Microsoft word - english summary e12 121031b.doc

ENGLISH SUMMARY

The report contains two chapters; the first one gives an
economic outlook for the Danish economy and the second
one an analysis of Danish labour market policy
Chapter I: Economic outlook

The economic situation in Europe is still dominated by lack
of confidence in public finances in a number of countries
and weak developments in demand and production. Initia-
tives from the ECB and EU in combination with the ongo-
ing fiscal tightening and structural reforms in highly ex-
posed countries are expected gradually to recover confi-
dence in the fiscal policy and future economic progress.
However, recovery of confidence is expected to be lengthy,
and periods with renewed tensions may arise. The an-
nouncement from the ECB of an additional bond purchase
programme has contributed to a reduction in Spanish and
Italian government bond interest rates which has had a
stabilizing effect on the financial markets. Spanish and
Italian interest rates are still rather high, and restoring
confidence crucially depends on these countries’ ability to
continue their fiscal consolidation.
In 2010 the euro zone member states established a tempo-
rary rescue funding programme to assist member states in
financial difficulty obtaining loans. The rescue funding
programme is replaced during 2012-13 by the permanent
stability mechanism ESM. Loans from ESM are explicitly
contingent on fiscal tightening and reforms. It is crucial that
loans are only provided on such conditions because in itself
a loan weakens the individual country’s incentive to pursue
a responsible fiscal policy.
ECB’s new bond purchase programme, Outright Market
Transactions (OMT), aims at reducing effective interest
rates on highly indebted countries’ government bonds. This
will ease the funding burden in the exposed countries in the
same manner as if they had been granted loans on favour-able interest rate terms. Basically, this reduces incentives to act fiscally responsible. However, the ECB can only pur-chase government bonds from countries that are already in an ESM programme, and thereby subject to requirements of fiscal tightening and reforms. At the same, under the new programme, the ECB can only buy short-term bonds. This implies that the country is only guaranteed assistance for a relatively short period, and if the country fails to meet the reform requirements, the ECB can stop the programme. The ECB will aim at neutralizing the liquidity effect from such purchase so that monetary policy in general is unaffected. A significant expansion of the ESM could contribute with the same effect as the OMT and is in principle preferable, partly because the transparency of such a model is higher, and partly because the requirement for fiscal consolidation are expected to be stronger if the creditor directly sets the conditions. On the other hand, the possibility of unlimited intervention implies that the ECB can credibly keep interest rates down with relatively few funds placed in the ESM. The instrument in question is untraditional, but it is consid-ered appropriate given the extent of the crisis, and given that both loans and bond purchases are contingent on a programme that sets requirements for reforms and fiscal consolidation. The Danish economy remains stagnant. GDP has hardly grown for the past two years, cf. figure A. Early retirement contributions have been reimbursed to members of the scheme, but so far there has been no significant effect on private consumption, and in spite of public housing renova-tions that have been moved forward, and of a temporary tax credit on expenses for home improvements, investments in dwellings remain at a low level. Note: The latest observation is 2nd quarter 2012. Source: Statistics Denmark and EcoWin. The overall effect of the economic policy is estimated to increase growth by ¼ percentage points in 2012, but con-versely reduce growth by ¼ percentage point in 2013 and ½ percentage points in 2014. The main expansionary measures are the reimbursement of the early retirement contributions which are estimated to increase demand by DKK 10 billion divided over the remainder of 2012 and 2013, increased public investment in 2012, and an investment “window” which increases firms’ basis for depreciation of certain investments made during the rest 2012 and 2013. The negative growth estimate in 2013 is in particular caused by cessation of the tax credits in connection with home im-provements, less public investment, and increases in excise taxes that follow from the tax reform. In addition to these elements, economic activity is stimulated by measures that do not affect public finances directly. These measures include public housing renovations, investments in waste-water plants and investments to reduce energy consumption. Growth prospects for the near future are quite uncertain. The expansionary elements from fiscal policy can contrib-ute to some progress, and the private sector has accumulated a significant amount of savings, so there is a potential for growth. The forecast is also based on the assumption that stability is gradually restored in the European countries, cf. above. On this basis, a start of progress is expected within the next year, but it is difficult to estimate when – and to what extent – it will occur. In 2012 growth is estimated