Yes, remarkably, these people are being paid by you

A standard analysis of the effects of the European Union would include the fact that it subsidises the production of certain agricultural goods. This is what led to those wine lakes and butter mountains of yore. Set the price well above the market price and watch as producers flood the continent with product that no one wishes to eat.

One such product is sugar. The EU price is well above the world price and has been for yonks. This keeps the sugar beet barons in business and leads to, as always with a price above the market clearing one, excessive production. Fortunately, this is about to change. We consumers will be less ripped off to favour some few thousand landowners, how excellent, eh?

Except there are those who think this is not a good idea: 

British efforts to tackle obesity could be rendered futile by a European Union deal that threatens to flood the market with cheap sugar, experts have warned.

Campaigners fear the reform, described as a “threat to public health”, will allow companies to laugh off Government measures such as the Soft Drinks Levy, aimed at forcing a reduction in sugar content.

Beginning in 2018, the levy promises to tax companies which make and sell sugary drinks almost £1.5 billion over the first three years.

The high mandated prices are accompanied by quotas, so that entire countries do not in fact disappear under the overproduction of sugar. Those quotas are to go, as are the guaranteed prices.

And here's the lovely thing. The people telling us that we should continue to be ripped off in favour of those few thousand land owners are in fact paid by us. The claim being that they are experts looking out for our interests. It being somewhat difficult to see that they are really.

That Carthaginian solution is looking better all the time, isn't it?

A coherent economic policy is a useful thing Mr. Corbyn

We thus suggest you take the time to acquire one:

A Labour government will take failing care homes into public ownership to protect social care provision, Jeremy Corbyn is to promise.

The Labour leader will warn the social care system is at "serious risk of breakdown" unless the Government invests more money.

OK, maybe there is a problem here and maybe there isn't. And we don't think that nationalisation is a good solution either. But leave that aside. Let's at least try to insist upon coherence here, shall we?

 In a speech to the Fabian Society new year conference, he will say rising costs and falling fee payments from councils had seen 380 care home businesses declared insolvent since 2010.
...
"So a Labour government would give social care the funding it needs and give a firm commitment to take failed private care homes into public ownership to maintain social care protection.

That coherence being what's missing here. The initial insistence is that the government isn't spending enough on care homes. The solution is thus that the government will take them over and become entirely responsible for them? That's going to help, is it?

And we can meet this coming the other way too. If funding levels are raised then the care homes won't go bust and thus need not be nationalised. Even, if government doesn't have to buy the homes (and they would, you cannot nationalise without compensation) then there would be more in the budget to pay for funding, wouldn't there? 

Yes, we realise that we and Jeremy are most unlikely ever to get on and all that but our wish for the new year really is that people start proposing actually coherent public policy, not just sound bites to please the crowd.

Adopting the economics of fascism isn't quite how we'd see off the extreme right to be honest

But that is how Colin Hines sees it in his latest tome, Progressive Protectionism. Of course, this subject has been discussed before, around about the time he announced that he was going to be writing the book. That passage of the years in the work hasn't improved the idea it has to be said.

As proof we've Richard Murphy insisting that the ideas have merit. As every compass has its butt end so do we have an infallible test of a bad economic idea:

The essence of Colin’s argument is that global capitalism is not working. And, given that Colin is a long time environmentalist (having been around that scene since it near enough began), what we should do to replace it is build strong local economies. This is not only green, but he also argues it is the way to tackle many other issues. Capital controls, for example, would let us more effectively tackle tax abuse and so build a more equal and just society. They would also end a focus on speculation that is creating massively harmful inequality in our country, and others. Controls on trade would, Colin argues, support local economies and jobs and massively reduce the enormous carbon cost of much of world trade.

This free market globalisation has just produced the largest fall in absolute poverty in the history of our species. Sounds like a pretty good result from a socio-political system to us. But that's not how Hines sees it:

Under these circumstances, beggar-your-neighbour globalisation gives way to the potentially more cooperative, better-your–neighbour Progressive Protectionism.

The book does not advocate a return to the oxymoronic protectionism of the 30s, where the goal was often for each protected industry or country to increase its economic strength by limiting imports and then hoping to compete and export globally at the expense of others. Unsurprisingly the more countries did this, the less trade there was between them.

