The Danish flexicurity model and the crisis Torben M. Andersen University of Aarhus CEPR, CESifo and IZA
The Danish Flexicurity Model Particular – triple: Flexible hiring/firing rules • Lax EPL • Generous UIB • Strong focus on ALMP Unemployment Active labour Insurance market policy
Flexicurity and the Great Recession • More exposed to shocks • Large employment response to be expected • Higher risk of persistence – higher unemployment response and generous unemployment insurance • Can the active labour market policy cope with an increase in unemployment? • Eroding financial balance of the model
The Great Recession and the role of institutions/policies Notion of flexibility: EPL UIB ALMP Adaptation of labour input to output - + ? Speed of adjustment -? - +/? (actual unemployment structural unemployment) Avoiding path dependence - - -/? (change in structural unemployment) • Aggregate • Disaggregate (groups/types of labour)
% 10 12 0 2 4 6 8 Q1-1990 Q1-1991 Q1-1992 Unemployment Q1-1993 Q1-1994 Q1-1995 Q1-1996 Q1-1997 Q1-1998 OECD Denmark Q1-1999 Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009
Coping with the crisis • Boom-bust pattern 3000 Predicted 2900 • Prior to crisis: Actual 2800 – Very low level of unemployment 1.000 Persons 2700 2600 – Clear signs of overheating 2500 2400 • Post Crisis 2300 – Adjustment to lover 1991K4 1992K4 1993K4 1994K4 1995K4 1996K4 1997K4 1998K4 1999K4 2000K4 2001K4 2002K4 2003K4 2004K4 2005K4 2006K4 2007K4 2008K4 2009K4 level of activity
Employment adjustment relative to output hours vs employees 3,5 3 2,5 Employment Hours 2 1,5 1 0,5 0 SVK NZL DNK ITA DEU NLD KOR BEL JPN FRA SWE HUN GBR PRT CZE FIN AUT IRL USA CAN ESP NOR -0,5
EPL and share of hours adjustment 140 Share of working hours in labour adjusment, GER 120 NOR AUS AUT BEL 100 CAN FRA CZE 80 FIN NET 60 UK IRE ITA NZL % US HUN 40 SWE 20 DEN POR SPA 0 0 0.5 1 1.5 2 2.5 3 3.5 -20 EPL index
Puzzle • Substantial variation in the employment to output adjustment • Not clearly related to labour market policies/institutions • Not even for the relative share of employment and hours All variables in logs
High turnover in the labour market TUR 35.0 30.0 ESP DNK FIN USA IRL 25.0 POL SWE SVK FRA Hirings % GBR ITA CHE 20.0 BEL PRT HUN CZE NOR AUT GRC DEU SVN 15.0 10.0 5.0 0.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Separation %
Job finding rates remain high – but are pro-cyclical 100 Exit from unemployment 90 80 70 60 2008 q2 50 % 40 2009 q3 30 20 10 0
High incidence of short-term unemployment 80 70 Short term long term 60 50 40 30 20 10 0 CAN NZL NOR AUS SWE DEN ICE USA FIN AUT ITA UK POL NET CH SLV JPN IRE SPA GRE CZE FRA BEL GER POR HUN
Burden of unemployment falling on youth 45 40 35 30 25 % 20 15 10 5 0
(b) Long term unemployment (a) Short term unemployment 70 80 CAN HUN Share of total unemployemnt NZL GER POR NOR 70 60 Share of total unemployment GRE AUS FRA SWE CZE ICE USA BEL IRE 60 SPA JPN NET FIN CH 50 UK POL DEN AUT ITA 50 ITA AUT UK SLV 40 POL NET 40 USA FIN AUS SWE IRE JPN DEN NOR ICE CZE GRE FRA 30 BEL 30 SPA CH CAN SLV HUN 20 20 NZL POR GER 10 10 0 0 0 1 2 3 4 0 1 2 3 4 EPL EPL
