Flexicurity: Danish for all?

• Author: Paul Hilbers/Jianping Zhou
• Position: IMF European Department
• Pages: 309-317

Page 309

A new buzzword is gaining popularity-flexicurity. It's derived from the Danish social model that combines flexibility to hire and fire with a strong safety net and programs to help unemployed people find new jobs. This unique mix has brought down unemployment to a 30-year low and is being studied closely by other European countries. But IMF staff caution that while flexicurity may help reduce unemployment, it could be costly to implement in other countries.

Page 316

Danish flexicurity model holds lessons for rest of Europe

The Danish labor market model has been dubbed "flexicurity" for its ability to deliver simultaneously labor market flexibility and social security. Employers are free to hire and fire, which has encouraged them to employ a record number of people. In return, workers are entitled to generous social security benefits if they lose their jobs. At the same time, active labor market policies ensure that no person remains unemployed for more than six months at a time before being offered a new job or training. This unique mix has reduced unemployment in Denmark to a 30-year low and has helped make its economy one of the strongest in Europe. Could the Danish model work in other European countries? Paul Hilbers and Jianping Zhou of the IMF's European Department have analyzed the Danish flexicurity model and find that it can help reduce unemployment, but is costly to implement and therefore not automatically applicable elsewhere.

Denmark's economy has been shining recently. Economic growth averaged slightly above 3 percent in 2005 and the first half of 2006, and unemployment fell to 4.4 percent this summer (see Chart 1). In contrast, most other European countries continue to suffer from chronically high unemployment.

Reforms that would help labor markets perform better in the long run and create more jobs encounter strong political opposition from workers and unions, who fear that their rights will be eroded. Because the Danish model has managed to achieve buy-in from all partners in the labor market and has enjoyed obvious success, it has caught the attention of policymakers elsewhere in Europe. At recent summits discussing the Lisbon Agenda (the European Union's blueprint for improving competitiveness), the European Commission has encouraged member states to pursue reforms based on the...