Working paper no. 16/2005


Two decades of structural reform in Denmark: a review

Outside observers are often intrigued by how Denmark manages to sustain one of the highest employment and GDP per capita levels in the OECD, while collecting some 50 percent of gross domestic income in taxes and providing generous welfare support, including access to early retirement and unemployment compensation rates of up to 90 percent of previous income. The answer seems to be, in part, that poten-tial adverse incentive effects of high tax and transfer rates are off-set by: (i) flexible labour market institutions, including low employment protection and relatively flexible wage institutions; (ii) active labour market policies, testing the availability for work of the unemployed effectively; (iii) welfare institutions that raise labour supply, notably among women, e.g. subsidized child care; (iv) fairly competitive product markets with little direct state interference; and (v) an education system, which – although a potential problem area in future – has met the trend increase in demand for skills.
This paper reviews the process of structural reform in Denmark over the last two decades. Denmark entered the 1980s with dismal macroeconomic performance: high and rising unemployment and inflation, chronic current account deficits rooted in insufficient private savings, and mounting public deficits. The reform efforts in the 1980s focused on restoring macroeconomic stability and healthy savings balances. In the 1990s, the focus shifted to the labour market. Reducing unemployment benefit rates proved politically unpalatable, but alternative ways were found to strengthen work incentives. Unemployment was also temporarily curbed in the mid-1990s through various leave schemes, but access to those schemes has subsequently been closed off or tightened significantly.

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