I finally caught up yesterday with Grant Robertson’s interview on The Nation.
There was the odd good aspect. It sounds as though the variable Kiwisaver policy, as a tweaky tool to supplement to monetary policy, is heading for the dustbin, joining the capital gains tax proposal. Other bits bothered me – in particular, the lack of any sense in Robertson’s comments of the importance of markets, competition, relative prices etc. He is clearly a believer in the power and beneficence of “smart active government”.
And I’m still a bit uneasy when I hear Robertson talk about changing the Reserve Bank Act to place a specific onus on the Reserve Bank to promote employment (or reduce unemployment). It will be important to see details. In principle, an amendment to section 8 of the Reserve Bank Act to say something along the lines of “achieve and maintain a stable level of prices, so that monetary policy can makes it maximum contribution to sustainable full employment and the economic and social welfare of the people of New Zealand” might do no harm. It would, in fact, be not dissimilar to words that have been in the Policy Targets Agreement in the past. On other hand, requiring the Bank to, say, actively target the lowest rate of unemployment consistent with maintaining price stability would be another matter. Right at the moment it might be quite good advice to this Governor, who seems particularly uninterested in the plight of the (cyclically) unemployed. But over time it would risk imparting a bias to the Reserve Bank’s choices that might well lead to persistently higher inflation outcomes over time. That wouldn’t help anyone.
But the bit of the interview I was most interested in was the discussion around a possible different approach to help facilitate people moving from one job to another, as technology and opportunities evolve and change. Robertson seems taken with the Danish “flexicurity” approach. I didn’t know much about it, but in my younger days the idea of active labour market policies had had some appeal, so I thought I would take a quick look. In some respects, Denmark’s experience is one to try to emulate: prior to World War Two it was largely an agricultural economy, heavily reliant on agricultural exports to the United Kingdom, but poorer than us. Now, while agriculture still plays an important part in the Danish economy ,other sectors have become much more important in the external trade and Denmark’s per capita income is far higher than New Zealand’s.
Here is how the Danish government describes “flexicurity”
A Golden Triangle Flexicurity is a compound of flexibility and security. The Danish model has a third element – active labour market policy – and together these elements comprise the golden triangle of flexicurity.
One side of the triangle is flexible rules for hiring and firing, which make it easy for the employers to dismiss employees during downturns and hire new staff when things improve. About 25% of Danish private sector workers change jobs each year.
The second side of the triangle is unemployment security in the form of a guarantee for a legally specified unemployment benefit at a relatively high level – up to 90% for the lowest paid workers.
The third side of the triangle is the active labour market policy. An effective system is in place to offer guidance, a job or education to all unemployed. Denmark spends approx. 1.5% of its GDP on active labour market policy.
Dual advantages The aim of flexicurity is to promote employment security over job security. The model has the dual advantages of ensuring employers a flexible labour force while employees enjoy the safety net of an unemployment benefit system and an active employment policy.
The Danish flexicurity model rests on a century-long tradition of social dialogue and negotiation among the social partners. The development of the labour market owes much to the Danish collective bargaining model, which has ensured extensive worker protection while taking changing production and market conditions into account. The organisation rate for workers in Denmark is approx. 75%.
The Danish model is supported by the social partners headed by the two main organisations – The Danish Confederation of Trade Unions (LO) and The Confederation of Danish Employers (DA). The organisations – in cooperation with the Ministry of Employment have also jointly contributed to the development of common principles of flexicurity in the EU, resulting in the presentation of the communication “Towards common principles of flexicurity” by the European Commission in mid-2007.
And here is a link to an accessible VoxEu piece from a few years ago on the flexicurity approach and Denmark’s experience after 2007.
The Danish “flexicurity” model has achieved outstanding labour-market performance. The model is best characterised by a triangle. It combines flexible hiring and firing with a generous social safety net and an extensive system of activation policies. The Danish model has resulted in low (long-term) unemployment rates and the high job flows have led to high perceived job security (Eurobarometer 2010).
The employment protection constitutes the first corner of the triangle. For firms in Denmark, it is relatively easy to shed employees. Not only notice periods and severance payments are limited, also procedural inconveniences are limited. The employment protection legislation index of the OECD for regular contracts is only 1.5. The Netherlands and Germany, countries with employment protection legislation, have an index of 2.7 and 2.9 respectively.
And here I started getting a bit puzzled. Denmark certainly makes it a lot easier than many European countries to shed employees. But it is even easier in New Zealand. On all 4 components of the OECD’s indicators of employment protection legislation, New Zealand ranks as less restrictive than Denmark – quite materially so by the look of it.
The OECD indicators on Employment Protection Legislation Scale from 0 (least restrictions) to 6 (most restrictions), last year available Protection of permanent workers against individual and collective dismissals Protection of permanent workers against (individual) dismissal Specific requirements for collective dismissal Regulation on temporary forms of employment OECD countries Australia 1.94 1.57 2.88 1.04 Austria 2.44 2.12 3.25 2.17 Belgium 2.99 2.14 5.13 2.42 Canada 1.51 0.92 2.97 0.21 Chile 1.80 2.53 0.00 2.42 Czech Republic 2.66 2.87 2.13 2.13 Denmark 2.32 2.10 2.88 1.79 Estonia 2.07 1.74 2.88 3.04 Finland 2.17 2.38 1.63 1.88 France 2.82 2.60 3.38 3.75 Germany 2.84 2.53 3.63 1.75 Greece 2.41 2.07 3.25 2.92 Hungary 2.07 1.45 3.63 2.00 Iceland 2.46 2.04 3.50 1.29 Ireland 2.07 1.50 3.50 1.21 Israel 2.22 2.35 1.88 1.58 Italy 2.89 2.55 3.75 2.71 Japan 2.09 1.62 3.25 1.25 Korea 2.17 2.29 1.88 2.54 Luxembourg 2.74 2.28 3.88 3.83 Mexico 2.62 1.91 4.38 2.29 Netherlands 2.94 2.84 3.19 1.17 New Zealand 1.01 1.41 0.00 0.92
And then I wondered about just how the unemployment rates of the two countries had compared.
At least for the last 15 years, our unemployment rate has hardly ever been higher than Denmark’s.
And what of the share of the population in employment. There the difference in recent years is quite startling, and all in favour of New Zealand. The sustained fall since 2007 in the Danish share of the population that is employed is among the largest in the OECD, matched only by Greece, Ireland and Spain.
Of course, the recent employment (and unemployment outcomes) aren’t just the result of employment protection legislation and active labour market policies. Demand is an issue too, and by pegging to the euro Denmark gave up the ability to use monetary policy to support demand (and the euro area authorities have largely exhausted their capacity). I guess the Danish unemployment rate isn’t too bad, but I wasn’t quite sure what the Danish labour market experience had to offer that should attract New Zealand.
I imagine that life on the unemployment benefit is a bit more pleasant in Denmark than in New Zealand, but it isn’t obvious that the Danish structure, as a package, is producing, over time, better outcomes than what we have here. And their model is vastly more expensive, and more heavily regulated, consistent (of course) with Denmark’s position as the OECD country with the third largest share of government spending as a per cent of GDP (57 per cent). New Zealand, by contrast, has total government spending of around 41 per cent of GDP
Perhaps more regulation and more spending was Robertson’s point. I guess we have elections to debate such preferences, but it seems a stretch to believe it would be an approach that would make our labour market function better. It isn’t obvious Denmark’s does.