Denmark: the long-lasting class compromise

3.1 Early days: the founding of a system

Industrial relations of a modern type emerged in Denmark as a result of industrialisation, but importantly also spurred by an Act which in 1857 introduced free enterprise and abolished the guild-based production system which had existed since the Middle Ages. (Engelstoft and Jensen, 1930; Galenson, 1969).

In spite of various divisions, for instance, between skilled and unskilled workers, the majority of the existing union associations in 1898 joined forces in DsF, De samvirkende Fagforbund (since 1959 LO, Landsorganisationen i Danmark). The DsF was a part of the Social Democratic movement; the political party had representation on DsF’s executive committee, just as the DsF was represented in the party leadership. These formal ties existed until 1996.

Also in 1898 the employer side formed a joint confederation, namely, Dansk Mester- og Arbejdsgiverforening (now DA, Dansk Arbejdsgiverforening). It occurred as a response to an increasingly successful industrial struggle where workers and their unions, often successfully, fought for higher wages, shorter working time and against degrading conditions.

In 1899, the newly formed employer confederation decided to fight back. A relative small strike among joiners was answered by a massive lockout of more than 40,000 workers. The conflict lasted over three months and ended in what has later been called a historical compromise, the September Agreement of 1899: the union side had to recognise the right to manage as the prerogative of employers, while the employers for their part acknowledged the national unions as bargaining partners. A further aspect of the agreement was that authority was strongly centralised as the two confederations “assumed responsibility for the effectuation of agreements concluded directly between them, both on their own account and by affiliates” (Galenson, 1969, p. 100).

The September Agreement of 1899 has been renewed several times and is now called the Main Agreement (Hovedaftalen). Seen in a historical perspective its importance lies first and foremost in the fact that the two parties at an early stage recognised each other and showed a readiness to regulate labour relations without state intervention.

In 1908, at the initiative of the government, a joint commission with representatives from the two sides of industry reached agreement on norms for the solution of industrial strife, including a comprehensive peace obligation. An essential distinction was drawn between conflicts of interest and conflicts of rights. The use of industrial action was to be restricted to conflicts of interest, i.e. basically conflicts associated with the renewal of collective agreements or in areas not covered by such agreements. The proposals from the joint committee in 1910 resulted in two pieces of legislation of utmost importance to Danish Industrial relations, namely, the Labour Court Act and the Mediation Act. Both are instruments aimed at helping the parties themselves to solve problems in their internal relationship. The Mediation Act introduced a set of rules whereby “neutral” mediators can help the parties find a compromise in collective bargaining rounds, and the Labour Court put the solution of “conflicts of rights” in the hands of judges appointed by the peak organisations themselves (Galenson, 1969). These regulations, taken together with the September Agreement, can be said to form the constitution of labour relations in Denmark.

3.2 Later developments: welfare state and spread of the system

Already in 1907 parliament legislated on publicly recognised unemployment funds. This laid the foundation for a system in which unemployment funds are organised by the unions, but supported by the state. Without doubt this structure contributes significantly to the high affiliation rate enjoyed by Danish unions, historically as well as at present.

In the 1930s, when the government was dominated by the Social Democratic Party, the first basic elements of a welfare state appeared. Besides improvements in unemployment, insurance legislation was introduced to secure old age pension, disability pension, sickness insurance and two weeks’ yearly holiday paid by the employer (Galenson, 1969). However, it was not until the late 1960s that what has been termed “generous” welfare provisions were introduced. Again it was governments led by the Social Democratic Party that orchestrated the reforms. Now the goal was to secure material conditions for the unemployed, the sick and the disabled at a level that was not significantly lower than what was enjoyed by people in employment. On the background of a period of virtually full employment in society the predominant view was that unemployment was not the fault of the individual and therefore should not be punished financially. Accordingly, the level of unemployment benefits and other welfare benefits was lifted to a level only slightly below the average pay for unskilled work.