Persistence in the labour market • Difficult to measure 1,00 CH FRA GRE ITA JPN GER • How to separate BEL LUX NZL 0,95 FIN AUT SWE – Exogenous sources IRE NET NOR AUS UK (shock) DEN POR 0,90 Autocorrelation – Endogenous sources SPA CAN (policy, institutions etc.) 0,85 TUR • Different measures 0,80 ICE indicate relatively strong persistence 0,75 0,75 0,80 0,85 0,90 0,95 1,00 Sign metric
• Trade-off: Volatility vs. persistence Unemployment persistence and gross flows GER 1,00 PRT USA AUT TUR NLD • Less volatile CHE BEL IRL SPA 0,95 ITA FRA markets = more UK SWE FIN Persistence 0,90 NOR CAN persistence? GRC 0,85 ISL y = -0,0018x + 0,9871 0,80 R² = 0,0654 0,75 • Very weak evidence 0,0 20,0 40,0 60,0 80,0 Gross job flows – also for the opposite
Social insurance a source of persistence? • Insurance= lack of ITA 1 FRA flexibility= strong JPN GER BEL SWE NZL persistence IRE UK AUT FIN 0,95 NET NOR AUS DEN POR 0,9 Autocorrelation unemployment – Incentives CAN SPA – Reservation wages 0,85 – Norms 0,8 • No clear evidence 0,75 supporting this USA 0,7 BUT persistence is crucial 0,65 0 0,2 0,4 0,6 0,8 1 Automatic stabilizer
High level of activation Share of unemployed in activation 35 30 25 20 % Insured 15 Social assistance 10 5 0 1. kvt 2. kvt 3. kvt 4. kvt 1. kvt 2. kvt 3. kvt 4. kvt 1. kvt 2. kvt 3. kvt 4. kvt 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009
Benefits and activation requirements:
Maintaining efficiency of active labour market policies? • Larger inflow 1,8 4 1,6 3,5 • Different composition 1,4 3 Dureation weeks (more core workers – 1,2 2,5 deadweightloss) 1 % 2 0,8 Activated in % of labour 1,5 force (left scale) 0,6 • Programmes less 1 0,4 effective? Average duration (right 0,5 scale) 0,2 0 0 Jan-04 Maj 2004 Sep-04 Jan-05 Maj 2005 Sep-05 Jan-06 Maj 2006 Sep-06 Jan-07 Maj 2007 Sep-07 Jan-08 Maj 2008 Sep-08 Jan-09 Maj 2009 Sep-09 Jan-10 Maj 2010 Sep-10 • More difficult to screen participants
• Can the system • Larger risk of long- • Overload in ALMP? cope with this?? term unemployment Main challenge – preventing long-term unemployment 10 20 30 40 50 60 0 1. kvt 2004 Post activation – employment effect 2. kvt 2004 3. kvt 2004 4. kvt 2004 1. kvt 2005 2. kvt 2005 3. kvt 2005 4. kvt 2005 1. kvt 2006 2. kvt 2006 3. kvt 2006 4. kvt 2006 1. kvt 2007 12 months 6 months 3 months 2. kvt 2007 3. kvt 2007 4. kvt 2007 1. kvt 2008 2. kvt 2008 3. kvt 2008 4. kvt 2008 1. kvt 2009 2. kvt 2009
Strong perceived job security Eurobarometer 2010 Perceived likelihood of respondens being able to find a job (after being laid off) 70 60 50 40 % 30 20 10 0 IT LT PT MT BG LU FR PL CZ RO AT NL LV IE ES EE HU CY EU27 SK SI DE UK SE FI BE DK
Conclusion Large change in (un)employment – but not relative to output change • • High gross flows remain despite crisis Most unemployment spells are short – Low risk of long-term unemployment – Relatively easy entry for youth – So far: weak signs of marginalization and increase in long-term • unemployment compared to other countries • Active labour market policy – can it also work in a deep recession? Financial viability of the model – crucial to maintain a high • employment level!
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