48 Low-Wage Work in Denmark
Figure 2.1 Unemployment as a Percentage of the Full- Time Labor Force, 1980 to 2003
14
12
10
8
6
Percentage 4
2
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year
Source: Author’s calculations from Statbank Denmark data.
JOBLESSNESS AND UNDEREMPLOYMENT Joblessness and underemployment have a special status in a welfare system that provides an almost universal income support system. The problem with such a system is that people who cannot get a job with an acceptable wage may fall back into receiving income support of some sort. The income support programs are available in order of accessibility: unemployment, sickness pay, welfare payment, and dis- ability pension (see the appendix for details on the entire social safety net). With a large and comprehensive welfare system that provides benefits close to the lowest wages, there are relative weak incentives to work for those with the lowest incomes. Peder Pedersen and Nina Smith (2002) show, for example, that in 1996, for around 16 percent of all employed UI fund members, the difference per month between what they would have earned from working and what they would have received in UI benefits was less than DKK(2001) 500. Figure 2.2 shows the composition of full-time-equivalent persons on unem- ployment and labor market programs (LMP), welfare, and sickness History of Low-Wage Work in Denmark 49
Figure 2.2 The Proportion of the Labor Force (Age Eighteen to Sixty-Six) on Income Transfer, 1988 to 2004
40
35
30 Sickness, Maternity, or Welfare 25
20 Disability Pension 15
10
Percentage of Labor Force Percentage 5 Labor Market Programs or Unemployment
0
1988 1990 1992 1994 1996 1998 2000 2002 2004 Year
Source: Author’s calculations from Statbank Denmark data. and maternity leave. The envelope curve reflects to a large degree the movements in unemployment and labor market programs. However, it is remarkable that the proportion of the population depending on sickness, welfare, and disability benefits seems to grow somewhat in years when unemployment goes down. Furthermore, it is remarkable that more than 25 percent of the labor force is on some sort of income transfer.4 Both observations tell us that the total number of welfare dependents does not go down as much as the unemployment rate goes down, simply because there is a tendency to move people to other arrangements; as a result, the total cost to labor market pro- grams and related programs does not go fully down when business cycles improve. Another dimension of this development is, of course, determining whether low-wage earners are indeed more likely than other wage earners to take up welfare transfer payments. In figure 2.3, we have looked at the annual rate of transition from employment into welfare and disability pension for low-wage earners and other wage earners. 50 Low-Wage Work in Denmark
Figure 2.3 Transfers from Active Labor Market Participation to Permanent Transfer Income Among Eighteen- to Fifty-Nine-Year-Olds
80 70 60 50 40
Percentage 30 Low-Wage Earners 20 Higher-Wage Earners 10 0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Year
Source: Author’s calculations from Center for Corporate Performance/Integrated Database for Labor Market Research (CCP/IDA) data.
We would have expected the transition rate of low-wage earners to be somewhat above that of higher-wage earners, because the relative in- come loss on these welfare transfer arrangements is lowest for low- wage earners. The reality, however, is somewhat more complicated. In most years the annual transfer rate from active participation in the labor market to permanent transfer income (pension, early retire- ment, and so on) has been about 0.6 percent among eighteen- to fifty- nine-year-olds. The figure shows that each year about 0.5 percent of all wage earners in this age group trans