A recent article in The New York Times made the case that Denmark’s high income taxes—which underpin a sturdy economic safety net—are pushing young Danes to leave the country.

The story and related concern about the country’s labor supply raise questions about Denmark’s economic “flexicurity.”

Flexicurity refers to a system that gives companies a fair amount of freedom to hire and fire but also provides significant economic security to workers in the form of unemployment and welfare benefits.

Denmark is part of a broader Nordic pattern of paying out substantial unemployment benefits. A recent report from the Organisation for Economic Co-operation and Development research group found that Nordic countries provide levels of unemployment benefits that typically are above 70 percent of average after-tax earnings. The report found that the comparable “index of generosity” in the U.S., Greece, Turkey and Italy is below 30 percent.

Denmark also does a lot to help unemployed people get back to work. This includes training programs, subsidies to employers that hire an unemployed person and even grants to fund an unemployed individual’s startup business.

Denmark’s system has the backing of a major industry association, the Confederation of Danish Industries. “The Danish example shows that labour market flexibility and job security are not contradicting terms but go hand in hand,” the Confederation says on its Web site.

And Danish flexicurity has produced impressive results: an egalitarian society with a high-octane economy. Denmark’s economy “barreled ahead in 2006 by 3.5 percent, one of the best performances in Western Europe,” The New York Times says. “The country is effectively at full employment.”

But a cost of the success is high taxes: The marginal tax rate paid by those making more than about $70,000 is 63 percent, according to the Times. The Times story profiles a Denmark-native software engineer who lives in Germany in part to avoid Danish taxes. It also warns of a looming labor shortage in the country.

The Times story comes on the heels of an OECD report last month that cites labor shortages in Denmark. “[W]age growth is now gaining momentum,” the report says, “and loss of competitiveness is expected to weigh down on growth in the coming years.” It predicts Denmark’s GDP growth will slow to less than 1 percent in 2009.

To improve the labor situation, the Confederation of Danish Industries has called for steps including lower taxes, removal of early retirement subsidies and a more effective public sector.

Meanwhile, OECD says one in three of its member countries—which are primarily developed nations—has cut unemployment benefits in the past six years with a view to encouraging unemployed people to find jobs. The pressure is clearly on Denmark to do the same.

Years ago, the Vikings from Denmark and other Scandinavian lands were famous for imposing their will on other parts of the world. Now, in a more peaceful era, how will this small nation respond to the global economic challenges facing it? Will Denmark persuade others to follow its flexicurity lead? Will it follow others in unraveling the safety net? Will it find a new way?