Flexicurity and wage dynamics over the life-cycle

Lorenzo Cappellari 1, Paul Bingley2, Niels Westergaard-Nielsen3
1UniversitÓ Cattolica, Italy, 2The Danish National Centre for Social Research, Denmark, 3CCP, Aarhus School of Business, Denmark

We investigate the relationship between the evolution of individual hourly wages over the life-cycle and flexicurity in Denmark – a combination of employer flexibility in hiring and firing, income security during unemployment and a growing emphasis on activation for the unemployed. We use 24 years of population-based longitudinal administrative data on men to model individual wage dynamics, distinguishing between a long term life-cycle profile and transitory wage shocks. We characterise flexicurity using individual membership of an unemployment insurance fund, which is voluntary (80%) and provides access to part of the flexicurity bundle of income security with activation. We find that, flexicurity is associated with lower starting-wage heterogeneity, lower growth rate heterogeneity and greater wage instability. These findings are robust across industries and occupations. While we are in general unable to distinguish a moral hazard from an adverse selection cause, robustness checks suggest that moral hazard, combined with signalling, may be the relevant interpretation of our findings.

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