to be around zero percent, followed by growth rates around 1½-1¾ per cent in 2013 and 2014, cf. table A. Production remains at a level well below the structural level, cf. figure B. The expected progress is estimated gradually to close the output gap towards 2018. Normaliza-tion of the economic situation is believed to manifest itself through strongly rising consumption and investment shares. Both shares are presently at very low levels which in com-bination with accumulated savings in the private sector is expected to cause increases in the shares towards 2020. The increase in the consumption ratio is related to an expected increase in the financial wealth share, increased employ-ment, and a larger share of the population that dissaves rather than saves, as demographic changes lead to more retirees. Key figures from the forecast for the Danish economy Current Per cent
Percentage change, volume
2011 2012 2013 2014 2015
Key indicators
Consumer prices, percentage changeb)
General government budget balance, DKK bn. General government bud. balance, per cent of GDP The percentage changes are calculated as real change in stock building relative to GDP in the Percentage of the total labour force. National definition. Source: Statistics Danmark, ADAM’s databank and own calculations. Note: Output gap is the relative difference in percentage between Source: Statistics Denmark, ADAM’s databank and own calculations. Employment continues to decrease slowly and the modest growth prospects are expected to entail a small increase in unemployment over the next year. From January next year the maximum length of the unemployment benefit period is reduced to two years, the government having postponed this measure for six months. A further temporary extension of the unemployment benefit period is not recommendable. Repeated, discretionary delays will stimulate expectations that the benefit period always is extended when a crisis persists. This weakens the individual’s job search incen-tives. However, there are arguments in favour of introduc-ing a business cycle dependent unemployment benefit period, but the dependence on the business cycle should be based on a set of rules rather than on discretion in order to ensure the credibility of economic policies. For such a rule-based dependency to be neutral for the public finances, the benefit period should be shorter than two years in periods with economic boom. The EU requirement to Denmark to improve public finances includes an improvement of the structural government budget balance by 1½ per cent of GDP from 2010 to 2013, and that the actual budget deficit is kept under 3 per cent of GDP in 2013. Both targets are expected to be met given the assumptions on fiscal policy. Based solely on the persistent stagnation in Danish economic activity, the planned fiscal strengthening next year is not appropriate. However, it is important to abide the EU recommendation for the purpose of maintaining confidence in the public finances and on this basis a relatively strict fiscal policy for the years 2011-13 is deemed to be a necessity. There is a risk for the weak economic situation to persist beyond 2013. At the same time the reform of the retirement system and other measures begin to increase the labour force and structural employment, in particular from 2014 onward. It is possible that the economic stagnation persists in 2014, and in that case expansionary fiscal measures are relevant. In itself this is an argument to hold back some of the potential fiscal stimulus until 2014 and the years hereaf-ter. This also highlights the importance of solid public finances so that in case of a lengthy recession there will be scope for an expansionary fiscal policy without conflicting with the given budget limits, whether these limits are set by the EU or by national legislation. The investment window which allows increased tax deduc-tions of a number of private investments made during the second half of 2012 and all of 2013 reduces public revenue. Contrary to e.g. a usual reduction of the corporate tax, this tax reduction is conditional on investments which, other things equal, has a larger activity effect. Meanwhile the scheme is temporary which creates an incentive to move investments forward. The isolated effect on investments through this measure is much larger than if the same amount of resources had been spent on public investment. This is so because the cost of the investment net of the tax benefit is paid by private companies. On the other hand, the scheme favours not only investments that are moved forward in time, but also investments that would have been made even without the tax benefit. It is very difficult to estimate the extent to which investments are moved forward as a conse-quence of the tax benefit, and how large the effect on eco-nomic activity will be. The investment window includes investments in machines and means of transport which often comprise a high import share which in turn limits the effect on Danish production and employment. However, in total it is considered appropriate to channel part of the fiscal stimu-lus through private investments. A tax reform was passed by Danish parliament this fall. The reform includes tax cuts consisting of an increase in the top tax bracket and a higher earned income tax credit. These tax cuts are mainly financed