The Danish labor market policy in a macroeconomic perspective

Student thesis: Master thesis (including HD thesis)

  • Anna Louise Ranum
  • Anna Bache Skov
4. term, Science in Economics, Master (Master Programme)
The Danish labor market policy, used after the worldwide financial crisis in 2008, has received substantial criticism. The intentions of the labor market policy were to increase the employment on the Danish labor market, by degrading the transfer payment system, which was believed to improve the financial incentive to work. The Danish labor market policy has been criticized, since it is not given, according to the critics, that the policy will increase employment, but may risk a higher structural unemployment and an increasing economic inequality.

The main subject of this report is to discuss whether, or not, the increased labor supply caused by the current Danish labor market policy, will lead to an equivalent increase in employment. This discussion is based on a macroeconomical perspective including the macroeconomic theories; The New Neoclassical Synthesis and the Post-Keynesian theory.

The definition of the Danish labor market is delimited to the last five labor market reforms; Dagpengereformen, Tilbagetrækningsreformen, Førtidspensions- og fleksjobreformen, Kontanthjælpsreformen, and Sygedagpengereformen – all of which are designed to increase the labor supply and subsequently increase employment in the Danish workforce and thereby improve the public finances.

A correlation between the dominating macroeconomic theory and the labor market policy is shown with a historical review of the development in macroeconomic theory followed by, and compared to, a historical review of the Danish labor market policy. A correlation was found which lead to the expectation that the New Neoclassical Synthesis has had a determinant significance to the labor market policy approach. To underline the correlation between the New Neoclassical Synthesis and the five labor market reforms, a comparison, of the two, in their current form has been made. We found, that the labor market reforms are based on the New Neoclassical Synthesis. The review of the New Neoclassical Synthesis clarifies, that the determination of employment, depends on the time horizon. Employment is determined by the aggregate demand in the short run and by labor supply in the long run.

To answer if an increasing labor supply will lead to an equivalent employment, it is investigated how long it will take before the employment is adjusting to the increased labor supply. It is found, that according to the New Neoclassical Synthesis perspective, it will take from 4 to 7 years before the reforms will break through, on the Danish labor market.

Subsequently, the post-keynesian theory is included as an alternative to the New Neoclassical Synthesis. According to this theory, an increased labor supply does not necessarily lead to an equivalent increased employment, since it is the effective demand that is the determining factor, in the determination of employment in short run. In fact, there is, according to this theory, a risk that the reforms will cause the high unemployment, caused by the financial crisis, to continue. The Post-Keynesian economists do not believe that the long run is important, which is why it does not make sense to expect the employment to completely follow the labor supply in the long run.

It is concluded, that there is a general disagreement within macroeconomic theory, hence there is no direct answer to whether the increased labor supply of the labor market reforms will cause an equivalent increased employment. According to the New Neoclassical Synthesis, a full adaption will happen during 4 to 7 years, while the Post-Keynesians believe, that the adaption will not happen on the short run, and that it is not possible to say anything about the long run. If the adaption is not happening, the reforms will, according to the Post-Keynesians, cause negative consequences in terms of maintainance of high unemployment and an increased economical inequality.
LanguageDanish
Publication date2 Jun 2015
Number of pages78
Publishing institutionAalborg Universitet
ID: 213470513