When full employment gave way to mass unemployment in the 1970s the immediate answer was not to roll back the generous welfare provisions. Instead, an early retirement scheme, granting workers between 60 and 67 years the right to receive an income corresponding to unemployment benefits, was added to the existing security net. In the mid-1990s at a time when unemployment had again risen to dramatic levels, the government for a few years introduced further schemes to try to combat unemployment, namely, schemes for training leave, parental leave and sabbatical leave. Persons belonging to an unemployment fund could for up to one year receive unemployment benefits as leave-takers from a job or from the status as a registered unemployed. When the employment situation improved, these leave schemes were abolished, and, as will be shown in Section 4, a radically different paradigm for (un)employment policies soon took over.

Another important feature of the development of the Danish industrial relations system has been the system’s diffusion to almost all sectors of Danish society. Since the 1960s the LO, traditionally organising unions of skilled and unskilled manual workers and office workers having gone through apprenticeship training, has had to share the role as peak organisations with two other organisations, the FTF which is the umbrella organisation for salaried employees (for instance, primary school teachers, nurses and police staff), and the AC which is the confederation of professionals (for instance engineers, medical doctors and researchers). In 1973, a reform of the Labour Court Act extended the jurisdiction of the court to all sections of the labour market and all groups of wage earners. At the same time, other peak organisations than the DA and the LO, among others public sector employers and the FTF and the AC, became entitled to appoint judges to the court (Kristiansen, 2014).

The growth of occupations as well as unions organised by the FTF and the AC was accompanied by the spread of collective bargaining to the public sector, at state as well as local government level. Not just the unions but also governments were interested in introducing this form of regulation, the latter mainly as part of a move away from the very strongly protected employment conditions enjoyed by many public employees at that time (Kristiansen, 2014). Since the 1970s the public sector with almost 100 per cent has had a higher rate of collective bargaining coverage than the private sector where the rate is probably only around 60 per cent (LO, 2011a).

Although the 1970s saw a wave of union organisation in parts of the private service sector, such as hotel and restaurants and IT, significant shares of this sector remain weak regarding union organisation and are not covered by collective agreements. Further, employer organisations have successfully resisted entering into national collective bargaining with certain categories of employees, for instance, engineers.

In spite of the mentioned shortcomings in the extension of the Danish industrial relations system, it remains among the most encompassing systems both concerning affiliation rates and collective bargaining coverage and displays a high degree of path dependency and stability.

3.3 Outcomes

“They may not be working long hours, but they are getting the job done”, Helen Russell (2016, p. 54) remarked when drawing a picture of working life and labour relations in Denmark. On the basis of OECD statistics and other sources she pointed out that Danish employees are relatively satisfied with their work, work fewer hours than workers in almost any other country and at the same time are among the most productive.

Since 1990, the collectively bargained weekly working time has been 37 hours (as compared with 60 hours in 1900, 48 hours in 1920, 45 hours in 1960 and 40 hours in 1975). Annual holidays were, in the wake of a successful strike in connection with the 1998 bargaining round, increased to six weeks per year. Real wages have, with only a few interruptions, been growing steadily for more than a century. The last interruption was in the years after the 2008 crisis, until in 2013 real wages started growing again. Since the early 1990s pension schemes have been part of the collective agreement for all categories of workers. Further, most collective agreements contain rights to paid maternity leave and paid in-job training.

Not directly an effect of the industrial relations system, but linked to it as part of the results won by the labour movement as a whole, the welfare state provide workers – and people who are unable to work – with a safety net, guaranteeing them a basic income. However, as will be shown in the next section this safety net has been weakened during the last decades.

Regarding the outcomes of the system for employers it is more difficult to distinguish the effects of the IR system from other elements in the national environment. Yet, it seems obvious that the IR system has played a key role in providing Danish employers with a labour force that is well-qualified, cooperative, innovative and flexible. Further, the employers are receiving support from a public sector that provides a basic level of income security, free education, and training and various labour market schemes geared to increase the supply and quality of labour. Weighing against these advantages are the relatively high wages. Danish employers often complain about high labour costs. Yet, the Danish economy has remained competitive and able to adapt to a globalised environment, and on the whole employers seem willing to pay the relatively high wages as a necessary price for getting access to the advantages accruing from “the Danish model”.

4.1 Decentralisation of collective bargaining

A solidaristic principle in collective bargaining is achieved by a centralised bargaining structure where the same rules and standards apply to everybody. A centralised bargaining structure most effectively reduces competition among the sellers and buyers of labour. Workers shall not compete on wages and working conditions and employers must compete in other areas, for instance investment in new machinery and the skills and qualifications of the workforce. At a more decentralised and individualised bargaining system the price of labour is more dependent on the market and the changing conditions of the business cycle.

