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Background information: Flexicurity - Flexibility through Security

 

Why “Flexicurity”?

Globalisation, accelerated technological progress and demographic change raise major challenges for European economies, for example:

  • Faster growth of global trade flows and, as a result, further integration of the world economy;
  • Enormous expansion of the global workforce;
  • Increasing shifts in the traditional division of labour between the previously well-established industrialised countries (USA, EU, Japan) and the emerging economies, in particular China and India, with regard to the technology and knowledge content of the products traded;
  • Growing importance of human capital and qualifications in the development towards “knowledge societies”.

These new circumstances also result in changes of labour relations. Enterprises face a continuous pressure to open up new sales markets. There is a rising need to adapt production technologies and organisational structures. For employees, too, this means that demands are increasing with regard to their adaptability and their readiness to adapt to changes. Lifelong learning and mobility more and more become a basic requirement of professional success. At the same time, we can also observe an increasing pressure on wages and jobs of low-qualified persons in the context of ongoing specialisation processes.

In parallel to these developments, the awareness of a common “European social model” has grown in Europe. Its key characteristics are:

  • A basic commitment to social cohesion and solidarity and to combating social poverty and discrimination;
  • General access to health-care and education systems;
  • A broad coverage of social protection systems;
  • A significant role of the public sector in the provision of the required infrastructure.

The need for social security basically has strong roots in European society and, therefore, is a certain constant factor when reforms are developed.

The reflections on “flexicurity” address the question of how both European competitiveness and the European social model can be maintained. On principle, 1

these two objectives are not irreconcilable, but rather interdependent. The elements of the social model are a decisive productive factor for maintaining competitiveness. In its turn, competitiveness is an essential basis of the sustainable funding and continuous development of our social model.

This relation is reflected by the re-focused Lisbon Strategy for growth and jobs. On the one hand, it is only a dynamic, innovation-oriented and enterprise-friendly economy that, in an environment of international competition, can provide the resources needed for maintaining welfare state structures. On the other hand, these structures themselves are a fundamental basis for reaching the Lisbon goals. In the face of ageing populations, for example, European economies have to continuously raise their employment rates — especially in groups less represented in the labour market to date (women, young people). This requires wide access to education systems and the systematic implementation of the equal opportunity principle as well as the fight against discrimination.

The flexicurity concept addresses the resulting challenge for the European employment systems: combining flexibility as the basis of adaptability and competitiveness with a high level of social security.

Flexicurity: The concept

The flexicurity approach can be described as a comprehensive political strategy of co-ordinated measures to promote, on the one hand, flexibility in the labour market as well as the modernisation of work organisation and labour relations and, on the other hand, job security and social protection taking account of vulnerable and disadvantaged groups in the labour market.

Thus, flexicurity is an overarching paradigm for reforming the different national employment and social systems in Europe. A core principle is its integral view of various policy areas. These include, for example: legal framework of employment (e.g. protection from dismissal, working time legislation and new forms of employment); degree of differentiation and permeability between various types of work (e.g. employment vs. self-employment); wage-bargaining systems; measures of active labour market policy; unemployment benefits; social protection in the case of illness, accidents at work, old age, etc. Here, attention has to be given both to substitutive interactions (e.g. protection from dismissal — higher transfers) and to complementary interactions (e.g. transfers — mandatory activation) of individual instruments with a view to the dual objective of flexibility and security.

Flexicurity is anchored in the Integrated Guidelines for Growth and Jobs in two ways: First, Guideline No 21 (“Promote flexibility combined with employment security and reduce labour market segmentation having due regard to the role of the social partners”) links the above-mentioned core elements with measures in the fields of undeclared work, anticipation of economic change, work organisation and transitions in occupational status, etc. Second, flexicurity-oriented measures address, in general, the three key challenges of the Lisbon Strategy in the field of employment, i.e. increasing the adaptability of workers, encouraging more people to enter the labour market and investing more in human capital and lifelong learning.

The responsibility for policies implementing flexicurity-oriented reforms primarily lies with the Member States. Hence, the design of these reforms essentially depends on the institutional framework of the relevant national employment system. The European level also has a role to play in this process as the open method of co-ordination is used so that the Member States can learn from each other. However, there are already harmonised regulations in individual areas. Examples for core areas of flexicurity-oriented strategies are discussed below.

Elements of flexicurity-oriented strategies in Europe

As described above, flexicurity-oriented strategies try to find the ways and means of creating a balance between flexibility and social security in Europe. On principle, the elements of social security should be provided by the public sector.

Measures of active labour market policy and promotion of human capital

Central components of a policy fostering flexibility are measures of labour market policy and the promotion of human capital. This provides the basis for high employment and a rapid transition between various types of occupations, while also enhancing productivity.

The Danish approach that is frequently used as a “reference model”, for example, basically rests on the three pillars of low protection from dismissal, wide access to relatively generous unemployment benefits and active labour market policy. A strong focus is also put on activation and re-integration. In terms of GDP, Denmark is the Member State spending most on active labour market policy all over the EU. The unemployed are obliged to regularly contact the public employment service and to prepare personal “action plans”; in this respect, the measures also include strong incentives. The results show that the Danish labour market is characterised by a very high dynamism: around one third of the workforce changes jobs every year and, at slightly less than eight years, the average duration of employment with one company is short by international comparisons. In 2004, Denmark recorded an employment rate of 75.7% and, hence, ranked first in the EU.

