The Voice of Foreign Companies A White Paper A Competitive Denmark: Short and long term solutions to the shortage of highly qualified labor January 29, 2008
Introduction In recent years, Denmark has been recognized globally as having built one of Europe s strongest business environments. Now the next phase of hard work begins. Denmark has a unique opportunity to set a course that will build on this success and continue to strengthen its competitiveness. Unfortunately, foreign companies are beginning to see this opportunity slip away as the competition intensifies for the limited supply of highly qualified labor. Indeed, the latest statistics show that inward foreign investment and related job creation are slowing: In 2006, total foreign investment in the capital region fell by 28% compared to 2004 and 52% compared to 2005 1. In 2006, fewer jobs were created through foreign investment compared to 2005 2. The number of Greenfield FDI projects has fallen steadily from 92 in 2004 to 65 in 2006, while comparable European nations have seen increases 3. In 2007 AmCham consulted foreign companies to identify key issues contributing to this decline. Survey results, provided by 90 top executives, strongly indicated that the primary reason foreign companies originally came to Denmark, i.e. the supply of highly skilled and educated labor, is now the main deterrent to their continued growth. To address these results and to present key findings to government decision makers and the international business community, AmCham Denmark held its first Foreign Investors Summit in August of 2007. The conclusion was unmistakable it is paramount that Denmark acts quickly and decisively to address the shortage of highly qualified labor. In autumn 2007, AmCham was encouraged by the government s plan to increase the supply of highly qualified foreign labor outlined in Denmark a good place to work. However, we find that some of the proposed initiatives require bolder changes to maximize their effectiveness. Furthermore, Denmark Top Executives From Foreign Companies Report: Three out of four have faced difficulties hiring employees in crucial strategic positions. 70% indicated that the difficulty filling positions has impacted their company. Nine out of ten anticipate labor issues affecting their company in the future. 50% highlighted the unattractive tax environment as being the largest barrier to hiring labor from outside Denmark. Two-thirds stated their companies would benefit from having greater access to labor from outside Denmark. Source: AmCham Labor Survey & Gallup Foreign Investor Survey 2007 1 2006 Annual Report, Copenhagen Capacity. 2 Ibid. 3 World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, p. 207 (October 2007).
The real difficulty lies not in developing new ideas but in escaping from old ones. John Maynard Keynes must devise a more comprehensive strategic plan to deliver long term solutions. Inaction may cause irreversible damage to Denmark s competitiveness and its attractiveness to foreign companies and their investments. It is crucial that actions taken today deliver results that ensure long term sustainability. Denmark must concentrate on the overall attractiveness of the business environment. Focusing on the education system and making personal tax more competitive will accomplish this. It will both secure a greater supply of highly skilled and educated foreign labor while also increasing the domestic supply of human capital. But foreign companies cannot wait forever. A global survey by McKinsey Quarterly, conducted in November 2007 among some 1300 business leaders, revealed that 50% of the respondents expected intensifying competition for talent - and the increasingly global nature of that competition - to have a major effect on their companies over the next five years 4. No other global trend was considered nearly as significant. This result sends a clear signal that something must be done to address the shortage of highly qualified labor. Modifications to programs currently in place will improve companies ability to attract talent, provide immediate relief to the shortage of labor, and sustain Denmark s competitiveness in the short-term. As the voice of foreign companies in Denmark, AmCham has a vested interest in finding solutions to the shortage of highly qualified labor. Therefore, we are pleased to present our white paper Keeping Denmark Competitive: Short and long term solutions to the shortage of highly qualified labor with focused recommendations to protect Denmark s competitiveness in the global economy. We seek open dialogue and debate regarding our recommendations with decision makers from both the public and private sector. Recommendations on Labor Short-Term Recommendations Increase the scope and usability of the Job Card/Positive List: 1. Ensure the Positive List reflects the skills/ educations in demand. 2. Lower the minimum annual salary requirement. Make the expatriate taxation program (KSL 48E) attractive and easy to use: Long -Term Recommendations Incentivize more students to complete higher education programs and encourage their timely entry into the workforce. Commit to a plan to make Denmark s tax system globally competitive and attractive to highly skilled and educated labor. 1. Extend the program from 3 to 5 years. 2. Lower the minimum monthly salary requirement. 3. Ease the restrictions on travel. 4 The organizational challenges of global trends: A McKinsey Global Survey, mckinseyquarterly.com, (December 2007).
