Editor Pick – Danish for All? Balancing Flexibility with Security: The Flexicurity Model
by Jianping Zhou / IMF
Within the Danish flexicurity model, a high degree of labor market flexibility coexists with a high level of social protection engendered by generous unemployment benefits and active labor market policies. This is why it looks increasingly attractive to continental European countries struggling with chronically high unemployment rates.
In this study Jianping Zhou looks at the mix of labor market reforms and macroeconomic policies that underpin Denmark’s favorable performance since its crisis in the early 1980s.
It is not clear, however, whether the Danish model should and can be adopted by other European countries to reduce unemployment. In particular, the Danish model may not be suitable for countries starting with high unemployment levels and budgetary difficulties. Using a calibrated model for France, for instance, the paper finds that implementation of the flexicurity model could be costly, and reduction in structural unemployment during the first few years might be limited.
One Response to “Editor Pick – Danish for All? Balancing Flexibility with Security: The Flexicurity Model”
I have read this paper with considerable detail and I find it intriguing that the assumed financial model for this analysis is that increases in active labour management programs are paid for solely by raising direct taxes, which then of course, dampen the demand for labour.
What if an alternate analysis was created in which instead of a rising tax wedge, the increase was financed through Long-term bonds, and the increase in the tax wedge was just the extra interest payments that the government of the economy would have to pay.
I really enjoyed the analysis of France, but what about the impact of dramatically embettering France’s other variables, e.g. epl through solely legislative means? What kind of effect will that have in this model on unemployment.
It’s excellent that the paper uses statistical theory to caution expensive governments with high unemployment rates from spending money on increased funding for ALMPs but the models shown are too basic and no concrete solution is suggested on how expensive governments with high unemployment rates should mitigate the impacts of the other variables while increasing ALMP spending.
What I’m really wondering is that is there a way for the ALMP funding increase to effectively reduce unemployment in high unemployment economies. What if the government forces through a large series of quick changes and ratchets up ALMP funding in a bid to allow its citizens to have the tools to adapt to a changing econmy? What does the model predict in such a scenario, especially if the tax wedge can be kept near-constant. For example, say a 5% unemployment reduction while keeping tw constant?