THE SCANDINAVIAN MODEL OF WELFARE: THE CASE OF DENMARK IN THE CURRENT CRISIS Peter Abrahamson Seoul National University National Taiwan University May 25 th 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 2

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 3

Robustness Many years of experience of handling social integration through public intervention The so-called Scandinavian welfare regime 4

A very peculiar time when the crisis hit Denmark September 2008: Unemployment rate: 1.7 percent Employment rate (16-64 men and women)

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 6

‘...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). 7

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). 8

Total Social Expenditure In % of GDP ,129.1 Index 1995 = Per capita at fixed 2006-prices PPP €

Functional distribution of social expenditure in Denmark, 2007, as percentage of GDP SicknessInvalidityOld AgeFamilies Employme nt HousingSocial Ass. Administra tion

Substantial change in distribution of financing State Municipality & Region EmployersEmployees

Absolute fertility rate

Flexicurity 13

A flexible labor market? 14

15

Indeed the Danish labor market is very flexible 16

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: Insured 67%60% Uninsured47%41% Single parent77%69% 17

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 18

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 19

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’ 20

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 21

‘…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) 22

Crisis governance: Government initiatives On April 21 st 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) 23

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) 24

The tax reform will reduce marginal personal income tax and Increase environmental taxes 25

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 26

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 27

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 28

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? 29

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 30

With a high degree of certainty it can be expected that Tax reductions disproportionately will benefit the better off and hence increase inequality 31

Income poverty/relative poverty and inequality have been on the increase since the mid 1990s Gini coefficient 1996: : 24 At-risk-of-poverty1994: 7% (10%) 2006: 10 % (12%) Poverty1994: 3.6% 2006: 5% 32

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 33

Flexicurity is delivering, yet it comes with a price: Marginalization of the least productive 34

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 35

Thank you very much for your attention 36