by higher duties, lower growth in public transfers in the period 2016-23, savings on Danish defence expenditures and lower EU-contributions. The tax reform is not fully funded in absence of behavioural effects. In the short run this is more pronounced (when the revenue resulting from the change in the taxation of capital income from pensions is not taken into consideration). This is both due to the time profile of tax cuts and the elements which finances the reform but also due the temporary higher deductibility of investments. The reform is expected to increase the GDP growth rate in 2013 by 0.1-0.2 percentage points and around ¼ percentage points when the temporary higher deductibility of investments is accounted for. The tax reform will increase labour supply by more than 15.000 persons in the long run, according to calculations by the Danish Ministry of Finance. The behavioural effects from the increased labour supply correspond to a lasting improvement of public finances by DKK 3.4 billion. In total, the tax reform is expected to strengthen public fi-nances by around DKK 2.7 billion each year when all effects are taken into consideration. However, the size of the behavioural effects and the speed at which they materi-alize are very uncertain. If the behavioural effects turn out to be weaker than expected this may result in a lasting unfunded increase in public expenditures. However, the recently implemented Budget Law implies that the risk of a lasting unfunded increase in public expenditures is reduced. This is due to the fact that fiscal policy will be planned according to a limit on the size of public deficits with the use of expenditure ceilings according to the Budget Law. The tax reform also specifies that several of the duties which are included in the nominal tax freeze will be discre- tionarily increased up to 2020, so that these duties will roughly keep up with inflation. It would be appropriate to make these duties follow inflation also after 2020. The taxation of owner occupied dwellings is also included in the nominal tax freeze, implying ongoing tax cuts for homeowners. The tax reform specifies that the taxation of owner occupied dwellings and the deductibility of interest costs will not be changed before 2020, apart from the grad-ual reduction of the deductibility of interest payments following from the tax reform legislated in the Danish parliament in spring 2009. A transition to indexation of the taxation of owner occupied dwellings would however be appropriate. It is recommended, that a tax rate on owner occupied dwellings amounting to 1 percent of the current property value should be reintroduced. However, the tax increase should be complemented by a tax rebate which counteracts the immediate increase in taxes. The rebate could be sustained for a period and then gradually phased out over number of years. This will ensure that the change in the taxation doesn’t increase expenditures for homeown-ers in the short run. The proposal is more fully described in Dansk Økonomi, forår 2011. The tax reform includes two measures which are targeted at families with children. The first element is the higher earned income tax credit for single parents, which is assessed to be an efficient way to stimulate labour supply. This is partly due to the fact that many single parents can obtain various grants which are reduced as the level of earned income increases. The high implicit tax rates reduce the economic incentive to work for a large part of this group. Also, em-pirical investigations indicate, that the labour market par-ticipation of families with children, and in particular single parents, responds heavily to changes in tax incentives. Finally, the low employment rate of the affected group implies a low immediate loss in revenue. The other element targeted parents is adjustment of the family allowance (a subsidy paid out to parents) according to the level of income. This implies a higher marginal tax rate for high-earning families with children compared to other high-earning families without children. However, efficiency considerations speak in favour of increasing taxes for all families in the considered income group, not only for families with children. The fact that the tax reform is underfinanced in the short run implies a structural deterioration of public finances in 2013, which would conflict with the requirement of the EU-council from 2010, saying that the structural balance should be improved by 1½ percent of GDP from 2010 to 2013. In order to prevent a violation of the recommendation the tax reform includes a change in the taxation of capital income from pensions such that the deductibility of contributions to new capital pensions is removed, while payment of pen-sions are not taxed later. Also, a tax rebate encourages that existing capital pensions are converted to a new arrange-ment where the deferred tax payments will be paid up front. This change of the taxation of capital income from pensions is a “bookkeeping trick”, which can relieve some of the constraints imposed by the EU-recommendation. Due to the “bookkeeping trick” it is possible to let fiscal policy stimu-late the economy to a larger extent, which is advantageous taking the weak economic situation into consideration. The government is projecting a revenue from the change in the taxation of capital