The decentralisation of Danish collective bargaining started in the early 1980s when single unions and bargaining cartels became bargainers instead of the main confederation, the LO. A similar change took place on the employer side where the member organisations of the employers’ main organisation, the DA, became bargaining agents. The agreements in the private sector have ever since been bargained in four to five industries covering a number of agreements each. The bargaining system in the public sector is divided into three areas: state, regions and municipalities, with cartels composed of several unions representing the employee side.

Apart from a few company-level agreements notably in companies that were not members of employer associations, this bargaining structure was still based on national coverage and only moved the bargaining from the level of the peak organisations to sector-level national bargaining. A more radical change in the direction of decentralisation took off during the early 1990s when the wage system was changed into pay increasingly being bargained at the individual workplace. This flexible system now covers more than 80 per cent of the agreements and for the great majority of workers means that the wage levels bargained at national level are only minimum standards, which are supplemented by increases bargained at local level.

In the public sector, decentralisation of wage setting was introduced in the late 1980s with the so-called “local wage” system and especially with the introduction of a more individualised system, “New wage”, in 1998.

There is no doubt that the decentralisation of wage setting has been a significant tendency during the past 20-25 years, but it is also evident that this decentralisation has not been implemented in a way where wages are completely individualised and only decided at the workplace level. This is due to opposition both among unions and from employers’ organisations who are interested in being able to control the general level of wages in order to be competitive in the globalised economy. The present system has been termed “centralised decentralisation” (Due and Madsen, 2006) or “coherent fragmentation” (Lind, 2004) to describe that it would be an exaggeration to label collective bargaining in Denmark simply as decentralised. Especially in an international comparison such a phrasing would be imprecise.

Decentralisation of wage settings has presumably to some extent resulted in a more differentiated wage structure. The overall pattern among the various industries does, however, not show any tendencies to marked and growing differences in wage increases during the past decade. Except the deviations of finance and insurance during 2009-2011 they all follow the same pattern of adjusting to the business cycle (cf. Figure 1).

The effects of the decentralisation may be more visible in measuring the distribution of income. The Gini coefficient has been increasing from 22 in 1992 to 29 in 2015 (LO, 2016) and the growing inequality is also visible if we look at the development among the various deciles of income. From 1987 to 2015 the lowest (1.) decile has had a much lower increase than especially the highest incomes (10. deciles) (cf. Figure 2).

Overall, decentralisation has resulted in a change of power in favour of the employer side, in particular since local wage bargaining is not subject to industrial action (Kristiansen, 2014). However, the bipartite character of the bargaining model is still intact. Unions continue to play an important role, in national as well as local bargaining, and have in most cases upheld the principle that outright cuts in pay are unacceptable.

4.2 Decreasing membership of trade unions

A key feature of Danish industrial relations is the high trade union density. In the literature, the high union membership rate in Denmark has often been linked to, if not explained by, the important role of the bargaining system (see, for instance, Due et al., 1993). Undoubtedly the bargaining system plays a role, but there is strong evidence to suggest that an even more important factor is the close connection between trade unions and unemployment benefit funds. In this system unemployment insurance is administered by the unions, which means that unions and unemployment funds historically have been seen by workers as one and the same thing (Lind, 2009). The unemployment funds are in charge of key elements of social security, notably unemployment benefits and the early retirement scheme (in force since the late 1970s). Relatively few countries have systems that are comparable to the Danish system, Finland and Sweden (at least until recently) being the most important ones and, indeed, with union affiliation rates similar to the Danish ones.

Unlike in many other western countries where union density fell from the 1980s and more or less has done so ever since, the union affiliation rate actually increased in Denmark (and Finland and Sweden) until the late 1990s. Since then, especially the unions associated in the LO have experienced a significant loss of members (cf. Table I). The LO unions’ membership peaked in 1996.

