Is 'Flexicurity' a Sustainable Policy?

Includes: DAX-OLD, EWG, GXF
by: Dirk Ehnts

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The graph above depicts the harmonized unemployment rates of Germany and Denmark in 2009, January to December. The data source is Eurostat.

Denmark is a country known for its flexicurity, perhaps THE country know for it. Germany has quite rigid labour markets, although not the most rigid. It is clear that flexibility is a nice thing to have when things are going well, but it seems to have destructive potential in the downturn. Remember that the flexicurity system is very expensive, since the unemployed receive a very large transfer (that’s the (se)curity part of flexicurity). This means that marginal tax rates are among the highest in the world:

The average marginal tax rate, or income tax on the last earned Danish krone, for high earners is around 60%, while for the majority of wage earners it is under 50%.

This means that unemployment will be putting pressure on the Danish budget. However, the German budget will be pressed as well because of the Kurzarbeit scheme. The question here is whether flexicurity is a sustainable policy. Kurzarbeit is not, and is blending out already.

On a side note, it is strange to remember the old debates in economics where some economists claimed that it is rigid wages that cause unemployment (Blinder and the people he discuss got Keynes wrong, I believe, and the HET website offers an explanation why). We can see here that it is flexibility in the labor market that causes unemployment. (Denmark is not a member of the eurozone, but its exchange rate is quasi-fixed to the euro at around DKK 7,45 to the euro. Higher unemployment, hence, is not the result of the Danish crown appreciating vis-a-vis the euro.) I wonder how hard the Danish budget is under pressure from persistent high unemployment.