Local LanguageDenmark economicDenmark a unique mix of welfare, economic growth
August 2007
COPENHAGEN — Across Europe, nations such as France, Italy and Germany struggle with lackluster economic growth, high unemployment and high taxes that often fall far short of paying for their welfare states.
Then there is Denmark.
As most in Europe, the Danes have high taxes, which take an average of 50% of income.
They have a big welfare state, which provides free public health care, education, child care and job training on top of generous unemployment benefits.
Wages are high, with 87% of the workforce belonging to unions. Prices are high, too.
But the Danes enjoy steady economic growth, the lowest jobless rate on the continent, a budget surplus and shrinking government debt. And they work 37 hours a week.
Denmark defies much conventional wisdom that you cannot have jobs, growth and sound government finances while imposing high taxes and running a big welfare state.
It s done it through what the Danes call "flexicurity," a hybrid of free labor markets, unfettered business and adjusting welfare to give incentives for people to work so they can pay taxes to finance the benefits they get.
Flexicurity has become an economic eye catcher of Europe, where global competition is widely feared as eroding jobs and undermining the social safety net.
Western government officials are trekking here dying to copy it. Even the low-tax, small-government, free-marketeers at the USA s libertarian Cato Institute say the Italians and the French could learn from the Danes.
 "People in other European countries are wondering: What is happening in Denmark? " says Anita Vium, chief economist of the Economic Council of the Labour Movement, a labor think tank here. "We have people coming to study it. The European Union has looked at it. They want to know what we are doing."
They often leave disappointed, say Vium and other Danish economists, bankers and government and industry leaders, who acknowledge that their model is not easy for other European nations, or the USA, to replicate.
Many European nations are not willing to pay the political price to free their labor markets, privatize some companies and build work incentives into their welfare benefits, they say.
In the USA, Americans may not want to pay the taxes the Danes do for health care, education and other social programs, though some Danes, such as Tine Aurvig-Huggenberger, vice president of the Danish Confederation of Trade Unions, say Americans may be paying as much in other ways.
"This is not something that is easy to export," says Danish Employment Minister Claus Hjort Frederiksen. "We have an advantage over some other countries. We are small country. We are homogenous. We ve always had to adapt to change. I don t know that this would work in the United States."
Flexible labor market
The "flex" part of flexicurity is a flexible labor market. Workers can be fired with little notice. Roughly 800,000 Danes, or about 30% of the labor force, switch jobs each year, government statistics show. Only 10,000 of the turnover is attributed to layoffs. Most move on to what they see as better jobs.
That contrasts with many European nations, such as France, where employers pay a penalty for firing people. The penalties, which are written into law, make employers reluctant to hire. When the French government last year tried to relax penalties for young workers, students took to the street in protest; the change was revoked.
Instead of giving job security, Denmark gives government unemployment benefits at roughly 90% of pay if a person is laid off. The benefits are not limitless; Danes can collect a lifetime equivalent of four years worth of benefits before they run out. That provides incentive to find a job.
"You can reduce your workforce when you want," says Klaus Rasmussen of the Confederation of Danish Industries. "That means you can hire people because you know you can reduce your workface if you need to. It s the same in Britain and the United States. You are willing to take risks in hiring. In France and Italy, they want assurances before they hire."
To collect unemployment benefits, Danes must be available to work and take jobs that government job centers find. The government provides free training and education to equip workers for new jobs. Business and trade unions also coordinate on what new skills and education are needed for emerging jobs in the economy.
"The strength of the Danish system is Danes do not cling to the job they have today," Frederiksen says. "They are willing to do something else."
Unemployment was 4.1% in December, a 32-year low. The Finance Ministry predicts it will be 3.9% this year. In comparison, the U.S. jobless rate was 4.6% in January.
Many Danes see the system as one that encourages them to constantly move up the economic ladder.
Dennis Kjaer, 34, is one. After being a math teacher for seven years, Kjaer went back to college last summer to get an anthropology degree — for free, along with a $720-a-month living stipend from the state. Two weeks ago, he was offered a job placing American exchange students with Danish families. He s going to put more college on hold, knowing that he can always go back and the state will pay for it.
"I got a job that gives me administrative experience, so I took it," Kjaer says. "I can go back at any time for my degree. We talk a lot about life-long learning here. You have to evolve all the time."
Kjaer is a divorced father with a 7-year-old son to help support. He says his son can get a free education, too, and other help as he grows up, if he needs it. "If you fall here, someone along the way will catch you and help you," he says. "I pay my 50% taxes with a smile because they re worth it."
At the same time, Denmark embraces free trade, competition and little government ownership or involvement in business.
Denmark has the least amount of government red tape and the shortest start-up time for new businesses in the EU, according to measurements by the Organisation for Economic Cooperation and Development, a Paris-based confederation of the 30 largest industrial democracies that is a watchdog against economic and governmental corruption.
Denmark keeps business taxes competitive, about 28%, or comparable to most in Europe. Personal income taxes and a high sales, or value-added tax of 24%, pay for the unemployment benefits, job retraining, child care and education.
The government leaves business and unions to settle almost every aspect of employment. There is no government-set minimum wage, but Danes earn livable wages. They also negotiate pension contributions that go into a national fund that is privately administered, but whose earnings the government taxes. That way, workers can carry their pensions with them from job to job.