Progressive Protectionism aims at reducing permanently the amount of international trade in goods, money and services and to enable nation states to decide the level of migration that their citizen’s desire.

What is being suggested is a move toward autarky as Enver Hoxa enacted, as Ne Win did, as Mussolini, Franco, as North Korea does, as the BNP when still extant claimed should be done.

Do note that we are not suggesting that Mr. Hines is actually a fascist. We are just noting that he's recommending economic policies adopted by those who were.

At which point enough with the insults. His recommendations are idiot stupidity which will make us all poorer. Larding them with the word progressive isn't going to be enough to get them down society's gullet.

Kids are different; it's time we accepted that

Roger Scruton recently argued for the reintroduction of selective schools - working from the premise that ‘knowledge benefits the child, but not as much as the clever child benefits knowledge’. He thus argues it is in the government’s interest (indeed in all our interests) to reintroduce selective schools—in the end, the whole of society benefits when the brightest individuals are educated to a higher level. 

Different sorts of education are needed for different people. The state’s role should be to promote society’s interest in general, not specifically reduce educational ‘gaps’. Those with other abilities would benefit from technical schools—like the “realschule” which arguably underlie much of Germany’s continuing success in manufacturing—schools of equal importance, but with different goals. We should not succumb to the notion that equality between individuals means identical skills. This may have brought about a dumbing down of our education system.

Scruton’s argument is very persuasive. Every child should have the right to be educated, so the state has a ‘duty’ to provide each child with an education. The state should not discriminate in the irrelevant areas, i.e. wealth and social status. But there should be discrimination in the relevant areas – i.e. academic ability. Assessment at any age is essentially arbitrary, but evidence suggests that ability is very stable through the lifespan from age 11. 

However, Scruton’s argument is short on empirical evidence.

Critics such as Chris Cook suggest such selection would be a ‘radical departure from educational orthodoxy’. Cook shows that in Kent and Medway, where there is extensive selective schooling, kids from poorer backgrounds do worse than in the rest of the UK. But this is confounded by the possibility that many families who would be in that position may leave for comprehensives elsewhere.

And US evidence suggests that universal ability testing actually helps find bright kids from less privileged backgrounds. Harris Westminster Sixth form may be a good English example. According to James Handscombe, its principal, 33% of its pupils are from deprived backgrounds (compared to national average of 29% and typical selective schools average of 10%).

Furthermore, this narrow focus on academic results is exactly what is wrong with the current system. These results are only relevant for some: the difference between a C and a D is largely irrelevant when it comes to university or careers requiring academic ability. We need more relevant measures. Many children find academic tracks stifling, boring and irrelevant—surely we should help them develop skills more relevant to their interests and desired careers. It is simply not the case that any individual is capable of following any career path.

A significant proportion of young people are now coming out of university with expensive degrees which are not preparing them for the world. Indeed there is a lot of evidence that apprenticeships have probed more valuable to both their prospects and self-esteem. According to the Office for National Statistics, more than a quarter of graduates in 2013 were paid less than the £11.10 an hour average for those on work-based training schemes.

More recently, the Sutton Trust found that people who had completed level five apprenticeships (equivalent to a foundation degree) were expected to earn £52,000 more over their lifetimes than graduates from non-elite universities. And with the average debt for university leavers now at £44,000, apprentices may find themselves better off in the long run. 

Challenging orthodoxy has been how we’ve made progress in every field. Where would science be today if Galileo had not challenged the Church’s monopoly on truth and power or if Darwin had not challenged special creation. Such challenge is the very essence of progress. There is always room for doubt and that, in and of itself, gives us the freedom to challenge orthodox views.

Some people are getting very angry about the Coca Cola Christmas truck

And we must be careful of these people when they are angry of course:

Coca-Cola’s "Happy Holidays" truck tour should be banned next Christmas because it promotes unhealthy living to children, a group of 108 health experts have said.

Over Christmas the lorry visited various locations in Britain offering free cans of fizzy drink, which contain nearly four teaspoons of sugar.

But Robin Ireland, director of food charity Food Active, said Coca-Cola was trying to "hijack Christmas" and bring the gift of bad teeth and obesity to children.