Short Term Recommendations Increase the scope and usability of the Job Card/Positive List Efficiency and accessibility of Danish work visas should be a key goal of the Ministry of Employment and the Ministry of Immigration. The Job Card/Positive List should be focused on making it easier for foreign companies to attract the best and brightest minds from around the world without delay. Although the total number of work visas increased in 2007 to just over 18.000, the majority of these were issued to supply much needed low skilled labor. Only 1,899 of these work visas were issued to highly qualified labor via the Job Card/Positive List 5. This number must be increased dramatically to meet current needs. Strategically vital positions must be added to the Positive List quickly. Survey results from 2007 show top executives indicating sales & marketing and executive management as the two most strategically vital skills necessary for growth 6. Unfortunately, they are also the most challenging to find on the labor market. It comes as a shock that neither of these positions is currently on the Positive List (see figure 1). To increase the scope and usability of the Job Card/ Positive List, AmCham urges the following two actions be taken: 1. Ensure the Positive List reflects the skills and educations demanded in the marketplace by working closely with private sector human resource departments. 2. Lower the minimum annual salary requirement to DKK 250,000 for Positive List jobs that meet Danish employment criteria with a minimum of 30 working hours per week. This level of salary is in line with the Autumn 2007 recommendation given by the Danish Economic Council and will ensure that companies are not forced to offer above market rates in order to utilize the Job Card/Positive List to hire much needed highly skilled and educated foreign labor 7. Figure 1: Positive List Does Not Reflect Demand Which skills are the most strategically vital to the future growth of your company? Sales and Marketing Managerial skills Technical/Engineering skills Finance/Accounting Laboratory science Software programing Unskilled Other Do not know % responding 0 10 20 30 40 50 60 70 80 Not included on Positive List Source: Gallup Foreign Investor Survey 2007 5 Resident Permits for Business and Education, http://www.nyidanmark.dk/nr/rdonlyres/ba2e6ce6-9b72-42e5-9793-58550479247d/0/ seneste_tal_udlaendingeomraadet_da.xls# Erhverv_studie(ES)!A1, Danish Immigration Service, (November 2007). 6 Gallup Foreign Investors Survey 2007 (August 2007). 7 The Danish Economy: Autumn 2007 (summary), The Economic Council, p. 15 (November 12, 2007).
If the economic boom is to continue, we need to attract foreign labor. Therefore the Job Card Program needs to change. The Economic Council, The Danish Economy: Autumn 2007 Make the expatriate taxation program (KSL 48E) attractive and easy to use In the short term it is important to attract talent from abroad to alleviate the shortage of highly skilled and educated labor. Denmark s expatriate tax program is a means to achieve this. However, currently only 2183 foreign experts and key employees are using the expatriate tax program 8. It is imperative that these numbers be increased quickly by implementing a revised, well functioning scheme that is free from complications and red tape. To make the expatriate taxation program attractive and easy to use, AmCham urges the following three actions be taken: 1. Extend the program from 3 to 5 years with the following taxation schedule - the first 3 years at 25% with the option to choose to stay an additional 2 years at 33%. The gradual taxation will help to ease foreign experts and key employees into the Danish society with a view to long-term residency. Users of the program should be able to choose the additional 2 years at any point during the first 3 years. 2. Lower the minimum monthly salary requirement of DKK 60,100. Currently companies are forced to offer above market rates in order to utilize the program to hire much needed foreign experts and key employees (see figure 2). In addition, the highly skilled and educated labor in demand may not necessarily be highly paid but are sensitive to taxes nonetheless. 3. Ease the restrictions on travel outside of Denmark from the current allowance. Today, not less than two thirds of the work must be carried out in Denmark. This limits program users who are required to travel extensively to carry out their work. As long as the travel is benefiting the company or subsidiary located in Denmark, any restrictions on travel undermine the employee s ability to do the work he/ she was hired to do. Figure 2: Expatriate Taxation Program Forces Inflated Salaries 60 50 DKK (1.000) 40 30 20 10 0 Portion of salary over median market rate Median monthly salary Sales & Marketing Head HR Manager Head of Sales IT Manager Finance Manager Sales Manager Manager Account Manager Head of Marketing Competence/Key Employee Production Manager Sales Consultant Sales Leader 8 Tax Program for Researches and Key Employees, http://www.skm.dk/tal_statistik/skatter_og_afgifter/671.html, (September 2007).