The LO has lost terrain relatively as well as absolutely. Among the two other traditional confederations, the FTF (salaried employees) has experienced stagnation whereas the AC (employees with a higher education) has increased its membership figures, and also now has a stronger relative position. What is the most conspicuous change, however, is the relatively strong growth of unions that stand outside the three confederations. Most of the unions in this category are so-called yellow unions (although the Union of Engineers was also included from 2009 to 2014, in Table II in 2010 and 2012). Thus, unions that form part of the institutions constituting “the Danish model” have been markedly weakened, although total union density remains high in Denmark.

The LO is still by far the most important main organisation, but it has lost more than 400,000 members since the mid-1990s, and the day when the LO will represent less than 50 per cent of organised labour in Denmark is getting close. The LO’s membership loss is to an important extent, but certainly not entirely, due to changing occupational structures. Fewer people are employed in the industries and trades that typically are basis for LO member unions. Changing occupational structures are also the main explanation for the growth among AC unions.

However, notably within the LO area members have also been lost to the “yellow unions”. Among these organisations the Christian Trade Union (Kristelig Fagforening) has existed for many decades, whereas others are relatively new on the scene, among them a number of organisations organised under an umbrella termed the Professional House (Det Faglige Hus). Since 2000, these unions have got more than 200,000 new members – or customers as they call it. Some of the new members choose these unions for ideological reasons (political, religious), but the main reason is financial, since membership fees are relatively low in these organisations. The “yellow” unions are able to provide certain services, mainly legal assistance, to their individual members. However, they are clearly less powerful than the traditional unions and have only on rare occasions managed to be parties to a collective agreement at workplace level. Neither the traditional trade unions grouped in the LO, FTF and AC nor the employer organisations recognise the alternative unions as part of “the Danish model”. Still, they constitute a growing share of Danish union members. They can be seen as the system’s “free riders”, as they often enjoy the same pay and working conditions as those of their colleagues who are members of the “real” unions, those that fight for and sign the collective agreements.

A part of the explanation of the decreasing affiliation to the traditional unions, and to falling union membership more generally, must be found in developments in the unemployment insurance system. Membership of unemployment funds remained relatively stable at around 2.2 million members till the end of the 1990s, but from 2000 to 2008 unemployment funds lost 120,000 members. After the beginning of the crisis in 2008, the decline was more moderate until 2013 when it accelerated again due to a severe tightening of eligibility (see below). We will now turn to this issue: the political regulation of unemployment and its importance for industrial relations.

4.3 Unemployment insurance and employment policies on the decline

As mentioned earlier the special construction of the unemployment insurance in Denmark (and Sweden and Finland), the Ghent system, is of great importance to trade union membership rates. If membership of unemployment funds is made less attractive – as has been the case since around 1980 – fewer people will join the insurance and most likely also the unions.

Unemployment insurance has always been very important to workers and unions and in a broader perspective for the functioning of the labour market. The level of social compensation in case of unemployment is not only important to the standard of living for the individual unemployed but also to the competition in the labour market and the level of wages: with no legal minimum pay in Denmark the level of unemployment benefits will tend to be the lowest level of pay an unemployed person will accept when offered a job.

At major reforms of employment policies during the 1960s and 1970s unemployment insurance was changed in two important aspects. First, unemployment benefits were raised to 90 per cent of former wages (with a general maximum at 90 per cent of average pay) which meant that low paid workers were compensated by 90 per cent of former wages while higher paid workers had a lower compensation rate. The average compensation rate was, however, around 80 per cent during the 1970s. Second, the state financed extra expenses in periods with high unemployment rates (via general taxation). Membership dues only financed about 10 per cent of the expenses.

During the 1970s, this insurance system was expanding and came to include more and more groups in the labour market and the access to unemployment benefits was widened by longer periods of entitlement and weaker demands and controls on the unemployed. This changed in 1979 when the first limitations in the access to unemployment benefits were introduced. Ever since, the unemployment insurance has been made less attractive by numerous cuts and measures aimed at controlling the unemployed (their availability for vacant jobs). The period for claiming benefits was, in principle, without limitations in the early 1980s, but has since then been reduced several times, in the latest instance from four years down to two years taking effect from 2013. From January 2013 to July 2015, 60,000 persons lost their unemployment benefits because of these restrictions in eligibility (AK-Samvirke, 2015). Furthermore, since 1982, unemployment benefits have failed to be regulated in a way that can match wage increases and inflation with the result that the average compensation rate has dropped from around 80 per cent in the 1970s to approximately 50 per cent in the 2010s (LO, 2006, Det økonomiske Råd, 2014). Figure 3 shows the decline of the compensation rate for skilled male workers and unskilled female workers.

