Less agreement on link between pay and competitiveness

Support for the pay restraint policies which have characterised collective bargaining in Denmark since November 1987 is falling away. This is the conclusion of a survey, published in late 1998, of employees' attitude to the question of whether pay rises create unemployment by destroying competitiveness. The finding raises questions such as: Can pay trends be kept under control, or will Denmark return to the situation of the mid-1980s, when pay increased in an uncontrolled way, ushering in many years of high unemployment? And is a new tripartite agreement required between the Government and the social partners?

Since 1987, when the Government, trade unions and employers' organisations agreed the so-called joint declaration, collective bargaining on pay in Denmark has been based on the principle that total pay trends must be below the pay rises in Denmark's competitors, particularly Sweden and Germany. This wage restraint rapidly secured widespread public support, but the signs are that support is now beginning to dwindle.

This is the conclusion of a survey carried out by the Institute of Economic Trends (Institut for KonjunkturAnalyse) for Arbejdsmarkeds Politisk Agenda, a newsletter of the Danish Employers' Confederation (Dansk Arbejdsgiverforening, DA), and published in late 1998. The survey asked a representative sample of Danish employees whether they agreed or disagreed with the statement that "pay rises create unemployment because they destroy competitiveness." While 50% of respondents wholly or partly agreed with this statement, 36% declared themselves wholly or partly in disagreement, whereas in a similar survey in 1990, 56% of employees wholly or partly agreed that pay rises created unemployment. Simultaneously, from 1990 to 1998, there was a significant drop in the group which declared itself in full agreement with the statement: from over 40% to under 10%.

The figures reflect the massive change in unemployment during the 1990s. The end of the 1980s was marked by economic recession and sharply rising unemployment, while the period since 1993 has been characterised by rising economic growth and sharply falling unemployment. The trade union movement would seem to be having difficulty in retaining members' support for a policy which puts a "jobs bonanza" before a "pay bonanza", in the expression often used by Hans Jensen, the general secretary of the Danish Federation of Trade Unions (Landsorganisationen i Danmark, LO)

Back to the 1980s?

It may be that attitudes are shifting back to the situation in 1986, when an earlier survey of employees was carried out. At that time an absolute majority of respondents (51%) disagreed that pay rises created unemployment. In 1990, only 32% disagreed about the link between pay and competitiveness, but the proportion of those disagreeing in 1998 has risen again - although only to 38% for now.

The situation in 1986 was influenced by the previous political intervention in collective bargaining in both the private and the public sector in 1985. The Conservative-led government's purpose in intervening was to keep pay rises down to little more than 2%. However, the government did not interfere with the right to conduct local pay negotiations, at a time when the economy was booming and unemployment falling, and at the end of 1986 and the beginning of 1987, when the next pay round took place, overheating in the construction industry triggered high pay rises. There was a "pay bonanza", not least because the government slackened the reins in the public sector ahead of a coming general election. In 1987, pay rises soared to over 11% - well over half as much again as the average rise in the years before and after.

The subsequent tightening of policy, which started with a tax reform and the so-called "potato diet" of the autumn of 1986, started to have a noticeable effect only late in 1987 when, in addition, the pay situation was brought under control by the joint declaration between the Government and the labour market parties. However, by then it was too late to prevent the rising level of unemployment and the government did not dare loosen the reins once again. So it was only with the change of government in January 1993 that developments reached a true turning point.

In the government, in parliament and among the labour market parties there is now a fear that the present situation will once again spiral into the negative position of the 1980s. In 1998, the rate of pay rises increased (DK9811193N), and if appreciation of the pay restraint policy is being eroded, the situation could get out of hand.

Difference between public and private employees

The Institute of Economic Trends survey underlines the risks for the public sector pay round, which started in early 1999 (DK9812198F). The figures clearly show that public employees are less in agreement than their private colleagues over the link between pay and competitiveness. In 1990, 54% of public employees agreed that the link existed, while 36% disagreed. In 1998, 40% of public employees agreed and 42% disagreed.

Arbejdsmarkeds Politisk Agenda concludes that the overall message of the analysis is that it may be hard to convince public employees to hold back on pay rises in the current pay negotiations.

Record rise in real pay

The increasing rate of pay rises in 1998 will help to confirm a record trend pay rises in real terms. One forecast from the Economic Council (Det Økonomiske Råd) suggests that the total rise in real pay in Denmark in the period 1990-2000 will be over 19%. According to international pay statistics from DA, outside Denmark only Norway will approach these figures.

This trend will accelerate in the years leading up to 2000, but even at the start of the 1990s, real pay rises were substantial - and higher than in most other countries. But unlike the current situation at the end of the 1990s, pay rises then were not at the expense of competitiveness. Up to 1996 it proved possible - the occasional year excepted - to keep to the goal of the pay restraint policy: to secure Danish competitiveness and steady rises in real pay despite modest nominal rises. However, in 1997 and 1998, according to DA's international statistics, pay levels jumped, and the increase in pay rises in Denmark is now invariably higher than in other countries. The latest comparison figures are for the second quarter of 1998 and show annual pay rises in Denmark of 4.1%, compared with 2.7% abroad - ie over a third higher.

Gloomy prospects

Forecasts from the Economic Council still anticipate rising employment up to the year 2000, but this cloaks a fall in the private sector which does not completely cancel out a continued rise in the public sector. Business expectations with regard to employment trends seem to be ever more negative. According to Central Bureau of Statistics analyses, both industry and the building and construction sector seem set for falling employment in 1999. This would suggest that the balance of payments deficit which has made an appearance for the first time since the 1980s will be a permanent feature of future years. There is thus not much room for maintaining Denmark's high employment rate and relatively low unemployment, which now lies at 170,000 or rather more than 6% of the workforce.


The managing director of DA, Jørn Neergaard Larsen, has publicly commented that new political initiatives are needed. In 1999 there will be every reason to focus on pay developments, competitiveness and workforce trends. For several years, Denmark has had pay rises significantly above those of other countries. This has already hit exports and businesses competing with imports, and if this development is not rapidly reversed, Denmark will be in serious trouble, according to Mr Neergaard Larsen.

This could perhaps be seen as an expression of the usual worries of a professional employer. However, there does seem to be a real threat to the economy in this weakening of competitiveness. Thus it is probably not a coincidence that the director of the Workers' Business Council (Arbejderbevægelsens Erhvervsråd, AE), Lars Andersen, has also voiced a certain concern about the high pay rises. At the same time, AE has stated that high dividends, not just pay rises, are also part of the explanation for the weakening of competitiveness.

There seems to be a real risk of ending up in the vicious circle which characterised the second half of the 1980s. One important means of avoiding this could be a return to the principle of lower pay rises than in neighbouring countries. Thus there could be a basis for a renewal of the joint declaration of 1987, taking as its starting point the conditions which characterise Danish society in general and the labour market in particular at the start of the 21st century. (Jørgen Steen Madsen, FAOS)

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment