Controversy over proposed unemployment benefit reform

In November 2003, the Danish government withdrew a proposal to restrict entitlement to unemployment benefits, which had met with strong criticism from opposition political parties and the social partners. Despite amendments to the plan, it had still been rejected by opponents, with the LO trade union confederation and DA employers' organisation united in their opposition. The rules on unemployment benefits thus remain unaltered and the whole issue has been shelved for the foreseeable future.

In connection with the negotiations over the state Finance Act for 2004 - which started in late summer 2003 - the Minister for Employment, Claus Hjort Frederiksen, drew up an ambitious plan for changes in the rules on unemployment benefits. The stated aim was to prevent misuse of the rules on supplementary benefits and to adjust benefit entitlement for highly paid groups of workers.

Minister’s four proposals

Originally, the Minister for Employment outlined four proposals which together would cut public expenditure on unemployment benefits by about DKK 800 million (EUR 110 million):

  • in future, a person should have to be unemployed for two days a week in order to qualify for supplementary unemployment benefits compared with the current one day. This would mean that people working for more than 21 hours per week, compared with the current 28 hours, would not be entitled to receive supplementary benefits for the hours between their working time and the normal working week of 37 hours;
  • temporary agency workers, casual workers and consultants employed without any notice of dismissal should no longer be entitled to supplementary unemployment benefits on a permanent basis. A ceiling of 52 weeks' benefit, which currently applies to part-time employees, should apply to all employees;
  • employees with a monthly wage exceeding DKK 25,000 (EUR 3,360) should be required to take time off in lieu after the termination of the employment relationship instead of having their overtime hours owed paid out as bonus and receiving unemployment benefits from the first day of unemployment; and
  • the rate of unemployment benefit should be calculated on the basis of paid employment during the past six months, rather than the current three months. This should prevent unemployed people seeking highly paid jobs of a short duration rather than a lower-paid permanent job.

Exceptions were foreseen for specific groups such as fishing industry workers. This met with strong criticism from the unemployment insurance funds, which accused the government of dividing benefit recipients into two classes.

Criticism from social partners

Some labour market researchers argued that the Minister's proposals would reduce flexibility on the labour market and create more disturbance than clarification, especially because the social partners in the main private sector bargaining unit are currently preparing their demands for the forthcoming collective bargaining round in 2004. The main point of contention was the proposal that the number of hours that people could work a week and still receive supplementary unemployment benefits for the other hours should be cut from 28 to 21 hours. Employers stated that flexibility would be reduced as it would be more difficult to find people who would be willing to work a shorter week during some periods of the year if they would no longer be entitled to receive supplementary benefits for the unworked days. This would have major consequences in building and construction and in the industrial sector. Both employers' and trade union organisations also criticised the proposal that higher-paid workers should have to be unemployed for longer before becoming entitled to unemployment benefits. The unions also believed that this would reduce the incentive to join an unemployment insurance fund (which are mainly run by unions - DK0209102F).

Revised proposal

The Danish People's Party - on which the coalition government of the Liberal Party (Venstre) and Conservative Party (Det Konservative Folkeparti) relies for support - had some doubts about the unemployment benefit reform, but ended up concluding an agreement as a part of a total package in connection with the 2004 Finance Act. However, the reform was amended so that it comprised only two elements, leading to a total cut in public expenditure of DKK 170 million (EUR 22.8 million):

  • a waiting period before receipt of unemployment benefit would be introduced for insured employees with a monthly income exceeding DKK 27,700 (EUR 3,722). The waiting period for an employee with a monthly income of DKK 32,000 would be 2.5 weeks, rising to five weeks for employees with a monthly income of DKK 42,700 or more; and
  • the period of paid employment on which unemployment benefit rates are calculated would be increased from the last three months to the last 12 months.

LO and DA join forces

The revised proposal also met with strong opposition, and from a broader range of social partners. The Danish Employers' Confederation (Dansk Arbejdsgiverforening, DA) - which otherwise generally sees the relatively high level of unemployment benefits as a barrier to incentives to work - took a very critical position on the idea of introducing a waiting period for highly paid employees (and at a level which was not that high). DA stated that this initiative would neither increase the incentive to find a job nor promote a higher degree of labour market flexibility, both of which are needed to promote employment. The Confederation of Danish Trade Unions (Landsorganisationen i Danmark, LO) and the Salaried Employees' and Civil Servants' Organisation (Funktionærernes og Tjenestemændenes Fællesorganisation, FTF) stated that the change would be detrimental to the whole unemployment insurance system. They saw the proposal as an attack on the insurance principle that the unemployment system is based upon - although this system is mainly financed through public funds.

The opposition to the planned changes resulted in the government withdrawing the entire proposal due to the manifest lack of support. Many labour market researchers and commentators saw this result as a victory for LO and DA, which showed once again that if the government comes up with a proposal on which they have not been properly consulted and they join forces against the measure, it is very difficult to carry it through without their support.

Commentary

After the Conservative-Liberal government's turbulent start to its relations with the social partners in late 2001 (DK0112147F), matters had gradually calmed down. However, just when the prelude to the 2004 collective bargaining round was starting, the storm broke again over government's plan that the Finance Act for 2004 should include major cuts in the unemployment insurance benefit system. There were some possibilities for unintended use - not to say abuse - of the system which the government wished to remove.

Initially, the discussion mainly focused on intervention in the rules on supplementary unemployment benefits. If one takes a critical stand, it could be argued that both employers and employees, acting in collusion, exploit this public system because collective agreements give employers the possibility of temporarily laying off their employees if they no longer have a need for them. The employees in such cases have a right to supplementary benefits. However, on the other hand, it could also be argued that this is one of the vital mechanisms which ensures a very flexible Danish labour market with a high degree of mobility and easy access for employers to shed their employees, but whereby the employers are also very ready to take these workers on again. Denmark is known throughout Europe for this unique flexibility. It is noteworthy in this connection that Danish employees - who live with these relatively insecure employment conditions - feel much more secure in their jobs than many employees in other countries in continental Europe which have a much higher degree of formal job security.

This is also why trade unions argued that these planned restrictions in the unemployment benefit system would have a direct impact upon the forthcoming collective bargaining round. The operational head of the Central Organisation of Industrial Employees (CO-industri) union cartel, Verner Elgaard, called the proposed change a 'spoke in the wheel' in relation to the employers' wish to increase the flexibility of the workforce. He stated: 'If the right to unemployment benefits disappears, we will demand that the right to temporary lay-offs of workers is taken out of the collective agreements.'

At the same time, the government's proposal was widely seen by the general public as a clear breach of promise, as the governing parties had, during the campaign prior to their victory in the 2001 general election, promised not to reduce unemployment benefits. Ministers argued that the planned cuts would be within the framework of this promise, as the government's platform clearly stated that it was benefit rates that would not be touched. However, statements from political leaders during the election campaign indicated that it was not only the rates, but the system itself that the governing parties had promised not to change. The whole affair ended with the government withdrawing its proposals in agreement with the other parties to the Finance Act compromise. When everybody else but the government found that its action was a breach of promise, the government had to give in. Otherwise, it would have seen its credibility harmed.

This whole affair has created a climate of insecurity and led to problems in relation to the collective bargaining that is to take place in early spring 2004. On the other hand, it is a fact that the whole issue of unemployment benefits will now be shelved for some time ahead. The Prime Minister, Anders Fogh Rasmussen, has guaranteed that the government will take no new initiatives in this field before the next general election, which is to be held before November 2005. He has also said that if the government has plans to change the system, it will inform the electorate thereof prior to the election. (Carsten Jørgensen, FAOS)

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