Flexicurity as a model for European labour markets

Beyond cyclical fluctuations, the low average rates of increase in economic activity in the countries of the former EU 15 since the early 90s suggests there are structural obstacles restricting growth potential. This economic sluggishness restricts the gains in well-being for European citizens measured by the rate of increase of per capita income, which led to an interruption in the convergence of the level of this variable relative to the US economy that had been in train since the post-war period. To improve these results calls for structural reforms to promote the use of the labour factor and to raise productivity growth rates, a need which has become more pressing amid growing global competition, rapid technological change and population ageing. European economic policymakers formally recognised this challenge when they launched the Lisbon Agenda at the March 2000 European Summit, a centrepiece of which is joint and consistent reforms of the institutional design of labour markets and of social protection systems. These reforms particularly require more flexible working arrangements, so that companies may be more adaptable to a constantly changing environment, and an overhaul of social protection systems, so they may generate the appropriate incentives for individuals to take up paid work and protect those who really need it. Despite the long-term welfare benefits to be had, the reforms often entail costs for specific groups of individuals; accordingly, their implementation occasionally meets some degree of opposition. Frequently, the final outcome is partial reforms, which do not achieve their goal: namely, that the final design of labour markets and of social protection systems should be a consistent whole that allows high rates of employment to be achieved. On the contrary, partial reforms have occasionally given rise to labour markets that combine a high degree of protection for jobs that already exist with the presence of obstacles to specific groups of individuals joining the labour market. Against this background, and across the range of the various Member States’ labour markets, it is worth paying particular attention to those that have been most successful in terms of obtaining higher employment rates, so as to explore the extent to which their institutional arrangements may be a valid example for the other members. It is believed this model can be found in the Nordic economies, and particularly in Denmark. The Danish labour market is characterised by the coexistence of a high degree of flexibility (obtained through relatively low dismissal costs) and a likewise high level of social protection (via generous unemployment benefits, albeit subject to a high degree of conditionality). The combination of flexibility and security, which when applied to the labour market might appear in principle to be opposites, has given rise to the term “flexicurity”. Under this term, the European Council has, by the end of 2007, to adopt a set of common principles to underpin the new Employment Guidelines to be approved in 2008. This article examines the Danish flexicurity arrangements and assesses the extent to which labour market reforms in other European countries may draw on them. These labour markets are characterised in the second section on the basis of the institutional aspects that may determine their results in terms of employment. The third section describes the Danish flexicurity model. Section 4 analyses empirically the relationship between institutional characteristics and employment testing the virtues of the Danish labour market arrangements. The article concludes with some final considerations.