The Danish Golden Triangle: a Cookbook for Dealing with the Ageing Challenge

CAN CORPORATE STRATEGIES DEAL WITH THE AGEING CHALLENGE?

Mihaela Liva GHITA

Utrecht School of Economics, Utrecht University, The Netherlands

Abstract: This paper provides new evidence on the efficiency of labour market policies in dealing with the aged workers dilemma. The analysis follows the transitional labour markets perspective and uses data provided by Statistics Denmark, Eurostat and OECD. The focus is not only the capacity of the Danish model to lead to effective labour market policies but also the extent to which such a system is really favouring older workers. The analysis shows that the shifts towards higher participation levels are not uniform, affecting workers of different ages in various ways. While the number of unemployed in the lower tail of the sample distribution decreased, the retirement level in the age groups 50-65 increased substantially, outweighing the increase in level of newly-employed. As far as job security is concerned, the analysis highlights that both early retirement schemes and low job protection operate as disincentives to stay longer in the labour market.

Keywords: labour market policies, aged worker, job security

1. INTRODUCTION

During the last decades, the increasing shift in the demographic composition of the countries accompanied by economic turnover highlighted once again the importance of one of the sectors of the economy, the labour market. Historically, the implicit relation between its stability and the economic growth of a country tended to raise awareness on the elements or events hampering its correct functioning. However, recent negative population growth tendencies have started to make evident that growing number of workers will be soon out of the labour force. The consequences of this process are twofold: from the one hand, fewer young individuals will have to ensure the socio-economic stability of a majority of old individuals, challenging the funding of the present retirement plans. From the other hand, if fertility rates are not likely to increase the labour market will suffer from workers shortages compromising the whole productivity of the system.

Policy makers have seen part of the solution of the problem in the conception of elder workers itself. Life expectancy rates are higher than in the past indicating that individuals live longer. Moreover, the physical condition in which individuals reach the retirement age is acceptable and definitively improved compared to the past. Therefore, the myth of the unproductive, unhealthy and unskilled elder worker had to be re-considered and integrated in a wider labour market approach based on incentives and opportunities. In this sense, most of the countries have adopted in their strategies the notion of employability, which aims at improving the capability of all individuals including elder workers to remain active in the labour market (Gazier B. 1999:1-2). Under a broader perspective, labour market policies should be able to canalize flows of individuals between different stages whilst enhancing individual autonomy and providing general economic growth. This can be framed under the developing idea of transitional labour markets. Denmark, as other countries in Europe, is also confronting itself with the ageing challenge and its impact of elder workers on the labour market. During the nineties Danish policy makers have adopted strategies framed in the transitional approach, which would in few years convert this country in a typical example to look up to. However, the study of the Danish model discovers many advantages and disadvantages. This paper is aimed at providing an accurate analysis of Danish Golden Triangle labour model while putting particular emphasis on the most vulnerable category of workers, the elder individuals. Crucial indicators are streamlined concerning the implications of the Danish model for aged workers in the labour market. The thorough analysis of policies and measures already implemented, as well as the deep insight given to the demand side and its attitudes is meant to constitute a cookbook for other countries in dealing with unemployability and social protection of elder workers.

The paper is organized as follows. Section 2 discusses the conceptual framework and the theories underlying our approach. In section 3, we report the results of descriptive analyses and examine the dimensions differentiating the most between age classes. Section 4 concludes with a brief summarizing discussion and final remarks.

2.TRANSITIONAL LABOUR MARKETS IN DENMARK: THE

AGEING CHALLENGE

The European labour markets appear to be threatened by the ageing of the population. Under a human capital theory perspective, the ageing work force would compromise the productivity of a country leading to high wage costs due to seniority wages and unemployment. Low fertility rates encompassed by increasing number of aged workers would, in turn, directly affect the equilibrium of the labour market creating supply side labour shortages. Furthermore, the lack of investment in human capital of aged workers and their apparent lack of updated skills would reduce the mobility of the latter restricting also the capability of the labour market to absorb and redistribute employment among individuals (Schils & Muffels, 2003: 1).