The government provides a bare-bones pension. Danes retire on an average of about 87% of their income, depending on their wage level. And those are taxed.
No working poor
If this sounds like lots of taxes to Americans, says Aurvig-Huggenberger of the Danish Confederation of Trade Unions, then Americans should calculate how much they pay for college, day care, what they and their employers pay for health insurance, and add-on taxes for Social Security and Medicare.
"The big difference between the United States and Denmark is you put an emphasis on individualism vs. the collective," she says. "We have no working poor. There are no kids living in cars with no child care. We pay high taxes for it. But in the end, how much money do you need?"
The Danes have a word for their collectivism. It s "jantelov," (pronounced YAN-tee-loav), or Jante Law. It roughly means that nobody is better than anyone else. Hence, there is a greater desire for people to help each other.
In Denmark, the unions and business have a working relationship rather than an adversarial one, with shop stewards sitting on company boards. If the economy takes a downturn or cannot compete globally, Danes and their unions know pay can be affected.
But they also know that there are no jobs if companies go under.
As a result, says Rasmussen of the Confederation of Danish Industries, business and labor willingly work together. "It s a healthy relationship," he says.
Economic, government and labor leaders say the model is the only way Denmark can survive in an increasingly competitive global economy: Business must be flexible, markets must stay free and workers skills and education must always be upgraded to provide a knowledge-based or value-added economy.
"We cannot compete with China or Vietnam on wages," Employment Minister Frederiksen says. "If we do not compete in salaries, how do we compensate for that? This system has proved to work very well in our accelerated globalized world."
Not for everyone
The Cato Institute based in Washington rates Denmark as one of the freest nations in the world in its 2006 rankings of countries economic freedom. Denmark ranks 17th, along with Germany, of 130 nations. Hong Kong is first, the USA third, Great Britain sixth, France 24th along with Sweden, and Italy, 45th.
And, says Cato global policy analyst Marian Tupy, France, Italy and other European nations can learn from Denmark: "Leave the economy alone."
But while Tupy applauds Denmark s free-trade and free-enterprise policies, he gives low marks to the big state-provided health, education and child care programs, wondering whether they could be offered less expensively by the private sector. And he questions whether the high taxes are a disincentive for some people to work.
Some Danes, such as Christina Moeller, think so and say the Danish workers paradise isn t for them.
Moeller, 30, who is in the oil shipping business in London, says taxes are a big reason she s unlikely to ever return to Denmark. She earns more and pays less in taxes in Britain. And she says her prospects of moving up the economic ladder are greater than at home.
She also says Denmark s social-welfare system has an insidious effect on her countrymen and women: It saps individual motivation.
"The mindset of most Danes is: How can I get more out of the system?" she says. "The system doesn t make you competitive. You cannot always do what (job) you want to do. It s not going to bring you a high life. It s a security system."
Would Moeller, who is single, consider returning if she got married and had children? Yes, she says, free child care and a free education are tempting.
"But if I did, I would be thinking only about myself," she says. "I d have to ask: Do I want my children growing up in the same competitive environment that I am in now or without motivation?"
| How Denmark, other nations compare |
 |
| |
Denmark |
France |
Germany |
Italy |
U.K. |
USA |
|
| Total area (sq. mi.) |
26,777 |
399,806 |
221,842 |
187,175 |
152,124 |
3.7 million |
|
| Population |
5.5 million |
62.8 million |
82.4 million |
58.1 million |
60.6 million |
300 million |
|
| Major religions |
Evangelical Lutheran, Protestant, Roman Catholic, Muslim |
Roman Catholic, Protestant, Jewish, Muslim |
Protestant, Roman Catholic, Muslim |
Roman Catholic, Protestant, Jewish, Muslim |
Anglican, Roman Catholic, Presbyterian, Methodist, Muslim, Hindu |
Protestant, Roman Catholic, Mormon, Jewish, Muslim |
|
| Major languages |
Danish, Faroese, Greenlandic, German, English |
French |
German |
Italian, German, French, Slovene |
English, Welsh, Gaelic |
English, Spanish |
|
| GDP |
$256.3 billion |
$2.2 trillion |
$2.9 trillion |
$1.8 trillion |
$2.3 trillion |
$13.2 trillion |
|
| Average per-capita income |
$47,390 |
$34,810 |
$34,580 |
$30,010 |
$37,600 |
$43,740 |
|
| Unemployment rate |
4.5% |
9.1% |
7.1% |
7.0% |
5.4% |
4.6% |
|
| Taxes (% of GDP) |
NA |
22.7% |
11.0% |
21.3% |
28.3% |
11.2% |
|
| Government budget balances |
|
| Revenue |
$147.0 billion |
$1.2 trillion |
$1.3 trillion |
$832.9 billion |
$973 billion |
$2.4 trillion |
|
| Expenditures |
$138.9 billion, including capital expenditures of $4.6 billion |
$1.2 trillion |
$1.3 trillion |
$925 billion |
$1.0 trillion |
$2.7 trillion2 |
|
| Debt (% of GDP1) |
28.6% |
64.7% |
66.8% |
107.8% |
42.2% |
64.7% |
|
|