income from pensions amounting to DKK 10 billion in 2013. The change in the taxation of existing capital pensions contribute with DKK 5 billion. However, it is very difficult to estimate the extent of the change of existing capital pensions. If most people choose to convert their existing capital pensions, this will imply that the extra revenue increases to around DKK 100 billion in 2013. In principle, the change in the taxation of capital income from pensions does not affect long run fiscal sustainability. The primary public balance is improved in the short run but deteriorates in the long run. The total public balance (in-cluding net interest income) is however improved as far into the future as the eye can se. This is due to the fact that the change in taxation results in a higher public net wealth and thus higher interest income. It is however an important assumption that the short-run improvement of public fi-nances does not cause an increase in public spending or lower taxes. There is a risk that the short-run improvement may lead to a less disciplined fiscal policy, which is an unfortunate side-effect of the change in the tax system. Thus, the medium-term target for the public budget balance should be adjusted accordingly. The magnitude of this adjustment can not be determined before the exact extent of the rearrangement of existing capital pensions is known in 2013. The present projection builds on the current fiscal policy and includes all reforms passed by parliament. The projec-tion shows, that taking the goal of public budget balance in 2020 as given, there is room for a growth rate of real public consumption of around 0.9 per cent each year (in the period 2014-20), which is estimated to be the “neutral” rate of growth taking the expected demographic development into account. The projection shows an expected public surplus of around DKK 7 billion in 2020. When abstracting from the revenue from the change in the taxation of capital income from pensions the surplus will be reduced to around DKK 3 billion. Taking uncertainty into consideration this corre-sponds to roughly public budget balance in 2020. If there is a political desire for higher public expenditures this requires higher taxes or reforms which stimulate labour supply. This obviously is a political prioritization. However some reforms may be beneficial under all circumstances. As an example it may be appropriate to review arrangements for people outside the labour force on a regular basis, to check whether the incentives to work can be improved. In the government’s fiscal plan towards 2020 from May 2012 further initiatives in the education area amounting to DKK 2 billion and initiatives with the purpose of promoting economic growth and employment amounting to DKK 7 billion are planned. However the contribution from the tax reform and several public savings turned out to be lower than expected. Also the tripartite negotiations between government, labour unions and Danish employers’ organi-zations did not lead to any results. Thus, there is a need for an updated fiscal plan towards 2020, which specifies the government’s desired level of public expenditures and how that should be financed. Public finances are estimated to be roughly sustainable in the sense that the ratio of public debt to GDP will be stabi-lized in the long run. In spite of this and the expected public surplus in 2020 it is expected that public finances for a number of years after 2020 will show structural deficits exceeding the limit of ½ per cent of GDP. In all years after 2035 it is expected that the public deficit will exceed 1 per cent of GDP, see figure C. However, the entire time profile of the public balance in the time period 2020-75 is markedly improved when compared to the assessment in the spring. Figure C Source: Statistics Denmark, ADAM’s databank, DREAM and own The improvement in the expected time profile of the public balance is reflected in the hammock-shaped deficit profile being elevated by just under 1 percent of GDP in the year where the deficit is expected to be highest (2045) compared to the assessment in the spring. The improvement towards 2020 reflects various changes working in different direc-tions. An important element which tends to improve public finances in 2020 is the change in the taxation of capital income from pensions. The improved public balance in
2020 also affects the development after 2020 due to lower
interest expenditures. The change in the taxation of capital
income from pensions also affects the entire time profile
even though it is (almost) just an intertemporal rearrange-
ment of public revenues.
The projection relies on a number of assumptions, among
others concerning the future development of the labour
force and economic policy. The projection e.g. assumes that
the nominal tax freeze with respect to the taxation of owner
occupied dwellings and a number of excise duties is contin-
ued after 2020. If the alternative assumption that the excise
duties instead follow inflation is adopted fiscal sustainabil-
ity improves by ½ percent of GDP and the largest deficit
which is obtained will be reduced to around 1 percent of
GDP. Even though a deficit of this magnitude is consider-
ately above the ½ percent which the Budget Law stipulates,
the challenges that fiscal policy faces are assessed to be
manageable.