However, the evolution of modern labour markets and the continuous adaptation of workers to contrasting situations imply the necessity of developing new theories, which take into account the multiple alternatives of workers and firms to promote transitions. These newly developed transitions would “allow or support the change of the employment status or the combination of labour market work with other socially useful activities” (Schmid, 1998: 3). Moreover, they would provide all individuals and households renewed economic security by broadening labour market options and means of financing (Gazier, n.d.: 1-2). From a wider perspective, the transitional labour markets constitute a major theoretical framework aimed at providing qualitative growth strategies (Schmid cited in Larsen, 2005: 4) and competitiveness with social protection (Larsen, 2005:4).

Denmark’s ageing of the population is not so drastic as in other countries, however it still represents a threat to the stable functioning of the economy. In fact, it is estimated that in Denmark the number of individuals aged over 65 will increase by 50% over the next three decades. The main concern is that the gradual decrease of young population in favour of aged individuals would exert more pressure in the public pension and health-care systems leading to a reformulation of public expenditures in general (OECD, 1995). In this sense, one of the critical issues of the public agenda is the reaction of the labour market in light of the changing demographic pressures. Under this point of view, in thirty years the increase in elder individuals would raise by 15 points the proportion of individuals aged over 65 in the working age population. The consequences of this increase are twofold: from the one hand, the labour market is prone to experience supply side shortages. From the other hand, it will become crucial to find alternatives means of financing public programmes. (OECD, 2005: 9).

In order to face these problems the Lisbon council in 2000 set a strategy aimed at increasing the rates of employment for economically active population in Europe by 2010. The objectives were specifically designed to raise the number of economically active population in order to support the increasing number of the elderly. As such, three goals were outlined, by 2010: 70% of the population between 15-64 should be employed; 60% of the women between 15-64 should be employed; 50% of the elderly aged 55-64 should be employed.

Denmark started to modify its labour market policy towards a transitional labour approach during the nineties by introducing specific measures aimed at improving the employability of the unemployed. The successful combination of low job security and high levels of social protection reduced drastically unemployment leading to conceive these results as part of the “Danish job miracle” (Larsen, 2005:5). However, the flexicurity arrangements, intended as the measures which both combine labour flexibility and social security, were result of a continuous policy learning based on negotiation, mainly promoted by the government, and aimed at finding an adequate mix of welfare and equity policies as well as efficiency and competition.

2. PUBLIC POLICIES VERSUS OLD WORKERS: THE DANISH GOLDEN TRIANGLE IN PRACTICE

The main objective of this section is to discuss the (social) policies vis-à-vis older workers and scrutinise whether the Danish policy system corresponds to the principles of TLM. In other words, are Danish labour market policies conducive to combining economic growth and competitiveness with social protection?

The decision to work or not to work might be influenced by benefit levels and eligibility criteria in pension systems and other social protection schemes. As far as the latter is concerned, it is often argued that the combination of high marginal tax rates and high benefit levels may generate low work incentives (OECD, 2005:51). This is in accordance with the so-called ‘pull explanations’ which draw attention to attractive financial possibilities of retiring early, i.e. the financial incentives to leave the labour market are too strong or the incentives to stay are too weak (economic incentives for voluntary retirement) (Larsen & Bredgaard, n.d.: 8)

As in many other European countries, the old-age pension system in Denmark consists of three pillars: the public pension system, the occupational pension system and the private pension system. Within these systems, several other schemes can be distinguished. Not surprisingly, in 2005, 90% of those at the official retirement age of 67 received the old-age pension. Furthermore, almost 80% of the labour force is covered by an occupational pension scheme, while 17% of all full-time employees aged 25-64 made personal contributions to a private pension scheme. The most important feature of the two latter systems is that they can be taken up from the age of 60 years old, which is 5 years below the official retirement age. A second remark is that the public pension system is highly complex, which is apparent in the table above, and far from transparent regarding, for instance, future entitlements (OECD, 2005: 54-60). Last, but not least, the official retirement age has been reduced from 67 to 65 which is countervailing with the current and future demographic and labour market tendencies (cfr. supra).The provision of relatively generous social security benefits combined with the social protection schemes discussed above results in a lower actual retirement age than officially determined:

