Active Labour Market Policies in Germany and Denmark. A comparison

Guideline

I. Introduction

II. What are active labor market policies?

III. History of active labor market policies in Germany

IV. History of active labor market policies in Denmark

V. Acomparison between Germany and Denmark

VI. Conclusion & Challenges for the Future

I. Introduction

Unemployment is one of the biggest problems in every nations economy. How is it possible to get as much as possible people in long-term employment. How can you help to prevent long-term unemployment? How can you prepare your human capital well for the labor market trough life-long-learning in a fast-paced world? And how can guarantee a certain flexibility on the other side for your open, globalized and innovative economy? So what are the right measures to achieve your labor market policy goals?

The right answers to these questions will determine the long-term success of your economy worldwide compared. And like all decision in politics have labour market policies different determinants. You can find them in history, culture and the institutions of a country.

In the following Essay I want to compare the two geographic neighbors Denmark and Germany and their different measures of active labour market policies that they have implemented in their systems. Active labour market policies have a long history that is going back to the so-called Rehn-Meidner model which was born in the 1960's in Sweden, but the research about this topic is not that old and goes back with its begins to the the years between 1990 and 2000. On the one hand, when you think about nowadays research literature the most experts agree that the champion of ALMPs comes from Denmark. This small nordic country is often seen as a paradigm and model at ALMPs. On the other hand we have Germany, a country with a booming economy and every year new records with total numbers of employments. Both countries have strongly developed economies and low unemployment rates. I want to compare these successful countries and want to focus on the impact of Active Labour Market Policies.

My expectations, influenced by the typology of Esping-Anderson are, that Denmark as „Social-Democratic" welfare regime has a stronger focus on training and have an higher budget overall for active policies. For Germany I expect in the tradition of „Conservative-Corporatist" regimes that they have a stronger demand for the individual citizen.

II. What are active labour market policies?

First I want to have a general definition of the term active labour market policies before I begin to explain what they mean in a broader view and which different kinds of measures there are.

„Active labor market policy describes measures of labor market policy, by means of which the welfare state wants to "actively" increase the employment opportunities of jobseekers and thus reduce overall aggregated unemployment(Kluve, 2013, S.8)

So you can already read that ALMPs are a part of the welfare state. And how the word active implements is the goal the activation of something. In the case of the ALMPs it is the activation of unemployed persons to find jobs. The short-term goal is the job-placement and the reintegration in the labour market. The long-term goal is full employment. The state is now a regulatory element that tries to implement policies to fix natural problems of the free market economy.

The active labour market policies are a complement to the passive labor market policies. These passive policies are the payment of wage replacement benefits, such as unemployment benefits and early-retirement programs.

When we are talking about active labor market policies, we usually distinguishes between 4 different types. The first one is „Job search assistance" where for example the labour agency of a state supports you to find a job. This could be trough consultations or by mediation to a company. The second one are „Training and qualification measures" what is like a direct investment in human capital. Training in different ways was getting more and more important in our fast changing world. The third one is the „Promotion of employment in the private sector". Promotion in the private sector should make it more interesting for an employer to hit new employees. Another way to promote the private sector could be incentives for people who want to start their own business. The fourth and last measure is „Employment in the public sector" or often called „Job-creation". This means you create in an artificial way jobs to reduce unemployment. Without financial support would these jobs never exist.

These four measures are often designed in different ways for specific target groups.

III. History of active labor market policies in Germany

The german history of active labour market policies is, to my surprise, longer than the I expected. Like I already mentioned at the begin was Sweden the „founder" of what we understand today as ALMPs. The first political thoughts of activation policies in Germany go back to the middle of the 1970's. So it was only around 15 years after the new Federal Republic of Germany emerged. This was a time when Germany had for the first time a so called „great coalition". This means a political coalition in the government between christ-democrats (CDU) and the social-democrats (SPD). This coalition had majority in the parliament of more than 90%. Germany followed France who reformed their law under the Gaullist government in 1963. The initiative for this reform in the labour market came by the social-democrats. The law was based on a proposal of the social democrats out of the year 1966 when those have been still in the opposition. This paper suggested a preventive role of the labour market policy. Finally in 1969 the german parliament passed the Employment Promotion Act (Arbeitsförderungsgesetz). This new law was one the most important changes in the post war time for the labour market. The economical scientist Guiliano Bongoli said about this reform that „Its approach to social and economic policy anticipated many of the themes that have been popularized by political leaders in the 2000s.“ (Bongoli, 2010, S.11).

This law build the new institution of the Federal Institute of Labor (Bundesanstalt für Arbeit) and was about unemployment insurance, continuing education, retraining, support of disabled, job-creation programs and training. Furthermore Germany adopted at the same time a law about vocational training. The context of those new law was a time of economic growth and technological change. So it was the right time to implement new measures to support people with training possibilities.

In the following years Germany had a rapid increase of people who profited of the new ALMPs. There was an increase from 1.600 beneficiaries in 1970 to 648.000 in 1975. Between the end of the 1980's and the year 1982 Germany had an increasing unemployment rate with a decreasing number of beneficiaries in this time. Normally you should expected that in periods of high unemployment the number of beneficiaries is getting higher too. But it was a time under budgetary pressures where the government had to shorten the ALMPs programs.

