Flexicurity. U. Michael Bergman University of Copenhagen

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1 Flexicurity U. Michael Bergman University of Copenhagen

2 Plan for the day What is flexicurity? Why is there an interest in the flexicurity model? Why are people unemployed? The Danish flexicurity system Flexicurity in Europe Is flexicurity the solution to the unemployment problem in Europe? FAQ

3 What is Flexicurity? A political strategy to enhance flexibility of the labor market and at the same time provide unemployment security.

4 What is Flexicurity? A political strategy to enhance flexibility of the labor market and at the same time provide unemployment security. Flexibility in hiring and firing (provide flexibility, but no on the job security), limited job protection. Generous income protection when unemployed (provides security) and requirements on unemployed to find a new job. Active Labor Market Policies (job search assistance, labor market training)

5 What is Flexicurity? A political strategy to enhance flexibility of the labor market and at the same time provide unemployment security. Flexibility in hiring and firing (provide flexibility, but no on the job security), limited job protection. Generous income protection when unemployed (provides security) and requirements on unemployed to find a new job. Active Labor Market Policies (job search assistance, labor market training) Flexicurity provides transition security. Transitions between education and work, different jobs, unemployment and work, different types of work contracts and so on.

6 Basic idea behind flexicurity Employers are more willing to hire during upturns since it is easy to fire workers during downturns, high degree of flexibility. Employees accept this flexibility since the system of unemployment benefits is viewed as fair and generous, it provides security. Unemployment benefits high in comparison to other European countries. Active labor market policies ensures training and retraining of unemployed workers such that they can be employed quickly.

7 Basic arguments underlying flexicurity Strictness of employment protection legislation cannot explain unemployment or employment in OECD-countries; job creation is matched by job destruction. But, the degree of protection affects the distribution of unemployment

8 Basic arguments underlying flexicurity Strictness of employment protection legislation cannot explain unemployment or employment in OECD-countries; job creation is matched by job destruction. But, the degree of protection affects the distribution of unemployment Lower unemployment for older but higher for younger. Unemployment spells longer higher and higher long-term unemployment Tenure is longer. Ambiguous effects on productivity. Less strict protection implies that low productive workers could be fired, easier to make changes in the work force and its composition, but weaker incentives to invest in new workers. There are positive effects on entry rates (the number of new firms expressed as a percentage of total registered firms) but the degree of coordinated wage formation more important.

9 Basic arguments underlying flexicurity Overwhelming empirical evidence that more generous unemployment benefits tend to increase unemployment and decrease employment. Generous benefits increase welfare since consumption is smoothed over time. Generous unemployment benefits also raises the equilibrium rate of unemployment (weaker job search incentives and higher reservation wages, the minimum wage at which an unemployed will accept employment). More generous unemployment benefits tend to increase long term unemployment. Note that monitoring of unemployment insurance recipients is important. If benefits are monitored, then the size of benefits has no effect on unemployment. Duration of benefits is positively related to unemployment.

10 Percent Why is there an interest in the flexicurity model? 14 Unemployment EU15 Denmark France Sweden

11 Challenges? High levels of unemployment in Europe High levels of long term unemployment and youth unemployment. Demographic changes (an aging population) put pressure on public finances and the welfare systems in Europe. One possible solution is to increase labor force participation, increase employment and extend working hours. We all have to work longer as our life span increases.

12 The labor market Employed may become unemployed (job separation) Unemployed may become employed (job finding) If employment (and unemployment) are constant over time, then the inflow into employment must be equal to the outflow from employment (and similarly for unemployment; the outflow from unemployment must be equal to the inflow into unemployment).

13 The labor market Employed may become unemployed (job separation) Unemployed may become employed (job finding) If employment (and unemployment) are constant over time, then the inflow into employment must be equal to the outflow from employment (and similarly for unemployment; the outflow from unemployment must be equal to the inflow into unemployment). Also note that flows between labor force and those who are not in the labor force affects the rate of unemployment.

14 Causes of unemployment Insufficient demand Cyclical unemployment, in bad times unemployment rises and in good times it falls

15 Causes of unemployment Insufficient demand Cyclical unemployment, in bad times unemployment rises and in good times it falls Imperfections on the labor market

16 Causes of unemployment Insufficient demand Cyclical unemployment, in bad times unemployment rises and in good times it falls Imperfections on the labor market There is an equilibrium rate of unemployment (the natural rate of unemployment) around which unemployment fluctuates. Determinants of equilibrium unemployment are: Taxes (income taxes affect employers willingness to work and payroll taxes affect employees willingness to hire). Unemployment benefits and benefit duration. Union density and coverage of collective agreements. Degree of wage bargaining coordination. Active labor market policies. product market regulations. Employment protection legislation does not affect equilibrium unemployment.