The current, at least public, advice of the killjoys is that fizzy drinks should be a rare treat for children. You know, like Christmas? So we rather think that associating the two would meet their objectives.

But the real complaint becomes apparent in the letter in the BMJ:

This Christmas the truck visited five locations in north west England in the first week of December: two in Greater Manchester plus Lancaster, Liverpool, and St Helens. The major local newspapers such as the Liverpool Echo and the Manchester Evening News provided substantial coverage over several days, including where to see the truck, live blogs, and reproducing images of the bright red truck with lights twinkling. They faithfully reported that you could have your photo taken with the vehicle while being given free product (including a 150 ml can of standard Coca-Cola containing 15.9 g of sugar—nearly four teaspoons).

With figures showing that 33.8% of 10 to 11 year olds in the north west are overweight or obese and that 33.4% of 5 years olds have tooth decay,11 many public health departments have used their ever-squeezed budgets to launch campaigns about sugary drinks to try to help their communities reduce their consumption. So Coca-Cola’s campaign was scarcely welcomed by local directors of public health, medical professionals, educationalists, or indeed members of the public. Food Active, a healthy weight campaign based in north west England, organised a letter of concern stating “We can celebrate without allowing Coca-Cola to highjack Christmas by bringing false gifts of bad teeth.”12 The 108 signatories included five public health directors and the current and past presidents of the Faculty of Public Health.

But neither the letter nor the accompanying press release received any coverage in either Liverpool or Manchester. As we wrote in follow-up letters to the Liverpool Echo and the Manchester Evening News that also went unpublished, it is of huge concern that no alternative views were provided in the face of a concerted commercial marketing campaign by Coca-Cola.

Because the local papers didn't publish our letter therefore the Coca Cola truck must be banned.

Is it any wonder that the phrases health fascists, health-nazis, have been coined?

Why we oppose taxing capital

Last week, I set out the ASI's position on tax policy in 2017. In making the case for scrapping all taxes on capital, I mentioned that existing tax rates and reasonable interest rates imply massive taxes on future consumption.

"Taxes on interest income, capital gains, inheritance and corporate profits all effectively tax future consumption higher than current consumption, incentivising short-termism. And this future consumption tax goes up every year you forgo instant gratification. A few months back, I did the maths. Assuming a 5% interest rate and the European Commission’s estimate for the Marginal Effective Tax Rate on capital (47%), you’re effectively paying 97% extra in tax for waiting 30 years and a whopping 147% if you leave it another 10 years."

I think it's worth expanding on this point, but the mechanism isn't exactly clear. Why does a 47% tax on capital imply a 147% tax rate 40 years down the line? It's worth going back to basics.

People prefer to have things now rather than later. Market interest rates reveal how strong that preference is. If the market rate of interest is 5% (high for today but not by historical standards) then it means £100 of consumption today is worth £162.29 of consumption in ten years time.

Should I spend now or save for tomorrow? Capital taxes distort that choice. Let's pretend we have a flat 20% income tax with no deductions or exemptions. If you get paid £125, you'll pay £25 in tax and then you can choose to save or spend the rest of the money. If you saved £50 and the market interest rate was 5% you would end up with £81.44. But you'd have to pay 20% of your interest income each year in tax. Leaving you with £74.01.

It's the equivalent of the interest rate falling from 5% to 4%. That might not make much of a difference over 10 years. That's just £7.43 extra in tax, effectively a 10% additional tax on consumption. Not huge, not small either, but not huge.

However, as Einstein probably never actually said "compound interest is the most powerful force in the world". The difference between a bank account paying out 4% and one paying 5% becomes much larger over 30 years (4% = £162.17, 5% = £216). That's a difference of £53.93, or to put it more generally you'd be almost a 1/3 richer with an account paying 5%. To put it another way, a flat income tax of 20% implies an extra 33% tax on consumption in 30 years time. The longer you wait to bigger the extra tax you must pay is.

But we don't have a flat tax of 20%. We have an income tax with a top rate of 45%, a corporation tax of 20%, capital gains tax of 20% (not to mention inheritance tax). We also have some tax exempt savings vehicles like ISAs but they have a maximum limit so those most able to increase savings are still taxed.

