.
Public spending, which still
stood at 54.9% of
GDP in 2002, is due to fall to 50.8% in 2007. At this rate of change,
the size of Danish government will be reduced to the OECD
average (±40%) by the year 2015. So in the end the Denmark might
become a fairy-tale social paradise after all. Not by virtue of their
long praised Big Government - Flexicurity model, but because in 2002
the Danes finally decided to dump the ballast from their oversized
welfare system and to introduce some Irish free-market ideas in their
outdated social Model.
Martin De Vlieghere and Paul
Read the full study here:
The Path To Sustainable Growth - Lessons From 20 Years
News from Brussels' leading think-tank..
is een onafhankelijke en pluralistische denktank. We onderzoeken
sociale modellen en structuren op hun efficiëntie in de realisatie
sociale objectieven. Los van ideologie onderzoeken we het succes van
beleidstypes in hun realisatie van werkgelegenheid, welvaart,
solidariteit en individuele vrijheid.
The Path To Sustainable
Lessons From 20
Years Growth Differentials In Europe
Martin De Vlieghere and Paul
Abstract: While the rest of the
world is booming, Europe lags
behind. Europe's performance is
spite of high productivity and knowledge, high level of
development and good labour ethics. Growth is also remarkably
dissimular among regions. France, Germany and Italy are stagnating, and
so do Denmark,
Sweden and Finland. All gained less than 44%
prosperity over the last 20 years. The Irish
economy grew 4 times faster, gaining 169%
wealth over the same period. In half a generation Ireland so
metamorphosed into Europe's second
richest country creating jobs for all.
" is the main cause of Europe's weak performance. The oversized Public-Sector lacks productivity and undoes the
entire productivity gains of the Private Sector, eradicating
all of its outstanding performance and
productiveness. Europe can improve its overall performance by copying
success formulas: Scaling down Public Spending, downsizing
bureaucracy, and shifting the tax burden
consumption. This book demonstrates why the Lisbon
Agenda and decades of Keynesian inflationist demand stimulation have
failed. It devellops alternative and workable
supply-side strategies as well as effective cures for humane growth
and a financially sustainable social
book reads as a step-by-step manual for economic
It is a data-reference for students and politicians
interested in growth, wellfare and in social modelling. It is a
for economists concerned about Big
Government, poor public sector productivity and for parents worrying
about their declining standard of living and their children's future.
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