Elected in 1982, the german christ-democrats (CDU) with the chancellor Helmut Kohl build a new government and expended various types of ALMPs. This initiative was in the context of a “qualification offensive". The number of beneficiaries changed from 555.000 to a total of 1.400.000 in 1987. This means the number was 2,5 times doubled. And how you can expected this means a strong increase of the budget for for ALMPs. In the end of the 1980's Germany had with 1% of the GDP always a higher budget for ALMPs compared to 0,7% average in the OECD. The most of those 1.4 mio. beneficiaries concerned training or employment assistance. But on the other side there was a very high part of 10% that were in the non-commercial sector trough the so called „Arbeitsbeschaffungsmaßnahmen“(ABM). „Arbeitsbeschaffungsmaßnahmen“ are what I called the fourth kind of ALMPs. It were Job-creations to reduce unemployment.

Another very important historical event that influenced the the history of ALMPs in Germany was the unification in 1991. The task was now to integrate a former planned economic and socialist country into a free economic system. The ALMPs were extremely important in this time to limit unemployment. This time was shaped by early retirement and job-creation programs. One of the numbers to symbolize this was a peak of the ALMPs budget in 1992 with 1,8% of the GDP This was a short overview about the history of ALMPs in Germany. The reforms after the year 1992 are still the basement for the structure of our nowadays welfare/social state.

IV. History of active labor market policies in Denmark

Denmark played little in the field of active labour market policies until the mid-1990's. Compared to other countries found Denmark the ALMPs topic very late but started then surprisingly fast to get the new rising star. Before the big reforms under the social-democratic government which was elected in 1993, Denmark spent not more than 0,5% of the GDP for ALMPs. In those years with the new government something like an “Activation Turn“ started first in Denmark and many other countries followed this direction. This so called “Activation Turn“ happened in a changed, new context. There were two reasons that caused this new focus on activation. On the one hand the labor market conditions in the most countries improved and on the other hand there were high unemployment rates which were cause by a high supply of low- skilled workers. The pioneers Denmark established a new paradigm trough their transformation of the danish compensation system. But the initiative for those reforms came not through the social-democratic party under Rasmussen. The initiative based on the work of the so called "Zeuthen Committee" which started their work already in the year 1992 and wanted to develop the paper about the structural problems of the labour market. The representatives in this Committee were mostly from trade unions or employer organizations.

The Reform in the year 1994 removed the possibility of regaining entitlement to unemployment insurance through participation in labor-market programs. The reform also limited the time of unemployment benefits with seven years. Those seven years were splitted into two different parts. The first four years are a passive phase and the second three years are an active period. There were also new work-availability requirements and individual action plans introduced. At the same time they oriented their unemployment policy towards activation. Following reforms after the year 1992 were strengthening the incentives and employment assistance. The reforms in 1996 and 1998 shortened the seven years first to five and then to four years. Another important change was that duration for young people under 25 was limited to two years and six months. The year 1998 was another very important year in the for the new activation programs. They had a focus on young unemployed people and decided strengthen incentives and a stronger investment in human capital. They also limited the unemployment benefits for people under 25 to six months. After this they had to participate in training programs.

V. A comparison between Germany and Denmark

To compare two countries in the field of active labour market policies is very hard because you need to decide which indicators are the best and say the most about efficiency and effectiveness of those policies. I want to show just some central parts of ALMPs in Denmark and Germany to show that the both countries are at the same time in some fields very similar and in others completely different.

But first I want to compare some Institutions in the following part that are important to understand the system in that the ALMPs act. I will show general informations about the structure of the labour market of this two countries. With Institution I mean formal and informal things. This could be an established law or practice.

Protection against dismissal

The dismissal protection is ruled completely different in Denmark and Germany. You can look only on the protection by law, because law guarantees the same rights for everybody. But when you look into the danish labour market system you will see very fast which role collective bargaining has and how big the power of trade unions is. Collective contracts are always in the framework of law and make only sense if they guarantee you better conditions than already written down in law. The Danish Em-ployees Act (Funktion^rloven) rules the dismissal protection in Denmark.

The german dismissal protection is ruled in the so called „Kündigungsschutzgesetzt“ (KSchG). It is to long to write about all the details in the law of the two countries, but you can say that Germany has a much more higher protection for employees by law than Denmark. On the other side has Denmark a coverage of 82% (Germany 56%) with collective bargaining and 66,5% (16,5%) of the workers are members of Trade Unions.(OECD-Data) So you can see that the state plays a much more bigger role in Germany than in Denmark. In Denmark the most is not ruled by stated. It is ruled in a consensus system directly between the employer/business associations and the em-ployees/trade unions.

Amount and length of unemployment benefit The system of unemployment benefits is quite different structured in Germany and Denmark. Germany has in the bismarckian tradition a system, that is financed by statutory contributions for social security. (SGB III § 24) This means the employer and the employee pay each the half every month for the insurance and it is ruled by law and you have to pay for your insurance. The system is different in Denmark, you can decide by your if you want to pay for a social/unemployment insurance. You have to be member of a so called „A-Kasse“. In Denmark are the unemployment benefits mostly financed trough taxes. How you can expect that means that Denmark needs high taxes to financed this system. One example is the value added tax that is at 25% in Denmark and at 19% in Germany. The amount of the unemployment benefit is in Denmark in the highest case at 90% of the average salary of the last 3 month. The upper limit for the 90% 2600 Euro. People with higher salaries get only a lower percentage.

In Germany it is 60% or 67%(with child) of the average salary of the last 3 month. In Germany everybody gets this percentage, it doesn't matter about the amount of your salary in the past.

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