To figure out how high the extra taxes on future consumption are we need to know the marginal effective tax rate (METR) on capital. Unfortunately that's rather tricky to work out. The best estimate I could find is from 2000 and by the European Commission, they reckon the UK's METR is 47%. Things have changed since then - income tax and capital gains tax is higher, while corporation tax has fallen, so buyer beware. But, an METR of 47% means a consumption tax of 97% in 30 years time. And if you waited another 10 years that tax would rise to 147% (even Jeremy Corbyn's bonkers maximum salary cap only implies a 100% rate).

Tax rates of 97% and above are absurd. Yet, rates like these are the status quo for those who defer gratification and make productive investments. This isn't just bad for those rich enough to max out their ISA limit, it's bad for ordinary workers as their wages stagnate due to chronic under-investment.

The tax code should be neutral between the frugal and the spendthrift. In 2017 we'll be pushing for tax reforms that fix this imbalance.

Internet drugs means it's high time to change our laws

A recent BBC story about buying drugs online ended up showing just how far we still have to go to sort out our drug laws, which look increasingly impractical and out of date.

The BBC investigated the ease with which illegal drugs can be bought online, and delivered to your doorstep by buying MDMA on the Dark Web - the encrypted network that anyone can access anonymously by downloading the “Tor Browser” to their computer.

Reportedly millions of pounds of drugs are purchased online every day on the Dark Web, where because of Internet traffic being sent through a worldwide volunteer network of over seven thousand relays, a user’s location and usage is completely anonymous.

The BBC contacted the Royal Mail, who duly replied that it “does not knowingly carry any illegal items in its network” (as it would). But the same BBC journalists spoke to delivery staff who reported that they “definitely handled suspect packages” but that “there was nothing that they could do”.

And this is the issue. How can the Government ever possibly hope to enforce the prohibition of many substances, when to millions across the Globe, they are just a few clicks away? One might argue that the Government should search suspect packages, but then you are treading a fine line between supposedly acting in the public’s best interest, and straight up violating their privacy.

Besides, surely the sheer volume of post that is shifted everyday would render such a measure totally impractical?

The Home Office has recently announced that it will be spending £1.9 million to boost their understanding around how crime networks “adapt and diversify” using technology. But rather than simply throw money about the problem, should we not seek to take a more holistic approach rather than one that will continue to see public safety compromised?

Each time someone buys illegal drugs on the dark web, the money that they spend goes into the hands of criminals. Often filling the coffers of organized crime networks that get up to some very dastardly deeds indeed. Were the Government to decide to liberalize Drug laws, not only would money fall into the pockets of legitimate law abiding people, but a revenue stream could be created through taxation.

Further, the substances bought would be regulated, to reduce harm to drug users as presently, occasionally drugs are made up of more than just what dealers say.
If technology now means that users can buy illegal substances more easily than ever anyways, why bother trying to enforce such strict prohibition?

Law liberalization, and subsequent regulation would make streets, homes and individuals safer, at no cost to the taxpayer. And the BBC have made obvious the already obvious fact that in the modern world, prohibiting drugs is harder, and will continue to be harder than ever.

There's no need to change trade agreements to achieve this

More of the usual in The Guardian. Radial calls to change the world without having the first clue of how it works right now:

Progressives must not cede discussion of the world economy either to the liberal globalizationism promulgated by Thomas Friedman and Mark Zuckerberg or the pseudo-protectionism associated with Trump and Le Pen. While the former accepts the current slide of the western working class as inevitable, the latter proposes only arbitrary and authoritarian countermeasures.

Instead, we need to push for a new architecture of international trade, investment and technology transfer that puts worker representatives at the decision-making table. Moving forward, international trade deals – in principle a good thing – must bring wages in cheaper-labor countries into closer alignment with those of their developed-world trading partners.

That last being, of course, exactly what trade deals do right now. If we, for example, sign a trade deal that opens the UK to more Bangladeshi garment imports then the income of Bangladesh goes up. As does the income of Bangladeshis, exactly the point that is being argued for.

If you buy one t-shirt made by those in some sweatshop in Dhaka, those earning 5,000 taka a month (£54 apparently) then those wages rise by some infinitessimal fraction. And if you buy two by two such and if millions of us buy all our clothing from such places then economic growth observably happens.

