The Ketchup-Bottle Principle

In case you don’t know, the ketchup-bottle problem is when you shake and shake the damned thing and nothing happens until – the bottle empties its entire contents over your dish. And other inconvenient places.

In a way, this was what happened over the weekend when everybody looked for a conflict over tax rates and indexation of benefits and then – whoops – the government and the Danish People’s Party agreed on major reforms of the unemployment insurance: The benefit period is halved and the rules for qualifying for the benefit tightened. Along with the special early retirement benefit (not to be confused with what was once the disability pension), this has been an issue in Danish labour marked policy for the past 4-5 years.

So, why did this happen? First, we should remember that neither the government nor DF are interested in an early election. Sure, DF is playing on the possibility of cooperating with a future SD-SF government but a bird in the hand is worth more than two in the bush.

Second, when SD and SF walked (or was thrown out) of the negotiations over the proposed cuts in indexation, the government and DF faced an interesting dilemma: They had to either break an earlier agreement with SD and SF, opening for a potentially explosive parliamentary situation, raise taxes or find some other object where savings could be made. In the end, unemployment insurance and child benefits fitted the bill.

In a way, this could be seen as a massive “f€%k you right back” from DF to the trade unions which have put their weight behind the Social Democrats – a major cut in the tax benefit for union fees are also included in the austerity plan. As the value of the unemployment insurance is lowered and union fees effectively raised, they will find it harder to attract members. At the same time, the plan also works by targeting groups which enjoy no general public sympathies – the unemployed and immigrants – while popular groups like early retirement benefit recipients and old-age pensioners do not suffer cuts. The later groups, incidentally, make up a large portion of DF’s electorate.

In a more general perspective, we are seeing a case of a solution (cutting unemployment insurance) looking for a decision opportunity (an austerity programme).

In a historical perspective, cuts in the unemployment insurance are unusual during economic crises. We have to go back to the 1920s to find good parallels. Some – both politicians and academics – will argue that shortening the benefit period and tightening access to the benefits will increase the supply of labour but the development also raises some questions about the future of unemployment insurance in Denmark.

Sure, the benefit period is not particularly short, but large groups on the labour market have insecure employment contracts and the system has become increasingly penalistic during the last decade (today, even policy makers openly admit that the aim of activation measures is not to improve the qualifications of the unemployed but to scare unemployed from claiming benefits) while the replacement rate has been effectively declining since the early 1980s. In a way, unemployment benefit today is worth as much (or as little) as it was in the 1950s.

We saw a first reaction against this earlier this year when trade unions managed to get employers to accept the introduction of severance pay as part of the latest rounds of collective bargaining. In effect this was a call for a higher degree of job protection. The unions desperately need something to motivate workers to join or stay, and as unemployment funds lose their value, other measures may step in. (What surprised me wasn’t the demand made by the unions but that employers accepted an – albeit limited – scheme of pay).

I would expect the Social Liberals to block any moves to extend the benefit period, so a future SD-SF government will face a limited number of choices in reforming unemployment insurance – easier access to benefits could be one approach, higher benefits (at least in the first part of an unemployment period) another. Finally, we could see calls for job security or an extension of severance pay for workers.