17 Causes of unemployment Insufficient demand Cyclical unemployment, in bad times unemployment rises and in good times it falls Imperfections on the labor market There is an equilibrium rate of unemployment (the natural rate of unemployment) around which unemployment fluctuates. Determinants of equilibrium unemployment are: Taxes (income taxes affect employers willingness to work and payroll taxes affect employees willingness to hire). Unemployment benefits and benefit duration. Union density and coverage of collective agreements. Degree of wage bargaining coordination. Active labor market policies. product market regulations. Employment protection legislation does not affect equilibrium unemployment. Frictional unemployment (unemployment in between jobs)

18 Causes of unemployment Insufficient demand Cyclical unemployment, in bad times unemployment rises and in good times it falls Imperfections on the labor market There is an equilibrium rate of unemployment (the natural rate of unemployment) around which unemployment fluctuates. Determinants of equilibrium unemployment are: Taxes (income taxes affect employers willingness to work and payroll taxes affect employees willingness to hire). Unemployment benefits and benefit duration. Union density and coverage of collective agreements. Degree of wage bargaining coordination. Active labor market policies. product market regulations. Employment protection legislation does not affect equilibrium unemployment. Frictional unemployment (unemployment in between jobs) Structural unemployment (caused by structural changes in the economy, there is a mismatch between skills and the requirements of the new job opportunities).

19 Causes of unemployment Real wage unemployment Real wages are too high (above their market clearing level, national minimum wage rates).

20 1 0.9 Main ingredients in the Danish flexicurity Danish APW system Changes in the system from0.6 passive to active 0.4 Shortening of benefit period. Rate of compensation Can no longer re gain newsweden benefit period by participating in activation measures. 0.1 Denmark Belgium Netherlands Finland 0 Implementation of activation requirements (workfare) Daily wage in Euros Social assistance afterfigure benefit 8 Income dependent andreplacement activation rates, Selectedperiods countries (also requires participation in active measures) Note: Replacement rate in unemployment insurance schemes calculated on the basis of daily income and for single persons in countries where benefits are dependent on socio-economic variables. Daily wages are truncated at relevant minimum levels (for countries with no legal minimum wage, the negotiated Basic principle is right minimum and wagesduty, are used). the right to obtain unemployment benefits and Source: Own calculations based on European Commission, MISSOC 2006 at the same time the duty to participate in programs or accept job offers. and ILO. Months Sweden Finland Netherlands Denmark Downloaded from cesifo.oxfordjournals.org by guest on March 22, 2011 Belgium Base duration Possible extension Figure 9 Duration of unemployment benefits in selected countries Note: In the Netherlands, the extension depends on seniority. Source: European Commission, MISSOC CESifo Economic Studies, 53, 3/

21 Main ingredients in the Danish flexicurity system Labour Market Performance in Denmark As of 1 July 2003 As of 1 January 2001 As of 1 January 2000 As of 1 January 1999 As of 1 January 1998 As of 1 January 1996 As of 1 January Year Passive eligibility period Activation period Figure 10 Changes to the social security system eligibility and activation periods Note: The right and duty principle in the activation period was introduced in As of 2003, there is no distinction between the two periods. Sources: The Danish Ministry of Finance (1999), The Danish Ministry of Labour (2000) and The Danish Ministry of Employment (2002). i.e. the transition from UI-benefits to social assistance (also associated with activation requirements) is a real option. The time profile of compensation offered (including efforts exerted in activation) therefore has a more clear time dependency after the reforms. The shift in labour market policy from a passive to an active focus was launched by appealing to a so-called right and duty principle. The argument being that the individual, on the one hand, has a right to income support, but, on the other hand, also a duty to actively search for jobs and being willing to work. At the same time, society has a right to demand something from recipients of income transfers, but also a duty to help improving job prospects. This can be interpreted as reflecting that the welfare state builds on reciprocity and work norms, cf. below. The right and duty principle was initially only applying to the UI-system, but in 1998, it was extended to also apply to social assistance. The political constraint that labour market incentives are not to be improved via general reductions in benefits has one important exception, namely the youth unemployment programme enacted in 1996 and later extended. The basic idea of the programme was twofold, namely to shorten transfer duration and to strengthen economic incentives to educate. The background was a high youth unemployment rate and Downloaded from cesifo.oxfordjournals.org by guest on March 22, 2011

22 Main ingredients in the Danish flexicurity system Long tradition of flexible dismissal rules in Denmark. Two main changes No limitation on how often temporary contracts can be renewed and no upper limit on how long one can be temporary employed. But, only 8% of total employment is temporary employed. More flexibility in varying working time.

