Economic Survey of Denmark 2006: Raising labour supply to safeguard welfare

 

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The following is the Chapter 2 of the OECD assessment and recommendations, taken from the Economic Survey of Denmark 2006 published on 9 May 2006.

Contents                                                                                                                           

Labour supply must be raised quickly to prevent overheating

In addition to tight fiscal policy to damp excess demand, all options must be used to free labour supply rapidly, thereby increasing potential growth. The tight labour market provides a fertile environment for reforms to boost labour supply. In this regard, specific priorities are:

  • First, to reap the potential efficiency gains from the municipal mergers taking effect from 2007. Municipalities should reduce employment as much as possible. This should give a welcome boost to labour supply for the private sector.
  • Second, to enhance job-search incentives by reducing the maximum unemployment benefit duration from 4 years to something like the 1-2 year duration in the other Nordic countries. Also, as proposed by the government, to abolish all exemptions in unemployment benefit rules and activation for people in their 50's.
  • Third, to use foreign labour more intensively: removing barriers for skilled workers from abroad; speeding up the administrative procedures to issue residence and working permits for those from the new EU member states; and helping firms connect to unemployed workers in these countries as well as in other parts of the EU where there are skilled but unemployed workers. Some improvements have recently been agreed in Parliament.

But increasing labour supply is not just a short-term priority. It is primarily a long term challenge, and the following paragraphs identify policies needed in this regard.

Later retirement is key to ensure fiscal sustainability

Since 1960, the average number of years spent in retirement has increased by half to currently 19 and 23 years for men and women respectively. One cause is distortions to retirement decisions from large fiscal subsidies to early retirement. In fact, most of the reduction in labour market participation among seniors is due to expansion of the voluntary early retirement pension available for 60-64 year olds. It was introduced in 1979 to reduce unemployment, and to make early retirement possible for seniors worn out after many years of hard manual work; but today a typical recipient comes straight from employment and has no particular health problem. Moreover, cross-country experience has shown that while aggregate demand and unemployment can fluctuate temporarily, the number of jobs is mainly determined in the long run by how many are actively searching for work. The government's recent proposal to raise the starting age for the voluntary early retirement pension by three years (from 60 to 63) and the regular retirement age by two years (from 65 to 67) is therefore welcome. These changes would apply for citizens younger than 50 years today and, after being phased in from 2017 to 2025, it would be followed by indexation of the retirement age to life expectancy. Together with the other elements of the government's proposals for welfare reform, these measures would handle the demographic challenge to fiscal sustainability for many years into the future. But, given the uncertainties associated with demographic developments and other spending pressures, future governments will need to be ready to take necessary measures, including adjusting retirement age in line with a longevity indexation formula. Still, the preferred option should be to remove the early retirement scheme altogether, as proposed also by the Welfare Commission.

Labour market attachment of seniors

Allowing the upswing to feed through to people currently at the margin of the labour market 

For every ten people in employment, there is one receiving a permanent disability pension - almost twice the number of unemployed. Providing income for those who really cannot fend for themselves is a hallmark of a welfare society, although the number of benefit recipients appears to be high in international comparison. Measures have been taken to reduce the inflow, but further attention should be given to how permanent disability status can be avoided for persons with remaining work capacity. In this regard, there is a need to give social policy an even more active orientation, starting with prevention and early rehabilitation. Disability pensioners are to a large extent being excluded from an active work life and more options to come back to work should be provided. Permanent wage subsidies are available on so-called flexjobs, which are popular among workers, municipal social authorities and employers. The scheme has been modified in 2006 but is still too generous and should be brought more in line with the level of related benefit programmes in order not to make expansion too expensive fiscally. Furthermore, flexjob arrangements should be reviewed on a regular basis and adjusted to changes in work ability and rehabilitation measures.

The current upswing is also a unique chance for marginalised groups such as inactive migrants to get a foothold in the labour market. One place to start is the large number of recipients of social assistance who are out of work, but are not registered as job seekers at the public employment service. The reform of the public sector should be used to align the efforts of the employment offices and the municipalities. It is also important to ensure that those participating in activation are available for employment at short notice.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

The complete edition of the Economic Survey of Denmark 2006 is available from:

Additional information                                                                                                  

For further information please contact the Denmark Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Jens Lundsgaard, Felix Hüfner and Espen Erlandsen under the supervision of Andreas Wörgötter.

 

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Economic Survey of Denmark 2006

 

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