As it has been these past years as we have been buying more from Bangladeshi sweatshops - the country has been growing at between 5 and 7% for most of the past couple of decades in fact.

Sure, we'd all like that growth to be faster - thus Madsen of this parish's insistence that we should all buy goods made by poor people in poor countries. Because this aids them in getting richer.

And thus why we should indeed have more trade deals, even just the one announcing unilateral free trade. In order that the poor may become richer as billions have been doing these decades.

But we don't need such trade deals to consider low wages rates - we just need to be doing more trade and those low wage rates will, over time, disappear. Because, you know, economic growth?

Inequality doesn’t matter: a primer

So Jeremy Corbyn’s talking about inequality. His ideas might be a little silly, but at least he’s talking about inequality, right?

Well, no – inequality probably isn’t something we should worry about at all. The fact that Corbyn's policy is solely designed to make the rich poorer just shows what a pointless measure inequality actually is.

Most people use it as a shorthand for living standards for poor and average-income workers, but inequality measures are just as sensitive to the incomes of the people at the top as the bottom. That means that if everyone becomes worse off, but people at the top become even worse off than the rest, then inequality falls. That’s what happened during the Great Recession, where inequality (as measured by the “Gini coefficient”) actually fell. 

OK, but that was a little blip. Everybody knows that income inequality is higher than ever, and getting worse.

Actually, the data says otherwise. Income inequality in the UK is now at its lowest level for thirty years, according to new data from the Office for National Statistics.

That doesn't sound right. What about wealth inequality?

That’s actually been on a huge downwards trend for the past one hundred years! And the wealth share held by the top 10%, top 5%, top 1%, even the top 0.5% and 0.1% has been static since the 1980s after a long decline during the 20th century – see the chart below. And during that time wealth per adult has increased massively, which means that people in the middle have seen huge gains.

You say that, but it’s obvious that some people at the top are getting much richer while most of the rest of us haven’t had a pay rise since the financial crisis.

It’s true that some of the top earners have seen huge pay rises over the past decade – FTSE 100 chief executive pay has nearly doubled. But that’s an absolutely tiny group: one hundred people out of a workforce of 32 million. That isn't the 1%, that's the 0.0003125%. What is true is that most people haven’t seen much of a pay rise for many years, and that seems to be what’s really the matter here.

People aren’t just mad about inequality – they’re mad about the unfairness of people getting bigger paycheques undeservedly while their employees get no rise at all.

It doesn’t look as if it’s undeserved, for the most part. Chief executives matter a lot – the strategic decisions they make affect every part of the firm they run, and it makes sense for a firm to spend several million if that’s what it takes to attract the top talent. Some think these pay packets are evidence of rent-seeking by executives, but financial markets seem to be very sensitive to the appointment and resignations of chief executives, suggesting that people with money on the line think that they matter a lot to firm value. And market movements after CEO deaths (both negative, after good CEOs die, and positive after bad ones die) have been getting larger and larger since the 1950s – a sign that they matter more and more to their firms, maybe because globalisation means top-level decisions matter more these days. It makes sense that big corporations would be willing to spend a couple of million quid for a chief executive that adds half a billion to the value of their firm, doesn’t it?

What’s more, it’s just not the case that cutting the wages of people at the top will boost the wages of people at the bottom. Companies spend what they need to to get resources they need – they don’t just have a big pot of money to spend on things. If we banned firms from spending more than a certain amount on IT services, we wouldn’t expect the money they had left over to go into workers’ wages, and we might find that the firms were less productive overall. Capping chief executive pay is similar to that.

Even if inequality has been falling, it’s still relatively high in the UK and the OECD and the IMF both say that inequality can slow down growth. Surely you accept that?

I’m afraid not. These studies tend not to be very high-quality, doing international ‘cross sectional’ comparisons that compare countries in a moment in time. That means that they end up comparing Sweden with Mexico, leaving out a lot of other factors that might be the cause of both Sweden’s lower inequality and its lower crime and poverty rates, and assuming what they’re trying to prove. But even though countries with lower inequality might have higher growth rates, that doesn’t mean that cutting inequality will boost growth rates.