23 Main ingredients in the Danish flexicurity system Long tradition of flexible dismissal rules in Denmark. Two main changes No limitation on how often temporary contracts can be renewed and no upper limit on how long one can be temporary employed. But, only 8% of total employment is temporary employed. More flexibility in varying working time. Notice periods in Denmark After 1 year s after 5 year s after 10 year s Share of workforce employment employment employment employed in private sector Construction 3 days 5 days 5 days 10% Industrial 21 days 2 months 3 months 40% Other 3 months 4 months 6 months 50%

24 State of flexicurity in Europe according to European Commission Nordic (and the Netherlands): Intermediate to high flexibility and high security. High employment and low long-term unemployment. Anglo Saxon: High flexibility and low security. Average to high employment and low long-term unemployment. Continental: Intermediate to low flexibility and intermediate to high security: Average employment and various long term unemployment. Mediterranean: Low flexibility and low security. long term unemployment. Average to low employment and high Eastern: Intermediate flexibility and low security. Low employment and high long term unemployment.

25 Is flexicurity the solution to the unemployment problem? Long-term unemployment and youth unemployment Denmark France < 3 months > 3months < 6 months > 6 months < 1 year 1 year and over 120 Sweden < 3 months > 3months < 6 months > 6 months < 1 year 1 year and over < 3 months > 3 months < 6 months > 6 months < 1 year 1 year and over

26 Unemployment Is flexicurity the solution to the unemployment problem? Unemployment and unemployment benefits Spain Turkey Slovak Republic Ireland Hungary United States Greece PortugalFrance Italy Poland Sweden Finland Germany Belgium Iceland United Kingdom Czech Republic Canada Denmark Japan Luxembourg Australia New Austria Zealand Korea Switzerland Netherlands Norway Benefits

27 Long-term unemployment Is flexicurity the solution to the unemployment problem? Long term unemployment and employment protection legislation 60 Slovak Republic 50 Italy Germany Belgium Portugal Hungary Greece 40 France Switzerland Czech Republic Ireland Spain Japan 30 United Kingdom Netherlands Poland Turkey Austria 20United States Finland Australia Sweden Canada Denmark Iceland New Zealand Norway 10 0 Korea Employment protection legislation

28 Benefits Is flexicurity the solution to the unemployment problem? Benefits and employment protection legislation Denmark Belgium Austria Finland United KingdomNew Zealand Ireland France 50 Australia Iceland 40 Sweden Norway Portugal Netherlands Poland 30 Germany Spain Czech Republic 20 Canada Switzerland Greece Hungary 10 Slovak Republic United States Italy Japan Korea 0 Turkey Employment protection legislation

29 Is flexicurity the solution to the unemployment problem? Benefits and EPL in Denmark, France and Sweden Denmark France Sweden 4 Employment Protection Legislation 3,5 3 2,5 2 1,5 1 0, Denmark France Sweden

30 illustrated in Figure 3, help to unveil the mystery: both Anglo-Saxon countries have very high levels of flexibility, as one would imagine, but on the other hand, also show a decent score on the security side (0.5/1). Is flexicurity the solution to the unemployment problem? Figure 3 also confirms that the overall level of flexicurity and the relative importance of flexibility and security show large disparities among the EU member states included here. In the ranking of countries according to the overall degree of flexicurity, in certain member states (Italy, Slovakia, Hungary, Ireland and the UK) flexibility clearly dominates, while in others Maselli s (such Luxembourg, composite Spain, Portugal, France, Belgium, index Finland, the Netherlands, of flexicurity Sweden and Denmark), the security aspects of flexicurity seem to prevail. 6 ILARIA MASELLI Figure 3. The interim indicators for flexibility and security Figure 4. Flexibility and security balance 10 ILARIA MASELLI Source: Own elaboration. Source: Own elaboration. Figure 8. Flexicurity and employment rate (15-25 Even years) more informative is a further breakdown of the index. Radar charts compare the performances of each country for the four elements of flexicurity considered in the index: Figure 4 presents the same data in a scatterplot, which illustrates more clearly the balance contractual flexibility, income security, employment security and training. The three radar between flexibility and security. The chart is divided into four squares: in the first are countries charts organise countries in three groups according to their score in the overall index: high, poor characterised by a low level of flexibility and security at the same time (both lower than 0.5/1). and medium performers. This panel is the most crowded and, surprisingly contains countries like Germany and France, where the welfare system has a long tradition and consolidated presence. The possible reason is High performers are those that score at least 0.6/1 and include, in order: Denmark, the UK, that the concept of security translated into numbers in the flexicurity index is not limited to Sweden, Ireland, the Netherlands and Finland. Incredibly, this group combines representative social assistance and embraces aspects of security that are still unknown in many countries, such countries of the Nordic and of the Anglo-Saxon models. Nevertheless, one feature distinguishes as employment security. In France, for example, people expect the welfare state to guarantee the them: all Nordic countries are characterised by a sort of equilibrium between the four measures, same job for life, whereas in Denmark the idea behind employment security is to increase the which is unknown in the UK and Ireland. The UK, indeed, registers a good score in all measures chances of finding a new job in case of dismissal. The few countries left are divided among the with the exception of ALMP: it has the lowest per unemployed capita expenditure among the high flexibility and high security square (Sweden and Denmark) and the dominant flexibility member states considered. Similarly, Ireland fares poorly on training. square (Slovakia and Hungary). Finland, the Netherlands, the UK and Ireland are border-line cases in this respect. Figure 5. High performers Source: Own elaboration. The coefficients of the regression provide additional interesting information: the average of the sub-indicators for flexibility and security does not produce the average of the regression coefficients; in other words, the relation between flexicurity and employment rates is clear and stronger than with flexibility and security taken separately. These findings provide numerical support to Bovenberg and Wilthagen (2008) who assert that flexibility and security should not be seen as conflicting aspects of labour-market arrangements, but as mutually supportive components of a well-functioning labour market. They reject the notion that flexibility is exclusively in the interests of employers while security is all that concerns workers, resulting in

