Danish 'flexicurity' failing the test of the recession

In Denmark, hiring and firing is flexible, and and unemployment benefits are generous. But how is the market strategy faring in the recession?

By , Guest blogger

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    Houses in a Copenhagen neighborhood are shown in this Feb. 18, 2011 file photo. Denmark used to have the lowest unemployment rate in the EU, but now it has fallen behind some of its neighbors.
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A few years ago, there was a lot of praise for Denmark's "flexicurity" labor market strategy of flexible hiring and firing combined with generous unemployment benefits (particularly for people with low income) and "activation" policies. This was understandable as Denmark in early 2007 had the lowest unemployment rate in the EU, only 3.4%. By comparison, Denmark's southern neighbor Germany had an unemployment rate of 7.1% and its northern neighbor Sweden had an unemployment rate of 6.7%.

Already then, the strategy wasn't really as successful as it seemed because there was a lot of "hidden unemployment", but then again that was true of Germany and Sweden as well.

Yet during the recession in 2008-09, Denmark saw a much greater decline in employment than both Germany and Sweden and while both Germany and Sweden are now experience robust job growth (so robust that in both countries employment is now higher than before the recession), Denmark continues to experience a decline in employment.

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As a result, despite the fact that "hidden unemployment" has declined in Germany and Sweden but not in Denmark, Denmark (7.9%) now has a higher unemployment rate than both Sweden (7.6%) and Germany (6.3%).

While employment is up 3% in Germany and 2.6% in Sweden since 2007, it is more than 2% lower in Denmark (hours worked is down 4%).
Note that the German gains are a lot more impressive given that it has had a slight population decline while Sweden's population is up by 3% and Denmark's population is up by 2.1% since 2007.

The main reason for the poor Danish performance is that while both Germany and Sweden has improved incentives, Denmark's government has failed to do anything useful in this aspect.

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