A better method would be to do time series comparisons that look at what happens within particular countries when inequality rises or falls. A paper by Kristin Forbes that did that found that, actually, “an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.” Another paper, which tries to control for lots of the factors that usually confound results like the IMF’s and OECD’s, finds that across US states lower inequality is associated with lower subjective wellbeing.

My friend, the mysterious “Anonymous Mugwump”, points to evidence that wealth inequality caused by market factors, as opposed to cronyism, doesn't seem to be related to low growth, and that in African states higher inequality levels don't seem to be related with low growth either.

But inequality does undermine the social fabric of the country. You can’t put a price on that.

Does it? As Ben points out, a 2012 paper that looked at survey data from all 34 OECD countries over 30 years found no effect from inequality on honesty, altruism or civic-ness, very little effect on obedience or tolerance, and a positive effect on work ethic. Nor does inequality seem to allow the rich to buy elections – indeed most of the evidence suggests that, contrary to popular opinion, it’s very hard to buy an election. Donald Trump might have been a billionaire but it was his fame, not his money, that helped him win the election – he ran one of the cheapest campaigns of recent times and beat one of the most expensive ones.

Haven’t you read the Spirit Level? It contradicts everything you’ve been saying, and it’s evidence-based.

It’s bunk. Christopher Snowdon has demolished practically every important claim in the book, from inequality causing shorter lifespans to higher murder rates to unhappier citizens to less charitable giving, with most coming from “highly selective use of statistics” (to quote The Economist) – leaving out inconvenient countries to create the impression of a trend where there is none.

If what you’re saying is right, why does everyone care so much about inequality? Doesn’t their preference for more equality matter?

The great fact about inequality that most people who talk about it won’t admit is that people are very very bad at judging how unequal their societies actually are. An amazing paper asked people in all sorts of different countries, rich and poor, equal and unequal, to choose which ‘picture’ of society, below, was closest to showing the shape of incomes in their own society.

Globally, respondents were able to pick the “right” diagram only slightly better than randomly – 29% got it right, compared to a random baseline of 22.5%. Accuracy differed significantly between countries: 61% of Norwegians got it right, 40% of Britons did, 5% of Ukrainians did. In only five countries out of forty did more than half of respondents guess correctly. (All this uses post-tax-and-transfer data; people’s accuracy is much worse if you use pre-tax-and-transfer data.)

And respondents weren’t even close – looking at how many people were only one diagram off the right one, respondents only did one percentage point better than random (69% versus 68%). As the authors note, “with only five options to choose between, getting within one place of the correct option is not a very difficult task”. Except for a few Scandinavian countries, people’s perceptions of inequality in their own country were barely better than random. That means that loads of the objections people have to inequality, if there is any truth to them, are probably actually objections to perceptions of inequality, which may be more driven by media coverage than reality. If that’s true, then trying to reduce inequality in fact is a waste of time – you should try to get the media to talk about it less instead.

Surely there’s nothing actually wrong with reducing inequality though, even if it doesn’t achieve much?

It depends on how you do it. Taxes are not created equal. Taxes on capital will depress investment and, according to most economic models, growth. This isn’t a right-wing point – Joe Stiglitz and the late Tony Atkinson, who both thought that inequality was a problem, worried that capital taxes would actually make the welfare of people at the bottom worse by reducing growth. Since income tax is a tax on both earnings that people invest and that they consume, it is another form of capital taxation in its current form. We think the best solution would be to exempt savings and investment from taxation altogether, and tax people when they consume their wealth – which would allow us to tax the rich in greater proportion to the poor, but wouldn’t hurt growth.

So are you saying you don’t care about inequality at all? Isn’t that very heartless?

It’s not inequality that matters, it’s poverty and overall living standards. The real problem we’ve had since 2008 is that median earnings have barely risen since then at all, and the cost of living has risen for people across the board. In particular, housing costs eat a large chunk of most people’s incomes, and most homes in Britain are small and pokey compared to those in continental Europe and in the United States. It’s not for want of space – only 2% of England is built on – it’s because we have incredibly restrictive planning laws that restrict the supply of land to build on. House prices in the South East could be 30% lower if planning laws were less strict.

Changing things like that, and changing the tax system so we can get more economic growth, are the best ways to reduce poverty and improve people’s lives. I'm in favour of just giving poor people money, whether through tax credits or something more radical like a basic income or negative income tax, too. The point is to raise up people at the bottom, not cut down people at the top.

