Flexicurity and the Economic Crisis 2008-2009

A key feature of the Danish labour market is its so-called flexicurity, the coexistence of flexibility (low adjustment costs for both employers and employees) and security (owing to a developed social safety net with high coverage and high replacement ratios). This is often believed to have contributed to the resilience of the Danish labour market and especially to its ability to maintain a low and stable unemployment rate. The aim of this paper is to examine the performance of the flexicurity system and changes therein during the previous three decades, including the first years of the Great Recession. We carry out two types of analyses: at the levels of establishments and employees, respectively. First, we use linked employer-employee data for the private sector to examine how labour demand responds to output shocks by a study of firms’ labour adjustment behaviour during economic upturns and downturns. Second, based on the same data set we examine how the flexicurity system protects workers from income losses associated with job losses due to plant closures or major lay-offs. In particular, we are interested in how the transformation of the flexicurity system since the mid-nineties to increasingly emphasise activation and to reduce maximum unemployment benefit durations has changed employees’ security in case of displacement. We document large worker flows that exhibit strong cyclical variation giving rise to volatile unemployment dynamics. External flexibility of firms has remained unchanged for almost three decades. While we find no clear traces of trend changes in employers’ labour adjustment behaviour, we do find that income losses of displaced workers have declined over time, mainly due to their faster re-employment. Although it is still early days to conclude with certainty, there are so far no strong indications of the reemergence of unemployment hysteresis to the same extent as in previous recessions.