31 Is flexicurity the solution to the unemployment problem? Maybe!

32 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation.

33 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation. Less generous unemployment benefits (than earlier) and the introduction of more requirements on unemployed to find a new job and accept job offers.

34 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation. Less generous unemployment benefits (than earlier) and the introduction of more requirements on unemployed to find a new job and accept job offers. Changes in legislation and benefits were done during a general upturn in the economy.

35 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation. Less generous unemployment benefits (than earlier) and the introduction of more requirements on unemployed to find a new job and accept job offers. Changes in legislation and benefits were done during a general upturn in the economy. Note that there may be multiple outcomes and relations between benefits and unemployment. A generous benefit system can be associated with lower unemployment if rules are more strict and there are strong incentives for unemployed to find a new job. If unemployment is high initially, changes in the benefit system are required to reduce unemployment (large reductions in benefits may be required to reduce unemployment). Lower benefits and more requirements on unemployed are complements, not substitutes.

36 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation. Less generous unemployment benefits (than earlier) and the introduction of more requirements on unemployed to find a new job and accept job offers. Changes in legislation and benefits were done during a general upturn in the economy. Note that there may be multiple outcomes and relations between benefits and unemployment. A generous benefit system can be associated with lower unemployment if rules are more strict and there are strong incentives for unemployed to find a new job. If unemployment is high initially, changes in the benefit system are required to reduce unemployment (large reductions in benefits may be required to reduce unemployment). Lower benefits and more requirements on unemployed are complements, not substitutes. Implementation of flexicurity in Europe may not solve the unemployment problem, there is no easy and general solution to complex problems. The grass may not be greener on the other side.

37 Flexicurity a myth or not? Weak support that Danish unemployment can be explained by less strict employment legislation. Less generous unemployment benefits (than earlier) and the introduction of more requirements on unemployed to find a new job and accept job offers. Changes in legislation and benefits were done during a general upturn in the economy. Note that there may be multiple outcomes and relations between benefits and unemployment. A generous benefit system can be associated with lower unemployment if rules are more strict and there are strong incentives for unemployed to find a new job. If unemployment is high initially, changes in the benefit system are required to reduce unemployment (large reductions in benefits may be required to reduce unemployment). Lower benefits and more requirements on unemployed are complements, not substitutes. Implementation of flexicurity in Europe may not solve the unemployment problem, there is no easy and general solution to complex problems. The grass may not be greener on the other side. There is no empirical evidence suggesting an optimal combination of flexibility and security.

38 Further readings T. A. Andersen and M. Svarer, Flexicurity Labour market performance in Denmark, CESifo Economic Studies, 53, G. Carone, K. Stovicek, F. Pierini, and E. Sail, Recent Reforms of the Tax and Benefit Systems in the Framework of Flexicurity,European Economy Occasional Papers no. 43, Approaches to flexicurity: EU models, European Foundation for the Improvement of Living and Working Conditions, Luxembourg: Office for Official Publications of the European Communities, European Commission, Towards Common Principles of Flexicurity: More and Better Jobs through Flexibility and Security, Luxembourg: Office for Official Publications of the European Communities, European Expert Group on Flexicurity, Flexicurity Pathways: Turning Hurdles into Stepping Stones, Brussels: European Commission, I. Maselli, Beyond Flexibility and Security: A Composite indicator of flexicurity, CEPS Working Document No. 329, 2010 A. S. Tangian, Defining the flexicurity index in application to European countries, WSI- Diskussionspapiere 122, 2004 T. Wilthagen, Flexicurity Practices, Brussels: European Commission, 2007.

39 Thank you!

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