Labor flexibility beats unemployment: a closer look at the labor market in Denmark

Despite Bernie Sanders’ efforts to identify Denmark with some sort of democratic socialist utopia where a highly-interventionist government regulates all the nooks and crannies of the economy, it is well known nowadays that the success of this Scandinavian country is closely linked to its high degree of economic freedom. We just need to look at the latest Index of Economic Freedom, published every year by the Heritage Foundation, to state the obvious: Denmark ranks in the top 15 worldwide.

When looking more closely, Denmark excels at two specific economic indicators: business freedom and labor freedom. Business freedom measures the impact of government regulation on businesses. This indicator places Denmark at the top of the ranking, only behind Hong Kong. As for labor freedom, which examines the legal framework that regulates the labor market in a country, Denmark finds itself in the top 6. The strong correlation between labor freedom and low unemployment rates seems to explain why Denmark has one of the lowest unemployment rates in the EU. In the following lines, I aim to explore the specific characteristics that make the Danish labor market an example to follow in many ways.  

Wage Formation in the Danish Market

Wage formation in the Danish labor market is undertaken at two levels: sectoral and enterprise levels. At the sectoral level, unions representing both employers and employees negotiate wage increases as well as other benefits. However, it should be noted that, at the sectoral level, only minimum wages are agreed upon. Actual wages are negotiated at the company level and are, in most cases, higher than the sectorial minimum wages agreed on the collective bargaining. As stated by Eurofound,

Wages negotiated on enterprise level are usually higher than the minimum gross wage settled through collective bargaining. Even starting salaries are often higher than the minimum. Half of all newly employed in the private sector receive a starting salary that is considerably higher (18% or more) than the required minimum of the collective agreement […] actual wage increases are determined at company level and it is probably only few employees that are paid the minimum wage.

In fact, negotiations at the enterprise level have gained importance over the last decades as revealed by the percentage of employees covered by the standard-wage system as opposed to the minimum-wage system, which moved from 34% in 1989 to only 16% in 1994, remaining at that level ever since. Under the increasingly less relevant standard-wage system, salaries are negotiated at the sectoral level and individual companies are not allowed to modify the sectorial agreements. In contrast, the minimum-wage system described above, which is predominant nowadays, allows companies to use the sectorial agreement just as a reference to set their wages, the company being the epicenter of this wage-formation process.

What is the role of the Danish government in this process? None. The government does not interfere in the way wages are determined. This becomes obvious by the fact that there is no legislation that establishes a minimum wage on a national level.

Flexibility + Security = Flexicurity

The Danish labor market is based on the concept of “flexicurity”. This concept, firstly coined by the former Prime Minister of Denmark Poul Oluf Nyrup Rasmussen, refers to the two main characteristics of the Danish labor market: flexibility and security.

In terms of flexibility, firing costs are minimal. For instance, a white-collar worker that was unfairly dismissed today would receive a compensation of maximum four months of salary after working for 10 years in the company. This flexibility is reflected in the fact that 25% of private sector workers change jobs every year. Moreover, employers are incentivized to hire through very low social security contributions, which do not exceed 2% of the employee’s gross salary.

The second pillar of the system is security. Employment security is given priority over job security, meaning that the focus is placed on preventing employees from being away from the labor market for long periods of time rather than shielding them in their current positions. This is achieved by combining flexibility with considerable unemployment benefits (usually 90% of the last salary during a maximum of 4 years) and effective policies aimed at relocating the unemployed.  These benefits are, in turn, accompanied by sanctions in case the job seeker refuses to accept a job offer.

Labor Flexibility Beats Unemployment

A well-functioning and efficient labor market is, no doubt, one of the ingredients that account for Denmark’s economic prosperity. It is certainly responsible for the low unemployment rates that the country has enjoyed over the last decades. The Danish experience should open the eyes of those European governments that refuse to undertake reforms that liberalize their labor markets. The evidence is clear: labor flexibility results in lower unemployment. Will the Danish example be followed by those countries badly hit by the plague of unemployment? Spain partially liberalized its labor market four years ago, and the reform seems to be yielding positive results. Who will be the next?