THE SCANDINAVIAN MODEL OF WELFARE:THE CASE OF DENMARK IN THE CURRENT CRISIS

Peter AbrahamsonSeoul National University

National Taiwan University

May 25th 2009

Introduction

Crisis symptoms are the same in Denmark as elsewhere:

Bank bankruptcies A ‘frozen’ housing market A slow down in economic activity => Rapidly increasing unemployment

Yet,

Well preparedness and

Robustness

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Well preparedness: Recent welfare reforms

1994: Labor Market Reform

1997: Social Assistance Reform

2003: Start Allowance

2003: Welfare Reform Commission =>

2006: Welfare Reform

2007: Structural Reform:

2007: Labor Market Commission

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Robustness

Many years of experience of handling social integration through public intervention

The so-called Scandinavian welfare regime

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A very peculiar time when the crisis hit Denmark

September 2008:

Unemployment rate: 1.7 percent

Employment rate (16-64 men and women) 77.4

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The Scandinavian Welfare Regime

universal and (therefore) expensive; tax financed; based on public provision of both transfers and

services; emphasizing personal social services vis-à-vis

transfers; provides high quality provision; has high compensation rates and is therefore

egalitarian; and is based on a high degree of labor market

participation for both sexes

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‘...the Nordic model is about... universalism, generous benefits, social citizenship rights, dual-earner model, active labor market policies, and extensive social services’ (Joakim Palme 1999: 15) .

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The Nordic countries are generally characterized by publicly funded and administered programs that have comprehensive and universal coverage and relatively egalitarian benefit structures. Traditionally, they have been supported by redistributive general taxes and strong work orientations, in terms of both programmatic emphasis on work and economic policies that stress full employment (Duane Swank 2000: 85).

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Total Social Expenditure 1995 - 2006

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1995 2000 2005 2006

In % of GDP 31.9 28.9 30,1 29.1

Index1995 = 100

100 90 94 91

Per capita at fixed 2006-prices PPP €

7.509 7.530 8.437 8.435

Functional distribution of social expenditure in Denmark, 2007, as percentage of GDP

Sickness Invalidity Old Age Families Employment

Housing Social Ass. Administration

6.1 4.2 10.7 3.7 1.6 0.7 0.7 0.8

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Substantial change in distribution of financing

State Municipality & Region

Employers Employees

1987 43.8 39.8 11.7 4.71990 49.3 36.6 8.4 5.71995 39.3 35.1 10.9 14.72000 28.6 39.8 9.8 21.82004 26.8 41.2 19.9 21.02007 21.1 40.7 17.3 20.9

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Absolute fertility rate 1901 -2008

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Flexicurity

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A flexible labor market?

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Indeed

the Danish labor market is very flexible

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A Generous Unemployment Benefit System?

On paper the Danish transfer payments to unemployed people look very good. There are no waiting days and in principle the amount is 90 percent of prior wage or salary. However, since there is a ceiling compensation is in average much lower:

1995 2004

Insured 67% 60%

Uninsured 47% 41%

Single parent 77% 69%

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Generous, seems to be an exaggeration, specially concerning social assistance

Nevertheless, the benefit period may be said to be generous with respect to benefit period.

Within the unemployment insurance system one can receive benefits for a total of four years including periods of activation, and in principle social assistance can be received indefinitely

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Evaluating Activation Measures

Interviews with the clients revealed that half of them did not see any aim of going through activation other than they had to in order to keep their benefits. When they were to judge the effects of activation they more often pointed to issues such as improvement of their every day life and self confidence than to issues of being qualified for regular employment

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There appear to be rather limited effects of activation measures;

but one ‘curious’ effect has been identified by economists; one which they have labeled the ‘motivation effect’,

or as it would better be understood by sociologists: the ‘scare effect’

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Unemployed people significantly increase their job search and hence employment when they approach the time of activation,

meaning that

the prospect of activation may be more effective than activation itself

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‘…throughout the period [from 1994 and onward] the policy has included complementary elements of social disciplining and social integration. There is no doubt, however, that developments have been shifting from a significant focus on social integration to a much stronger emphasis on social disciplining’ (Larsen and Mailand 2007: 3)

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Crisis governance: Government initiatives

On April 21st 2009 the newly appointed Prime Minister, Lars Løkke Rasmusen presented the government’s work program for the coming six months, and stated that

‘handling of the crisis is of course the totally dominating objective’ (Prime Minister’s Office 2009: 1; author’s translation)

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Spring Package 2.0: Growth, Climate, Lower Taxes

It is expected that the tax reform will reduce income taxes by more than 28 billion DKK =>

1½ per cent of GDP (long-term, permanent effect)

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The tax reform will reduce marginal personal income tax

and

Increase environmental taxes

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Part of the agreement was also to return to citizens the earlier collected compulsory pension saving

Other elements concerned grants to renovation of own home

Enabling the municipalities to build more public housing

In short, the exercise was to increase private consumption substantially

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Initiatives from the Ministry of Social Affairs

Fighting ghettoization and building more units Reducing the number of people facing eviction

from their apartment because of arrears Support to NGOs to establish debt counseling

services DKK 850 million in funds to enable the

municipalities to renovate and construct ‘citizen near’ institutions

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Initiatives from the Ministry of Justice

A number of initiatives to combat the increasing gang violence

Essentially of the nature of sharpening punishments and increasing police work

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Conclusion

With a high degree of certainty it can be expected that the initiatives taken together will:

Increase private consumption substantially

It is, however, much more uncertain whether that will lead to

an increase in domestic production/growth or to

an increase in imports?

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With a high degree of certainty it can be expected that

the many initiatives to increase activity within construction renovation and building

will reduce unemployment in the sectors that are the hardest hit

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With a high degree of certainty it can be expected that

Tax reductions disproportionately will benefit the better off and hence increase inequality

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Income poverty/relative poverty and inequality have been on the increase since the mid 1990s

Gini coefficient 1996: 20

2006: 24

At-risk-of-poverty 1994: 7% (10%)

2006: 10 % (12%)

Poverty 1994: 3.6%

2006: 5%

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Given the very low level of inequality and poverty,

and especially the very small prevalence of long-term unemployment and long-term poverty the increases are not expected to spill over into less social cohesion

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Flexicurity is delivering, yet it comes with a price:

Marginalization of the least productive

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In line with the general idea behind the universal welfare state that services should benefit all or most of the population the Danish government has chosen to govern crisis intervention to the benefit of the population at large instead of targeting the unemployed and the marginalized. The philosophy seems to be that the rising tide will lift all ships, small as well as big ones. But it could only do so because of the very favorable situation which prevailed when the crisis reached Denmark

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Thank you very much for your attention

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