The secret to Denmark's success is a knack for niches, and a labor peace pact that larger economies will find hard to copy / Jan. 9, 2006
The secret to Denmark's success is a knack for niches, and a labor peace pact that larger economies will find hard to copy.
Jan. 9, 2006 issue - Bang & Olufsen assembles high-end speakers and televisions by hand in rural Denmark from parts sourced worldwide. The company can pull this off in one of Europe's cushiest welfare states because shop stewards like Grethe Krabbe and operations chief John Bennett-Therkildsen are often on the same side. The latter can demand up to 40 hours a week, for example, as long it averages out to 37 hours over the course of a year. For even greater flexibility in the pre-Christmas rush, "I want to go to 45 hours," says Bennett-Therkildsen over tea near the factory in Struer. "You already get 43 with overtime," counters Krabbe, grinning broadly from across the table. But with B&O moving 200 jobs to the Czech Republic to save 7 million euros per year, she admits she will most likely have to concede one day. "If it means survival of the company, then it must be done," says Krabbe.
In most of Europe, CEOs can only dream of this kind of cooperation, not to mention civility, in dealing with unions. Denmark has created the competitive advantage that the rest of Europe lacks—a flexible work force—without abandoning a very European commitment to social welfare. CEOs can hire and fire easily because dismissed workers collect generous benefits and are quickly guided into new jobs. Trade unions go along because, unlike most European counterparts, their aim is to boost employment in general rather than to defend each and every job.
The key to the system is that it reduces the burden of welfare on business, says Jorgen Sondergaard, director-general of the Danish National Institute of Social Research. Welfare is financed by income taxes, not the hefty company contributions required elsewhere in Europe, so managers do not see hiring new people as a huge financial risk. As a result, people gravitate to where they are most needed. Each year, some 30 percent of Denmark's workers change jobs, a rate outpaced only by the United States and Britain. And Danish unemployment now stands at 4.7 percent, or just half of the euro-zone average of 8.6 percent. "We don't think [consciously] about the Danish model because there is no alternative," says Niels Jacobsen, CEO of Oticon, one of the world's leading makers of hearing aids. "But it seems to work."
Others do think about it, a lot. The delicate Danish balance of flexibility and security in the labor market has captured the imagination of Europeans in more sluggish economies. Denmark is expected to grow 2.7 percent this year, compared with 1.2 percent in the euro zone. French TV crews have flocked to Copenhagen, and Danish scholars are in high demand at economic conferences in Brussels, Paris and Berlin. With Europe's giants—France and Germany—searching for a politically workable approach to economic reform, NEWSWEEK decided to take a closer look at some of Denmark's most competitive companies to understand exactly how the system works.
The success of the model rests on a realistic understanding of Denmark's place in the world. Particularly now, in the face of wage competition from Eastern Europe and China, Danes in labor and management essentially conspire to find clever ways to keep the high-end jobs at home. Jacobsen says he has no intention of producing in China because he wants his workers near his world-class R&D center, so he can keep his hearing aids a step ahead of rivals. (His latest Syncro model uses artificial intelligence to interpret sounds.) While elsewhere, union leaders are fighting a rearguard battle against globalization, Harald Borsting, confederal secretary of the Danish Confederation of Trade Unions, says he sees instead "a world of possibilities." What makes this conspiracy thrive is a strong foundation of trust, which may be difficult to replicate in larger nations with adversarial labor relations, like France, says Sondergaard.
In contrast even to small Nordic neighbors, Denmark (with a total population of 5.4 million) never spawned giant industries like steel, chemicals or cars, with the size to ride out recessions. Its small family companies required a fluid labor pool to survive tough times and, over the last century, a unique system of collective bargaining emerged to meet that need. Today, with 82 percent of workers unionized—compared with about 25 percent in Germany and just 10 percent in France—unions and employers can together map out such policies as minimum wage, working hours and benefits. "We have different interests, but we find solutions close to where the problems arise," says Lars Rebien Sorensen, CEO of pharmaceutical company Novo Nordisk, a leading maker of insulin.
A "peace clause" in the collective agreement means there is no such thing as a general strike of the kind that periodically shuts down France and Belgium. Nor are there the German-style "warning strikes," aimed at securing a better deal during negotiations. In the last decade, the details of work rules on sick days, break times and the like have been increasingly hammered out at firm and factory level between shop stewards and managers, many of whom seem more resigned to living with the Danish system than enthusiastic.
The price that business pays for the power to hire and fire with relative ease is high wages, which are 73 percent above the average hourly manufacturing wages in the 30 developed nations in the Organization for Economic Cooperation and Development, of which the state takes up to 63 percent in income taxes to pay for health care, unemployment benefits and almost all pension payments. To outsiders besotted by the Danish model, Jorn Neergaard Larsen, head of the Confederation of Danish Employers, warns: "It's work, every year, every day, to keep it in balance."