The projection shows that, taking the underlying assump-
tions as given, there is no urgent need for reforms with the
purpose of improving public finances. However, it is impor-
tant to notice that the assumptions may turn out to be
wrong. As an example the labour force may grow at another
pace than expected and expenditures may increase more
than planned. Thus, it is important to continue focusing on
fiscal targets and adjust policy if the development in public
finances turns out worse than expected. The fact that fiscal
policy is assessed to be sustainable in the long run does not
in itself imply a high level of welfare. Reforms which aim at
enhancing welfare and efficiency are as important and
relevant as always.
Chapter II: Danish labour market policy

A high employment level is required to finance the Danish
welfare state. By guiding, motivating and upgrading the
skills of the unemployed workers, the active labour market
policy plays a central role. In 2012 the budgeted expendi-
ture for the active labour market policy in Denmark was approximately 16 billion DKK or almost 0.9 per cent of GDP, which is significantly higher than other OECD coun-tries. This calls for a focus to ensure an optimal and effi-cient design of the active labour market policy. The active labour market policy is part of the Danish labour market system. The system is characterized by flexible rules for hiring and firing workers combined with relatively high unemployment benefits. The active labour market policy is aiming to help and motivate the unemployed workers to find a job through skill upgrading, guidance, sanctions and by testing the availability of the unemployed for work,. The labour market system contributes to Danish labour market being very dynamic in an international context. Denmark has one of the highest job turnover rates among OECD countries. It is in line with the job turnover in U.S., and significantly higher than in other Scandinavian coun-tries. Even with a decline in employment there has been a considerable job turnover in the latest years, and despite the economic situation there has been a monthly transition from unemployment to employment of at least 11,000 persons, see Figure D. At the same time, the departure rate from unemployment to employment the past few years has been at about the same level as for the period 2005-06, which are usually considered neutral or even boom years. Transitions from unemployment to employmentHazard for unemployment (right axis) Anm.: The series are adjusted for seasonal fluctuations.
Kilde: Own calculations based on registry data.
The Danish active labour market policy

A vibrant labour market is important to ensure a well func-
tioning economy where labour finds its best use based on
personal qualifications and experience, while companies
can find qualified workers. An active labour market policy
can contribute to increase and sustain a vibrant labour
market.
In the Danish active labour market policy the unemployed
have both a right and an obligation to participate in e.g.
skill-enhancing courses, subsidized jobs in private or public
enterprises or corporate internships, and they are regularly
called for meetings at the municipal job centres to give
advice on job seeking, discuss job opportunities, etc. The
active labour market policy is administered fully by the
municipal job centres, but the state reimburses part of the
municipal expenses.
