The high road to high wages: Denmark's answer to the U.S. model

An underground economy?

Economists in both Denmark and the United States said that, contrary to some economic dogma, the high wages, high taxes, and high union density in Denmark have not had a negative effect on employment or economic growth. Denmark’s unemployment is currently well below the U.S. levels, and before the recession it had hovered around 4 percent for several years.

“The Danish economy has been quite healthy, at least since the early 1990s,” said Lane Kenworthy, a political scientist at the University of Arizona who has focused on making comparisons between the U.S. and European economies. “I don’t have any sense that wages or taxes have impeded the Danish economy or their competitiveness.”

Nevertheless, Kenworthy warned that there are some costs associated with the Danish labor market model. In particular, he said, certain services such as housecleaning or personal care become unaffordable for some people, which can end up creating an underground economy where workers, often immigrants, perform these jobs off the books.

“One obvious issue this raises is the true absorption of immigrant persons,” Kenworthy said. “If they’re working in an underground economy, I think at the very least it slows down the process of integration. The second big issue is that it reduces the tax base, since these people are working outside of the tax system.”

Niels Ploug admitted that Denmark has some problems with underground labor, but added that it constituted a relatively small part of the labor market. “I think this is an unfortunate feature of all economies,” he said. “It’s relatively small in Denmark, but it’s possible that it could grow in the future.”

Denmark has dealt with the issue primarily in two ways. In the case of some occupations, such as housekeepers, the Danish government has chosen to subsidize employees’ wages when bearing the full cost would put these services out of reach of many Danes. The other major solution has simply been to bring those jobs into the public sector. In Denmark, most childcare and eldercare providers, and most home-health aides (typically jobs that pay workers low-wages in the U.S.) are paid by the state.

Kenworthy also recommended caution when comparing the wages of American and Danish workers, because many low-wage workers in the U.S. receive tax benefits from the government, such as the Earned Income Tax Credit, while Danish workers pay much more of their income in taxes to the government. This serves to equalize take-away income somewhat, he said, but still doesn’t account for the benefits that all Danes receive from the government — like free and guaranteed health care, childcare, and education,  along with paid vacation time, sick leave, and parental leave — which Kenworthy said “are probably beyond the wildest dreams of American workers in the same jobs.”

“Maybe you should come here”

But many Danes emphasized that there are disadvantages to the U.S. labor market, as well.

“You have created a very unequal system,” said Lars Lyngse of the United Federation of Danish Workers. “In Denmark we have been able to maintain a national identity, a national unity. A big reason why we have been able to do this is because we don’t have a lot of people falling through the cracks.” (Denmark is in a three-way tie among OECD countries for lowest income inequality; the U.S. has the second highest level of income inequality, behind only Mexico among OECD countries).

The Danish system has economic benefits, as well, Ploug said. “Most of Denmark is what you would call the middle-class,” he said. “There are not as many people buying yachts and personal jets, but workers who earn a decent wage are not excluded from the economy. They are able to spend more and contribute in that way.”

Diana Ranile Baluyos said that she had spoken to hotel workers in the United States who were often surprised to hear how much she made. “Many of them are working two or three jobs,” she said. “I tell them, maybe you should come here.”