Sunday, August 22, 2010

The Wane of Danish "Flexicurity" and European Safety Nets

Liz Alderman, economist and blogger on the NY Times' Economix blog, has some compelling things to say about the down-scaling of Denmark's welfare programs in light of the global recession, and how the northern country serves as a cautionary study on social safety nets and "two-speed markets" in Europe and the U.S. (...)

Until the late 1990s, a Danish citizen could expect state assistance for up to five years. The maximum was reduced to four years in 2005. The recession that hit in 2008 has caused the Danish government to pull back their generous system by half -- which means that benefits are now down to a maximum allowance of two years.

The vaunted Danish "flexicurity" system has met significant hurdles -- and growing detractors -- in a cash-strapped Europe still reeling from the crippling 2008 financial downturn.

This shift in Denmark's welfare spending traces its roots to a 2007 study by the Danish Economic Council. The chart below depicts the move from the Danish unemployment benefit scheme to paid work.


What is perhaps most telling about this picture is the abundance of work found by those just about to be forced off the state's dole.  As shown by the spikes of the red and green lines, this occurs both at the five-year limit of the 1998 policy, and at the four-year deadline of the 2005-2007 policy. 

If the newly instated two-year-limit policy proves par for the course, a future graph should show a similarly large spike in found work after 24 months. In other words, at least in Denmark, the unemployed tend to go off assistance only when the absolutely have to. 

Because Alderman explains this trend more clearly than I probably could, here's an excerpt from her post:

"[The findings] show that between 2005-7, the number of people who got jobs during their four years of benefits — the green line – rose at the beginning before dropping sharply, then spiked as benefits were about to run out, only to plummet after. The red line shows similar behavior in 1998, when Denmark’s benefit period was five years.
“It shows that people are not seeking all the jobs they could get, but just the jobs they would like to have,” said Steen Bocian, chief economist at Danske Bank. (...)"

Which of course begs the question, is the Danish-style safety net really necessary, or effective, or fiscally sustainable? Might the extensive programs, rather than alleviating legitimate benefits claims by those in precarious work situations, actually encourage unemployment? The Danish Economic Council's findings, Alderman's analysis, and the current financial hardship -- endured everywhere from the newly austere Britain to the debt crisis in Greece -- all seem to suggest exactly that. 

And that's saying nothing of the woeful and untenable "two-speed economies" in Europe and in the U.S. These dual economies risk being perpetuated both horizontally in the private sector, and vertically, on a EU-wide political level (eg. growth differences between the Big Three and EU member states that are smaller players). 

Yet regardless of location, what that means to, for example, young graduates (I being one) is an increasingly inaccessible entry-level job market, anemic growth, tentative hiring patterns... All of which beget each other, creating a potentially iron-clad recessive cycle that would be very difficult to break. 

Job seekers may fare better if they've got the benefit/blessing of some real work experience, or hard-earned, real-world work expertise of any kind. But for those trying to leap into the workforce with little else than recent coursework or internships (graduates, again) -- tough luck.

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