The balancing act is going to get tougher. Many firms have had to close factories because their products cannot compete at Danish wages, and the pension squeeze created by the aging populations of Europe is acute in Denmark, where working lives are particularly short. The average Dane works from age 33 to 61, due to the long years many Danes spend in school, as well as a lingering early-retirement option left over from the 1970s, when Denmark was battling unemployment. This raises the cost and shrinks the flow of funds into pension funds. "The system will give us a lot of trouble in the coming years," warns Larsen.
The result is that Denmark has been rethinking the costs of its system, albeit without the mass protests that have erupted in recent years following reform efforts in Germany and France. In the 1990s, Denmark added more stick to the labor-market carrot, raising penalties for the unemployed who turned down a job offer, for example. Now attention is turning to welfare, with recent recommendations from a special commission to be followed in March by a report from a high-level Globalization Council. They are looking at ways to keep older workers in the market and to help a growing immigrant minority (now 6.3 percent of the population) join the work force. Dan Boyter, COO of Pressalit, maker of high-end bathroom fixtures, heads a national network of companies that are working on strategies to integrate refugees into local communities. "If we don't do something as companies, we're going to have the same kinds of problems as in France at the moment," says Boyter.
Ironically, recent European Union directives designed to create a more competitive continental work force have either made no difference to Denmark or "reduced our flexibility," complains Larsen of the employers confederation. The Danish system of collective bargaining actually sets most work-related rules, backed by general unemployment laws that defer to the negotiated agreements. EU directives on such subjects as conditions for part-time workers require detailed new laws (and hefty lawyers' fees), creating what the Danes see as a lot of unnecessary paperwork and waste.
The Danish strategy for coping with China is typified in some ways by Novo. Revenues are growing at the rate of 15 percent a year, mostly outside Europe, and Sorensen sees expanding production in China and Brazil as a way to create new knowledge-based jobs in Denmark. Novo is in the middle of closing a small plant in Hillerod, north of Copenhagen, which makes the Novo Pen 3, a cartridge diabetics use to inject themselves with insulin. Before the machines were boxed up to ship to Tianjin, Chinese workers came to Denmark to be trained by the people whose jobs they are replacing.
Half of the displaced Danes will assemble the new-generation Novo Pen 4, which will remain in Denmark for three to four years until production is perfected, when it will move to China while the Danes turn to the next new thing. The other half of the Hillerod work force went into Novo's in-house job-training center, where they are being matched up with new jobs in the company. "Education, education, education—it's the only way to save jobs," says senior shop steward Niels Erik Olsen. Danish adults spend an average of 4.3 percent of their working hours in on-the-job training, the highest in the OECD.
Danish works councils do not have the power to reject plans to shut a factory or move work abroad, but their influence is such that companies are keen to keep them happy. If older manufacturing lines go to China, "we get to have more exciting jobs, ramping up pilot programs or learning new processes and new machines," says Lise Schactschabel, senior shop steward for Coloplast, maker of disposable medical supplies. Coloplast is designing an in-house certificate of the skills a worker has learned on the job, so they have credentials to show if they have to—or choose to—leave the company. Though collective bargaining allows companies to terminate a union worker typically with three weeks notice—and, in construction, with as little as three days—companies exercise this right with caution. "We don't have to keep the deadwood if someone doesn't fit in," says Oticon human-resources director Mads Kamp. "But it's like an honor system. If you treat people badly, others won't come."
The conspiracy of cooperation can leave outsiders in dismay. When Coloplast CEO Sten Scheibye decided in 2000 to move some production to Hungary, the $1 billion company was still growing 10 percent per year. But he could see the coming squeeze on health-care costs. He gathered 50 or so labor leaders in a quiet two-day meeting to decide how to present the scary decision that 800 jobs would go east, where wage costs were 80 percent lower.
The union bosses didn't howl. "When the wind is blowing, you can put up shields or windmills," says shop steward Schachtschabel, who secured a pledge that every displaced Dane would get at least one alternate job offer within the company. For two months, the shop stewards secretly drew up a plan to prep workers for the news. When a reporter called Schachtschabel shortly after the announcement, she was ready to explain that no Danes would be fired. So were the workers accosted at the factory gates. "He said, 'Oh, damn, there's no story here'," she laughs.
Of course, the big story here is the quiet evolution of the Danish model, often behind the scenes. Twenty years ago, says Novo's Olsen, he would have said the Danish model is not a good system from the worker's perspective because it wasn't so obvious back then that globalization would force uncompetitive companies to close down. Unions were still focused on long-term job security. Now, he has changed his mind because the model makes companies willing to take risks with short-term contracts, which can help them grow and create real jobs. "There are periods when people are unemployed, but the Danish system does not create poverty," says Olsen. The poverty rate in Denmark is among the lowest in the EU.
Danes are well aware how fast their star could fall. Soren Kaj Andersen, associate professor at the Employment Relations Research Center at the University of Copenhagen, notes that Europeans looked to Germany's postwar miracle, to the Dutch boom of the 1990s and to the much-hyped Swedish model. "We did not produce this model based on a master plan, and it might derail quite easily," warns Andersen. "Maybe in five years we'll all be talking about a Hungarian or Slovenian model."
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