The overall labour market situation in Denmark is favourable and the country already fulfils the Lisbon employment objectives. However, the projected decline in the work force as the population ages constitutes a challenge linked to the financing of welfare-related public sector commitments. In the framework of the medium-term fiscal strategy, measures are being taken to ensure the future financing basis of the welfare state. In addition to running substantial general government surpluses, the policy response includes measures to raise labour supply. To this end, a tax reform has been implemented, as well as labour market policy measures geared at raising labour market participation. However, while the need for further measures is recognised by the Danish authorities, the content of future reform has not yet been spelled out.

Building on the recommendations to Denmark in the 2003-05 Broad Economic Policy Guidelines concerning the need to raise labour supply, this Country Focus examines Denmark’s policy options. It concludes that while reforms have been implemented in the areas of income taxes, the combination of taxes and benefits and the labour market participation of older workers, the measures aimed at enhancing labour supply have not fully exploited the potential scope for strengthening work incentives. This Country Focus draws on ECFIN Country Study on Denmark (European Commission, 2004).