The Danish (un)employment ‘miracle’: aggregate demand, profitability and labour market policies

During the last 25 years, Denmark is one of the European economies where the unemployment rate has changed the most dramatically. Previously, from 1979 on and up to 1994 it rose far above the EU-average. In 1993 a centre-left government took office, and a major change in economic policies was undertaken both with regard to demand management and labour market reforms. From 1994 to 2002, the official rate of unemployment was reduced from 12½ percent to 5 percent. This paper challenges the conventional wisdom put forward by a number of Danish and international observers that the major explanatory factor for this Danish "unemployment miracle" can be solely explained by the 1994/1996 labour market reforms reinforcing the existing Danish flexicurity system. To put the analysis into a proper perspective we have chosen to look at the development in employment in a somewhat longer period, because the ‘flexicurity system' is well established, and has been a part of the Danish Model, since the 1960s. Anyhow, it went through a number of changes in the 1980s and 1990s which might have improved the labour market performance. Hence, our task with this paper is to investigate to what extent jobs were created by demand management policies or by improved international competitiveness caused by improved labour market adjustment and wage cost moderation. The arguments are supported by a theoretical framework as well as by empirical findings concerning the Danish economy.