Long Term Recommendations Incentivize more students to complete higher education programs and encourage their timely entry into the workforce To secure growth, increase foreign investment and remain competitive in the global economy, Denmark must maintain an adequate supply of highly educated labor. Companies bear the consequences of education policies they can only compete if they can rely on a pool of talents. Currently, only about 26% of 15-year It is essential that the government strengthen cooperation with the universities to find solutions. More students must be incentivized to complete higher education programs and encouraged to enter into the workforce in a timely manner. The government has set an ambitious target for educational attainment, olds aspire to complete a bachelor degree or higher, lagging far behind The critical areas education policy should address: namely that by 2015 95% of students should complete an education beyond other OECD countries 9. The shortage of students that are aspiring basic schooling, and that Correspondingly, only about 26% of the workforce has completed to complete an advanced degree, as well as the low number obtaining them 50% should obtain further education. It is imperative that the focus be placed a professional bachelor The long time horizon for completion on incentivizing students degree or higher education 10. If this of advanced degrees to aspire to obtain a higher degree and not on making figure does not increase, The insufficient number of students it easier for them to get Denmark will be unable to compete more effectively against larger economies for foreign investment. focusing on the critical areas of technology, engineering and life sciences one. This will bring the government s goal within reach without jeopardizing the quality of higher education programs. Figure 3: Population with a University Degree Divided by Age Group 45 54 year olds 25 34 year olds CAN CAN USA JPN 3 (5) DNK KOR SWE SWE JPN BEL FIN IRE AUS NOR NOR USA NLD ESP CHE FRA UK FIN DEU AUS NZL DNK 13 (13) BEL UK ISL NLD OECD ISL IRE OECD ESP CHE GRC NZL FRA GRC KOR AUT TUR TUR POL DEU HUN AUT 60 40 20 0 20 40 60 Source: OECD (2006), Education at a glance. % of population 9 Education at a Glance 2007, OECD 2007, Table A4.3a, p. 86. 10 Ibid, Table A1.1a, p. 36.