Structurally, the traditionally close ties between unions and unemployment funds were weakened by changes introduced shortly after a right-wing government took power in 2001. The conditions that linked unemployment funds to specific trades, occupations or segments of the labour market were liberalised so that “cross-occupational” funds were allowed. This made it possible for the yellow unions (all of which are open to workers from all sectors and occupations) to set up unemployment funds and thus make the package they can offer to members more attractive.

Employment policies in Denmark – in recent years called flexicurity as mentioned above – were developed in the 1950s and 1960s and called “active labour market policy” on the basis of ideas mainly from Sweden (the Rehn-Meidner model, see Hedborg and Meidner, 1984). It was designed to support general economic policies to strengthen economic growth, combat unemployment and inflation and secure an acceptable level of social justice (redistributive policies). In the theory, qualificational and geographical imbalances between various segments in the labour market should be reduced by training unemployed people in one segment to qualify them for another segment where demand exceeded supply of labour (and therefore might cause inflation). Or, in case of unemployment in one geographical area workers would be financially supported to move or commute to an area with excess demand.

Since a labour market reform taking place in 1993, activation of the unemployed has been a main pivot for “active labour market policies”, thus shifting the focus from the demand to the supply side. The rationale of activation measures have increasingly become to discipline the unemployed, so that they are prepared to accept whatever vacant job there might be (Møller et al., 2008). In general, the tendencies in unemployment policy during the last 10-15 years have been to reduce the access to unemployment benefits, increase activation (job offers, subsidised jobs and short training periods) and reduce temporary or permanent withdrawal from the labour market (by abolishing the leave schemes introduced in 1990s, abolishing an early retirement scheme for people between 50-60 years, and making the early retirement scheme for people aged 60 or more much less attractive). These changes have been introduced with explicit reference to “structural” problems and “bottlenecks” in the labour market and the fear of not having the sufficient amount of labour to secure the welfare state in future. Welfare cuts have been legitimised by the necessity to save the welfare state!

With the cutbacks in unemployment insurance and the deployment of activation policies as a disciplining – and not qualificational – measure for the workers, employment policies have changed profoundly since the 1970s. The main intention is no longer to compensate workers who have lost their job, but to strengthen the incentives for them to seek a new job, thereby increasing competition in the labour market with the aim of keeping down wage levels. Until the early 1980s, the general interpretation and political understanding of unemployment were that unemployment was due to the malfunction of society. Since then the conviction has spread that unemployment is caused by the individuals themselves. Accordingly, social security provisions shall not compensate for malfunctions of the system, but must be sufficiently low to ensure that the incentives of the individual to take a job are strengthened. Labour market flexibility is hence no longer achieved through social security based upon relatively high unemployment benefits and opportunities for training and education for the next job, but rather flexibility is based upon fear of unemployment and poverty.

4.4 Globalisation, the EU and social dumping

Globalisation, understood as the worldwide liberalisation of trade, investments and capital movements, has not been a big issue in Danish industrial relations. Although many jobs have moved from Denmark to Asian and Eastern European countries, this has not been challenged by the Danish unions. This is due to their “pro-capitalist” strategy based on the belief that the road to affluent workers goes through prospering companies. Many companies have outsourced production operations to countries with lower labour costs, but have kept and often expanded research, development and the more sophisticated part of production tasks in Denmark. As a result of the latter as well as growth in the service sector, employment has not been hit drastically, with the important exception, however, of the years just after the 2008 crisis when about 200,000, or 10 per cent, of the jobs in the private sector disappeared.

It is mainly indirectly, through the Danish membership of the European Union, that questions relating to globalisation and its effects for labour have entered the country’s IR agenda. In particular, social dumping has become an issue.

In the Danish debate initiatives taken by the European Union have often been defined as threats to “the Danish model” because increased legislation on the basis of EU directives have been feared to undermine the bargaining system (Due et al., 2000, Knudsen and Lind, 2012b).