Promoting an easy transition between employed and self-employed work

In this period of rapid structural change, self-employment and entrepreneurship becomes more and more important. A key element of a flexicurity-based policy, therefore, is to promote an easy transition between employed and self-employed work. Thus, flexicurity requires an integral approach to labour market and enterprise policy measures; it forms the framework for creating adequate incentives promoting entrepreneurship.

Sweden, for example, implemented an unemployment insurance scheme for the self-employed whose basic characteristics correspond to the scheme for employees. Thereby, the risk involved in a change from employed to self-employed occupation is reduced, start-ups are encouraged and, as a result, job creation is promoted.

Flexible types of employment

Flexible types of employment, in particular part-time work and fixed-term employment, contribute to more flexible labour markets. However, they also harbour the risk of a permanent segmentation of labour markets with negative consequences for the groups concerned (e.g. women or young people). Here, political solutions require careful considerations in order to strike a good balance.

In the Netherlands, for example, the Flexibility and Security Act issued in 1999 essentially facilitated the conclusion of fixed-term contracts. At the same time, however, minimum standards were introduced to raise the security of employees under these “new” types of contracts. The related provisions include equal access to training measures and equal treatment under employment-dependent insurance schemes. The conclusion of successive fixed-term contracts is considered to constitute an abuse. At the EU level, too, there are regulations on the equal treatment of employees and the control of abuse with regard to temporary work contracts.

Establishment and maintenance of adequate social protection mechanism

In the flexicurity approach, creating and maintaining adequate social protection mechanisms is an indispensible prerequisite of flexibility and competitiveness. This relates not only to measures ranging from support for unemployed people to assisting them in finding jobs. Rather, it is a central aspect to offer active support and to provide institutions and programmes ensuring that changes in the occupational status (and “transition phases”, such as education and parental leave) do not result in disadvantages.

At the European level, an example is the Commission’s current proposal for a directive on improving the portability of supplementary pension rights that is based on the “rucksack” principle. Its objective is to reduce the obstacles created by company pension schemes for the freedom of movement and occupational mobility within the same Member State. When changing jobs within or between Member States, outgoing workers should have the choice between maintaining their rights in the form of dormant pension rights within the previous supplementary scheme and the transfer of their acquired rights to the new scheme.

At the level of the Member States, an example is the introduction of modern, market-based labour legislation in the former communist new Member States. In this context, important elements of market-based conditions were the establishment of unemployment benefits and statutory pension schemes; after all, these measures made it possible for employees to leave big state-owned enterprises that previously made available the majority of social benefit schemes.

Another example is the new Austrian scheme of severance pay/employer-based retirement income provision (introduced in 2002): it significantly raised the flexibility of employment conditions while maintaining security. Before the reform, employees were entitled to receive severance pay based on long-term or lifelong employment with one company. The reform shifted the obligation to make severance payments to independent staff provision funds to which employers contribute on a monthly basis. As a result, the entitlement to severance pay is now independent of any employer changes. At the same time, employers became able to evenly spread their severance pay contributions over time, thereby increasing financial predictability.

In this context, an interesting example also is the Austrian Betriebspensionsgesetz (Company Pension Act) containing provisions of labour law on occupational retirement provision. The Act essentially relates to four types of provision guarantees:

  • pension company commitments of domestic or foreign pension companies;
  • occupational group insurance;
  • direct guarantees;
  • life insurance.

Within the framework of pension company commitments, occupational group insurance and life insurance, the employer has to make contributions for the benefit of the employees to a pension company or an insurance company that invests these contributions and, on occurrence of the benefit event, pays out a pension.

In the case of direct guarantees, the pension is directly paid by the employer.

Under the main types of guarantees — i.e. pension company commitments and occupational group insurance — the employee may take along rights acquired like a “rucksack” when changing jobs, i.e. if the new employer gave the employees a corresponding guarantee, the rights can be transferred to the scheme applied by the new employer. If the new employer did not give the employees such a guarantee, the rights can be preserved in the pension company or insurance company of the former job.

Objectives of the discussion and questions addressed to the ministers

On the basis of the illustrative presentation in this paper, the first objective of the discussion is to initiate an exchange of information among the ministers on flexicurity-oriented measures already taken or planned at the Member State level. The purpose is to get an overview of the current state of activities in Europe. This discussion is to be resumed and continued, for example, by the conference on “Innovation in International Labour Market Policy — New Solutions in a Changing Labour Market” (to be held in Vienna on 16 and 17 February 2006).

The second objective is to identify areas and topics that, from the ministers’ perspective, should be addressed at the European level in the medium term; this discussion is to be continued in greater detail by the Employment Committee and the subsequent meetings of the Employment Council. This exploratory debate is also intended to contribute to the Commission’s forthcoming green paper on the development of labour law.

  • Which experiences have been made in national reforms aimed at improving the balance between flexibility and security and which packages of measures exist for the medium term?
  • Which experiences have been gained with regard to the interaction between different departments and policy areas? Which role can be played by social partners?
  • Which elements of the flexicurity strategy should be dealt with at the European level in the medium term, for example within the framework of the Lisbon Strategy?
Date: 17.02.2006