The Danish flexicurity model and the crisis Torben M. Andersen - - PowerPoint PPT Presentation

The Danish flexicurity model and the crisis

Torben M. Andersen University of Aarhus CEPR, CESifo and IZA

The Danish Flexicurity Model

Particular – triple:

• Lax EPL
• Generous UIB
• Strong focus on ALMP

Flexible hiring/firing rules Unemployment Insurance Active labour 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

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)

Notion of flexibility:

Unemployment

2 4 6 8 10 12 Q1-1990 Q1-1991 Q1-1992 Q1-1993 Q1-1994 Q1-1995 Q1-1996 Q1-1997 Q1-1998 Q1-1999 Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 % Denmark OECD

Coping with the crisis

• Boom-bust pattern
• Prior to crisis:

– Very low level of unemployment – Clear signs of

• verheating
• Post Crisis

– Adjustment to lover level of activity

2300 2400 2500 2600 2700 2800 2900 3000 1991K4 1992K4 1993K4 1994K4 1995K4 1996K4 1997K4 1998K4 1999K4 2000K4 2001K4 2002K4 2003K4 2004K4 2005K4 2006K4 2007K4 2008K4 2009K4 1.000 Persons Predicted Actual

Employment adjustment relative to output

hours vs employees

• 0,5

0,5 1 1,5 2 2,5 3 3,5 SVK NZL DNK ITA DEU NLD KOR BEL JPN FRA SWE HUN GBR PRT CZE FIN AUT IRL USA CAN ESP NOR Employment Hours

AUS AUT BEL CAN CZE DEN FIN FRA GER HUN IRE ITA NET NOR NZL SWE UK US POR SPA

• 20

20 40 60 80 100 120 140 0.5 1 1.5 2 2.5 3 3.5 Share of working hours in labour adjusment, % EPL index

EPL and share of hours adjustment

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

AUT BEL CHE CZE DEU DNK ESP FIN FRA GBR GRC HUN IRL ITA NOR POL PRT SVK SVN SWE TUR USA 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Hirings % Separation %

Job finding rates remain high – but are pro-cyclical

10 20 30 40 50 60 70 80 90 100 % 2008 q2 2009 q3

Exit from unemployment

High incidence of short-term unemployment

10 20 30 40 50 60 70 80 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 Short term long term

Burden of unemployment falling

• n youth

5 10 15 20 25 30 35 40 45 %

AUS AUT BEL CAN CZE DEN FIN FRA GER GRE HUN ICE IRE ITA JPN NET NZL NOR POL POR SLV SPA SWE CH UK USA 10 20 30 40 50 60 70 1 2 3 4 Share of total unemployment EPL

(a) Short term unemployment

AUS AUT BEL CAN CZE DEN FIN FRA GER GRE HUN ICE IRE ITA JPN NET NZL NOR POL POR SLV SPA SWE CH UK USA 10 20 30 40 50 60 70 80 1 2 3 4 Share of total unemployemnt EPL

(b) Long term unemployment

Persistence in the labour market

AUS AUT BEL CAN DEN FIN FRA GER GRE ICE IRE ITA JPN LUX NET NZL NOR POR SPA SWE CH TUR UK 0,75 0,80 0,85 0,90 0,95 1,00 0,75 0,80 0,85 0,90 0,95 1,00 Autocorrelation Sign metric

• Difficult to measure
• How to separate

– Exogenous sources

(shock)

– Endogenous sources

(policy, institutions etc.)

• Different measures

indicate relatively strong persistence

• Trade-off: Volatility
• vs. persistence
• Less volatile

markets = more persistence?

• Very weak evidence

– also for the

• pposite

AUT BEL CAN CHE GER SPA FIN FRA UK GRC IRL ISL ITA NLD NOR PRT SWE TUR USA y = -0,0018x + 0,9871 R² = 0,0654 0,75 0,80 0,85 0,90 0,95 1,00 0,0 20,0 40,0 60,0 80,0 Persistence Gross job flows

Unemployment persistence and gross flows

Social insurance a source of persistence?

AUS AUT BEL CAN DEN FIN FRA GER IRE ITA JPN NET NZL NOR POR SPA SWE UK USA 0,65 0,7 0,75 0,8 0,85 0,9 0,95 1 0,2 0,4 0,6 0,8 1 Autocorrelation unemployment Automatic stabilizer

• Insurance= lack of

flexibility= strong persistence

– Incentives – Reservation wages – Norms

• No clear evidence

supporting this BUT persistence is crucial

High level of activation

Share of unemployed in activation

5 10 15 20 25 30 35

• 1. kvt

2007

• 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

• 3. kvt

2009

• 4. kvt

2009 % Insured Social assistance

Benefits and activation requirements:

Maintaining efficiency of active labour market policies?

• Larger inflow
• Different composition

(more core workers – deadweightloss)

• Programmes less

effective?

• More difficult to

screen participants

0,5 1 1,5 2 2,5 3 3,5 4 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 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 Dureation weeks % Activated in % of labour force (left scale) Average duration (right scale)

Main challenge – preventing long-term unemployment

• Overload in ALMP?
• Larger risk of long-

term unemployment

• Can the system

cope with this??

10 20 30 40 50 60

• 1. kvt 2004
• 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
• 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

3 months 6 months 12 months

Post activation – employment effect

Strong perceived job security

Eurobarometer 2010

Perceived likelihood of respondens being able to find a job (after being laid off)

10 20 30 40 50 60 70 LV IT IE LT PT ES EE HU MT BG LU CY FR PL EU27 SK SI CZ RO AT DE UK SE FI NL 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!