In reality, however, most directives have only marginally influenced Danish industrial relations. Yet, certain serious challenges have come from European court rulings interpreting the European provisions. The decision in 2006 on the freedom to organise or not was the decisive farewell to closed shops in Denmark (Applications Nos 52562/99 and 52620/99, European Court of Human Rights). Conservative-liberalist governments had tried to get rid of closed shops but had not succeeded. Many trade unionists saw the ruling of the Court as a heavy blow to the power basis of the unions although only an estimated 200,000 workers were covered by closed shop agreements at the time when they became illegal.

From the European Court of Justice, the Laval case (C-341/05) from 2007 and the related Viking (C-438/05) and Rüffert (C-346/06) cases have had even more serious implications (Bücker and Warneck, 2009). At the core of the Laval case was the question whether unions in the host country (in this case Sweden) are free to take industrial action in order to attempt to force an employer with workers from a different member state (in this case Latvia) to sign a collective agreement. The Court demanded that companies should be able to know the expected wage level in an area, but this is difficult in Denmark and Sweden where there is no minimum wage in areas without a collective agreement. According to the Danish (and Swedish) bargaining system wages will be set by collective bargaining by applying procedures that may include an industrial conflict. Following the Laval ruling, in 2008 legislation was passed in Denmark saying that industrial action was legal provided that the foreign employer was informed about the normal level of pay. Apart from the uncertainty on how clear such information must be in a decentralised and individualised wage system, there is now from a juridical point of view no difference in procedures for Danish and foreign employers, but trade unions are fearing a possible future case on the issue.

The Laval case and its until now rather unclear repercussions has strengthened the already existing tendency that foreign companies and workers are working in Denmark on terms that deviate from “the Danish model” (Hansen and Hansen, 2009). However, it was a victory for the union side when in 2015 the Danish Labour Court ruled that Danish unions are entitled to take action, in particular through sympathetic action by blacking deliveries and services to flights, as steps to obtain a collective agreement with Irish based Ryanair, after this company had established itself with hubs in Copenhagen and Billund. Ryanair reacted by moving the hubs to airports in neighbouring countries (Sinander, 2015), but withdrew from its threat to take the case to the European Court.

Social dumping, which has been debated in Denmark since the country’s entry into the EC in 1973 but only became a significant issue after the 2004 enlargement, appears typically concerning issues that are not covered by legislation, but may be, or may not be, covered by collective agreements.

The relatively few reports available on wages and working conditions among migrant workers show that the biggest differences between Danes and migrant workers can be found in foreign companies with posted workers. The migrant workers are in general paid less than the Danes, their working environment is poorer, they work longer hours, the intensity of work is higher and a number of living conditions are worse. Further, they are to a much lower degree member of unions and covered by collective agreements (Hansen and Hansen, 2009, Arnholtz & Hansen, 2011, Pedersen and Thomsen, 2011). The number of foreign workers from the EU was 79,000 full time persons in 2010 and had increased to 109,000 by 2015. The main increase was among workers from Central and Eastern Europe (Styrelsen for Arbejdsmarked og Rekruttering, 2016). Migrant workers from the EU constitute about 5 per cent of the labour force in Denmark.

A 100 per cent coverage of collective agreements would hardly solve the problem of social dumping. Most national collective agreements contain some very flexible elements – not least regarding wages. As mentioned earlier for most workers final pay is negotiated at the individual plant.

In Denmark, the only dedicated actors that take up the struggle against social dumping are the unions, but their handicap is that they also are keen defenders of the bargaining system and are against legislation (LO, 2011b); this means there is no support for a legislated minimum pay, which is an instrument that to some extent could counter social dumping.

All in all it can be concluded that the free movement of labour and the increased competition for jobs in the Single European Market, as well as problematic pieces of regulation such as the Laval ruling, has made it more difficult for the organised industrial relations parties to keep everybody under the umbrella of “the Danish model”. The stronger competition in the various labour markets – especially building and construction, road transport, agriculture and foresting, and cleaning in hotels and restaurants – may have been an important factor for keeping wage increases down, and the increase in the number of workers working under sub-standard conditions is a challenge to a system which otherwise has proven quite resilient through the era of globalisation.