I thought I’d try this and see how it goes. When starting a semester there’s always some easy overview stuff that should not cause people outside the field any problems and I thought I’d start with that. The current post will be based on the paper Flexicurity – labour market performance in Denmark by Andersen and Svarer. Monday I printed approximately 40 papers (un)like this to be read during the semester, and I’m not sure I’m going to be blogging all of them but we’ll see how it goes.
The article is as mentioned just an overview article that can be read by pretty much anyone who understands English. It’s not hard, it’s just stuff I need to know. I filled one A4 paper with notes related to the paper and my blogpost will be based on those notes, rather than the text; I assume this approach will be useful in terms of preparing for the exam because at that point I will not have time to reread the paper. Some of my remarks may not be from the paper but instead related to stuff covered during the first lecture.
First off they talk a bit about the (‘Danish’) flexicurity model, which is based on a combination of a relatively flexible labour market and relatively high social transfers providing social insurance. This model has often been argued to be a major factor behind the Danish (and in other contexts, Scandinavian) economic performance. In the paper they argue that the flexicurity model has been ‘around’ to a significant extent since the 70’es and given the economic performance of Denmark in the 70’es and 80’es the flexicurity model is probably ‘not the whole story’. They argue in the paper that a third factor, active labour market policies, has been crucial for the relative success of the model.
They mention and talk a bit about – and I believe they also misspell – the Ghent system (Gent in the text), which relates to how the Danish UI (unemployment insurance) benefit payments scheme works. Other noteworthy features (in this context) of the Danish labour market: Many small firms, and people who are temporarily laid off constitute a substantial number of the unemployed at any given point in time.
They talk a bit about EPL [employment protection legislation] and argue that there’s a distinction to be made between ‘job security’ (strict EPL) and ’employment security’ (lax EPL). Denmark has relatively lax EPL.
Denmark has a high replacement rate (UI benefits are relatively high compared to wages of people in employment) especially for low-wage workers. So low wage-workers generally confront the highest marginal tax rates related to the state transition from unemployment to employment.
Reforms in the 90’es had three main effects: i) Shorter duration of benefits, ii) changed rules regarding eligibility – getting a job basically became a requirement for ‘resetting the clock’ regarding benefits; it was/is no longer enough to participate in a job training program, ii) workfare. Youth unemployment was dealt with by lowering benefits (to the level of study grants) for young people and by implementing stricter activation requirements for this population segment. Wage formation has become less centralized over time.
Activation measures generally last about 6 months. Workfare affects both employed and unemployed people. Unemployed people in the active labour market programmes are subject to a lock-in effect which means that the activation requirement may crowd out job search. They are also subject to a positive effect, the post-programme effect, which deals with the fact that an activation programme may increase human capital. (though it’s worth noting here that even if human capital goes up, job search efforts may still be impacted negatively by the programme, e.g. by more narrow job-search post-activation). Unemployed people who are not in an activation programme may increase search efforts prior to being faced with activation measures, as activation measures are generally unenjoyable (in the literature they are often modelled as a tax on leisure). This threat/motivation effect has been shown in a Danish context to be both real and significant. People who are employed are also impacted by the workfare requirements of people who are unemployed, because they make the outside option (other jobs) less attractive, which means that wage demands of people employed will be impacted by the policies. This is because from the point of view of a person who’s already employed workfare can be considered a tax on job searching and/or an increase in search costs. They argue in the paper that active labour market policies have impacted wage formation in Denmark during the 90’es. The wage effect is an indirect effect which is hard to observe and it illustrates how a general equilibrium framework is necessary to evaluate costs and benefits of labour market policies.
The time profile of the UI scheme has changed since the reforms were first implemented, as compensation is now falling with the duration of unemployment (in the 80’es it basically wasn’t). In a long time this fall was caused by both the jump from UI-benefits to kontanthjælp after the UI-benefits had been exhausted and by the implicit tax on leisure which hit unemployed people who had received UI benefits for some time and thus became subject to workfare requirements. Today unemployed people face workfare requirements from day one, but as the UI benefits duration has shortened even further (to 2 years in 2010, not in text) the time profile aspects of the system are still very important.
Noteworthy is the fact that workfare requirements introduce a screening element to the benefits system, as benefits are arguably better targeted to people who ‘really need them’ (and thus are willing to be subject to the workfare requirements). Also noteworthy is that how one perceives workfare requirements can impact the effects they can be expected to have; for example, one might choose to perceive of workfare requirements as ‘an option to prolong the benefits period’ rather than a ‘condition to get benefits’, and a recipient of UI-benefits might start to ‘think of workfare as a job option’ – such perceptions would be expected to cause workfare to crowd out job search.
Workfare seems to be popular politically, compared with lowering benefits. Most voters care more about income distributions which can be measured than utility functions which can’t.
Empirically, the lock-in effect is more significant in the short run than the post-programme effect, and (as already mentioned?) the threat effect is real and significant. The wage effect is hard to measure but given current estimates it’s probably quite significant. In the long run the post-programme effect is likely to be larger than in the short run; this again relates to the extent of hysteresis/state dependence. When evaluating the costs and benefits of workfare, it’s important to deal with this aspect. In general, the reforms of the 90’es have improved cost effectiveness, but this is still an issue. Denmark is in the absolute top of most measures of spending on active labour market policies.
Sanctions, which are imposed on people who are subject to workfare requirements but do not meet the requirements, have increased over time. Arguably males are more responsive to sanctions than females. Workfare may be improved through better targeting of programmes; for example supplementary education, the most common activation measure, is more likely to be cost-effective for people with low education than for people with a high education. In the public sector the use of matching groups have been implemented to improve the efficiency of the programmes.
Any kind of feedback is most welcome.