Figure 1: Retired from the labour force in 2004

Source: Statistics Denmark (2004)

3. HE FLEXIBLE LABOUR MARKET

Since the 1994 labour market reform, Danish labour market policy does not only take into account supply, but also demand of labour (Larsen, 2005: 18). With regard to the latter, the flexibility of labour markets, i.e. the work organisation and labour relations, is of crucial importance (Larsen & Bredgaard, n.d.: 3). As far as older workers are concerned, the question should be asked whether employers provide older workers with similar incentives to remain in the labour market as younger workers. The relative hiring intensity on the one hand and retention rates on the other hand are possible indicators of employer practices towards older workers. The former is measured as the hiring rate for a specific age group divided by the hiring rate for all employees (OECD, 2005: 77).

Figure 2 clearly illustrates that the hiring intensity decreases significantly by age and more so for women than men. Retention rates, i.e. the proportion of workers who remain with the same employer over a given period of years, can be used to visualise job terminations across age groups. It can be seen in Figure 3 that retention rates fall sharply after the age of 50. This might indicate that workers between 50 and 65 years old change jobs more than younger workers, or make the transition into unemployment, sickness or early retirement (OECD, 2005: 77-80).

Figure 2: Hiring intensity by age categories and gender

Source: OECD, (2005)

Figure 3: Job retention rates over five years (1999-2004) by age categories and gender

Source: OECD, (2005)

Besides the policies and measures included in the flexicurity model above discussed, the Danish Golden Triangle also contemplates the possibility of developing active measures to promote the reinsertion in the labour market of those workers which are not able to find a job by themselves in the long term. As far as elder workers are concerned, the aim is clearly the promotion of the employability of these individuals by putting into practice active labour market policies, which demystify the traditional conception of unproductive, unskilled and unhealthy aged workers. In accordance with this, three are the objectives of these policies: the first one aims at widening opportunities, putting special emphasis on the education and training of older workers as a special measure to reinsert individuals or prolong their retention in the labour market.

The second one tries to improve access to employment services in case of unemployment while the third objective is meant to reduce employment barriers. Once in unemployment the government should not only facilitate access to education and training but should also assist those individuals who encounter difficulties in finding a new job. In this sense, elder workers are not only constraint by the decisions of the demand side of the labour market but the approaching of the retirement age operates as a disincentive to return to the labour market. Figure 4 shows the share of unemployed individuals participating in active labour market programmes by age category. In general, all individuals seem to prefer participation in ordinary education/training and job training programmes rather than other categories.

Figure 4: Participation in labour market programmes in Denmark in 2004

There is a decreasing tendency of participation in ordinary education. Individuals between 55 and 59 score the highest percentage of participation in job training (13%) across categories of age and programmes (OECD, 2005:103).

4.CONCLUSION

This paper has tried to give an accurate analysis of the situation of older workers on the Danish labour market. The actual analysis was carried out by investigating at the same time the public policy background and the collective agreement provisions from the perspective of transitional labour markets. The concept of transitional labour markets, defined by OECD as legitimate, negotiated and politically supported sets of mobility options for the individual (Edvardsson, 2004), has been used both as theoretical starting point for our analysis and as policy oriented concept. Our main findings revealed that Denmark, like most of the European countries today, is challenged by demographic changes leading to the ageing of its population. If, to this, we add also the fall in the participation rates of older workers, the trends are clearly leading to serious medium and long-term consequences for both the economic growth and the country’s social expenditure.

As a response to this situation, Denmark started to modify its labour market policy towards a transitional labour approach during the nineties by introducing specific measures aimed at increasing the level of participation of older people in the labour market. The specific flexicurity type of measures included improving their employment prospects, reviewing employment practices, adapting working systems, workplaces and career path to ageing, and promoting equal opportunities. Additionally, increasing the participation rate of older workers has become a key issue at all levels. Thus, the Danish government, employers and trade unions are coping with the challenge of developing appropriate policies for active ageing. This encompasses measures such as combating age discrimination, promoting life-long learning and flexible working arrangements and emphasizing the need to integrate an "age dimension" into human resource management.

REFERENCES

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