Denmark has lost the equivalent of 30,000 highly educated workers due to the record high Danish income tax. Confederation of Danish Industries (January 2008) Commit to a plan to make Denmark s tax system globally competitive and attractive to highly skilled and educated labor Globalization is forcing nations to play a greater role in enhancing their global attractiveness. Incentive policies designed to attract foreign investment, skilled labor and research experts, as well as rewarding higher education degree completion, are crucial to strengthening competitive advantage. In this regard, Denmark s high tax rate has contributed Looking inward, Denmark s tax policy hinders the incentive to work, acquire skills and complete a higher education. Due to the early entry into the top tax bracket with its high tax rate, the incentive to complete a higher degree is significantly diminished 11. The difference between the earnings of workers with a lower secondary education compared to a higher university degree to the reduction in the supply of highly skilled and educated human capital. In The critical areas competitive tax policy should address: is marginal on an after tax basis 12. To ensure the supply of a Confederation of Danish The high marginal rate of the top needed human capital in Industries publication Global Benchmark Report tax bracket the long term, Denmark must set down a plan with 2007 from April 2007, The high value added tax on healthy clear steps to reduce the Denmark ranked 22nd when compared against OECD countries as an attractive food staples i.e. milk, eggs, fruit & vegetables marginal tax rate, value added tax and other taxes on goods and services. The destination for foreign highly Tax credit incentives for higher Danish Economic council skilled labor (see figure 4). At a time when companies are having difficulties education completion pointed to the benefits of the government s medium term solution of middle-bracket tax filling essential positions and the war for talent has gone global, Denmark does not offer a competitive environment. cuts, which are predicted to increase the work force by 5000 13. But in the long term, bolder steps must be taken if Denmark is to maintain global competitiveness. Figure 4. Business environment attractiveness for foreign high-skilled workers, 2006 10 8 6 4 2 Note: High values indicate that the country s business environment is attractive to foreign high-skilled workers Source: IMD survey 2006 0 Index 0-10 United States Switzerland Ireland United Kingdom Australia Canada Austria Netherlands New Zealand Belgium Spain Iceland Czech Republic Hungary South Korea Japan Norway France Mexico Portugal Germany 22 (22) Denmark Slovak Republic Turkey Finland Poland Sweden Greece 11 OECD: Lack of Will to Reform Cuts Growth, Børsen, p. 16 (February 14, 2007). 12 Investment in Human Capital Through Post-Compulsory Education and Training: Selected Efficiency and Equity Aspects, OECD, p. 11-12 (July 12, 2002). 13 Had the tax cuts instead been given as reductions in the top-bracket tax rate, the effects on labor supply would by all means had been larger, Danish Economy: Autumn 2007, The Economic Council, p. 311.
Conclusion It is apparent that the current shortage of highly qualified labor has reached a level that requires bold and quick action. Alarmingly, the shortage of labor is taking place across the entire skill base. In the last 9 months, over 60,000 positions have remained unfilled, and in the last 24 months, companies have lost orders worth DKK 32 billion due to a shortage of human capital 14. If this shortage continues, the International Monetary Fund predicts Denmark to have one of the lowest GPD growth rates in the E.U. by the end of 2008 15. AmCham Denmark, representing a large and important group of foreign companies, hopes the recommendations given in this white paper improve the dialogue and debate on the current shortage of highly qualified labor. Additionally, AmCham urges decision makers to take action quickly. Foreign companies are sending strong signals that their businesses will be increasingly affected if the labor shortage persists. This should be great cause for concern. In 2006 Denmark received over DKK 25 billion in Foreign Direct Investment 16. Furthermore, foreign owned companies contribute DKK 110 billion a year in corporate and employee income tax 17. Foreign companies have a strong interest in succeeding in Denmark and providing Denmark with the benefits of growth. What they need is the human capital to make it happen. The recommendations outlined in this white paper are a step in the right direction. 14 Companies: Get Us More People, Børsen, Tuesday, November 13, 2007. 15 WORLD ECONOMIC OUTLOOK 2007, International Monetary Fund, p. 70 (October 2007). 16 Quarterly flow statistics on direct investments, 3rd quarter 2007, Danish National Bank, (November 14, 2007). 17 Halving of Foreign Investment in the Capital, Berlingske, Tuesday, May 29, 2007. About AmCham Denmark The American Chamber of Commerce in Denmark (AmCham Denmark) is a non-profit, non-governmental, business association representing more than 280 companies actively investing in Denmark. AmCham Denmark is committed to building a competitive, sustainable foreign investment environment in Denmark, and to doing its part to minimize barriers to trans-atlantic trade. Christians Brygge 26 DK - 1559 Copenhagen V Tlf (+45) 33 932 932 Fax (+45) 33 932 938 mail@amcham.dk www.amcham.dk