As Europe’s economy recovers and most countries struggle to lower their unemployment rates, Denmark is grappling with a different sort of problem.

The Scandinavian country’s unemployment rate now stands at an incredibly low 4.3 per cent, which basically means that anyone who is willing and able to work is working. In December, Denmark’s minister for economic affairs and the interior, Simon Emil Ammitzboll, released a warning about the potential negative repercussions low unemployment could have for the country’s future economic growth.

“With growth in production and a solid increase in employment in recent years, the Danish economy is approaching a situation of potential capacity constraints,” the release said.

So why is Denmark’s near full employment rate causing concern instead of celebration?

Maurice Mazerolle, the director of the Ted Rogers School of Management’s Centre for Labour Management Relations says that the low unemployment rate, or “frictional unemployment,” is causing trouble for a number of reasons.

He said Denmark is running out of workers, especially skilled workers, which is in turn driving up wages because businesses need to attract labourers from other countries.

“When you start bidding up wages, you start heading towards inflation and a lot of companies can’t keep up, so they’re cancelling contracts and they’re losing future work as a result,” Mazerolle told CTV’s Your Morning on Monday.

Mazerolle said Danish companies have resorted to scouring other countries with high unemployment rates, such as Greece, Spain and Portugal, for skilled workers. As a result, Denmark will see an increase in wages, rents, inflation and an overall disruption in the economy, according to Mazerolle.

How did this happen?

Mazerolle pointed to Denmark’s small population of aging workers and its strict policy on immigration as contributing to the country’s labour shortage. He also explained that Denmark’s diversified economy heavily depends on exports and their products have suddenly become highly sought after in the rest of Europe.

Mazerolle said the situation has increased pressure on Danish companies to find skilled workers in order to keep up with the demand.

“So they have an aging population, a small population, a lot of exports (80 per cent of the economy depends on exports) and suddenly all of their products are in demand,” he said in summary.

The Danish government is trying to react to the low unemployment rate by adjusting the country’s retirement age. Mazerolle said Denmark wants to link the retirement age to life expectancy, so workers will stay in the labour force for longer.

It’s not just the older population that’s being targeted either. The Danish government is also trying to create more jobs for younger workers, students, people with disabilities and immigrants, Mazerolle said.

Mazerolle compared Denmark’s approach to the problem with Germany, another country nearing full employment. He said, while Denmark is looking beyond its borders for skilled workers, Germany is focusing inward by training its growing immigrant population.

Finding a balance

Asked whether there’s an ideal unemployment rate countries should strive for, Mazerolle said it isn’t set in stone. He said most economists agree that a healthy rate of unemployment should be around six per cent.

For comparison’s sake, Canada’s unemployment rate dropped to 6.6 per cent in February, the lowest it’s been in two years.

“There always has to be some unemployment in the economy because people quit jobs, they change jobs, they move,” Mazerolle said. “We want to encourage labour mobility.”