In the chapter, the effects of active labour marked policy on
the Danish labour market are examined through a review of
relevant studies from the literature as well as by two new
studies. Both studies differentiate the effects of the active
labour market policy for the period of economic boom
before the outbreak of the economic-financial crisis in 2007/2008 and for the recessionary period afterwards. In one of these studies, the effect of active labour market programmes on the unemployment duration of the individ-ual unemployed is examined, based on registry data. The analysis is based on a duration model, using a timing-of-events approach, where the transition rate into employment is estimated simultaneously with the transition rate into an active labour market programme. The model estimates the negative effect during the programme, the locking-in effect, as well as the positive post-programme effect. The esti-mated version of the model does not identify the effect that arises because the unemployed workers find employment before participating in the programme due to the threat of entering a programme sometime in the future, the threat effect. The main data used to calculate the effects originates from a database containing weekly information about all government income transfers on an individual basis, unem-ployment benefits, pensions, social assistance etc. This is combined with socio-economic information about age, gender, education etc. from Statistics Denmark. The effects are measured both as the percentage change in departure rate from unemployment to employment due to the partici-pation in active labour market programmes as well as the change in the expected residual duration of unemployment measured in weeks. In order to test whether the effects of active labour market programmes on individual unemployed are robust to possi-ble crowding-out effects, an analysis of how active labour market programmes affect gross unemployment across municipalities is carried out as well. The increased job search due to the active labour market policy may lead to a congestion externality, as the increased job search by the unemployed reduces the chances of other unemployed to succeed in their job search. The placement of unemployed in subsidised jobs may moreover lead to the displacement of other workers. The effects of the active labour market policy on the gross unemployment level integrate both of these negative externalities. The analysis of unemployment levels across municipalities suggests a positive effect of the active labour market pro-grammes, even when controlling for characteristics of the individual municipalities and the educational composition of the unemployment. In particular, a higher proportion of unemployed in wage subsidy jobs in the private sector or in corporate internships reduces unemployment level com-pared to a situation where the unemployed are not partici-pating in a programme, and this seems to apply both in an economic boom and recession. The duration model analysis suggests that corporate intern-ships as well as wage subsidy jobs in private enterprises reduce individual unemployment durations in an economic boom, but not in a recession. This supports previous find-ings where subsidized employment in the private sector has shown positive effects on employment possibilities. Frequent contacts with and meetings at the municipal job centres have come into focus as instruments to help unem-ployed workers into employment, as they can help clarify job opportunities for the unemployed and thereby increase their employment chances. Previous studies have found positive effects on the employment possibilities of individ-ual unemployed. The analysis of gross unemployment levels presented in the chapter indicates that an increased applica-tion of this instrument in the municipalities passes through to a lower gross unemployment level during a recession, while this instrument does not seem to have any effect on the unemployment level during a boom. It has been advocated that during a recession the composi-tion of the active labour market programmes should be changed towards a greater use of skill-enhancing courses for the unemployed. During a recession, it is however difficult to identify which skills the future labour market demands and therefore it is hard to target the educational and other active measures. It is difficult to analyse this topic empiri-cally, but a number of results in the literature suggests that skill-enhancing courses during a recession is beneficial for some unemployed. However, the increased employment is not necessarily large enough to outweigh the high cost of skill-enhancing courses with long durations. A higher weight should therefore be put on short and targeted courses. Overall, the studies indicate that active labour market pro-grammes can have positive employment effects for the individual unemployed during an economic boom, but a lower post-program effect during a recession means that active labour market programmes lead to longer unem-ployment spells for the participants, see Table B. At an aggregated level, participation in subsidized employment in private enterprises generally lowers the unemployment level, while contact and meetings appear to be the most effective instrument during a recession. Despite the fact that a number of programmes exhibit no or even negative effects on the individual unemployed transi-tion to employment during the recession, the analysis of unemployment levels across municipalities suggests a positive overall effect of the active labour market policy. This suggests that the expectation of the programmes and thus the threat effect of active labour market policy can play an important role. Effects of active labour market programmes in boom and bust Duration analysis for
Analysis of unem-
individual unem-
ployment level
Boom Reces-
Boom Reces-
Notes: + : Positive, statistically significant effect, i.e. shortened unemployment spell for individual unemployed and reduced unemployment level in aggregate analysis. − : Negativ, statistically significant effect, i.e. longer unemployment spell for individual unemployed and higher unemployment level in aggregate analysis .0 : the effect is not statistically significant. * : Not examined in the relevant study. <, =, > : Comparison of estimated effects in a boom and a recessionary period. As the maximum unemployment benefit duration has been reduced from four to two years (introduced in 2010, see also below) there is an increased need to consider the design for the active labour market policy, as there is no longer room for programmes with long durations. The negative lock-in-effect during the time in the programme has already been shown to dominate the positive post-programme effect in a number of cases, especially in a recession. The active labour market policies should therefore be targeted towards coun-selling and meetings combined with relatively short clarify-ing programmes, such as corporate internships or short-term employment with a wage subsidy. In recent decades an increasing number of studies have been carried out in order to estimate the effects of the active labour marked policies both in Denmark and other Euro-pean countries. In order to ensure effective active employ-ment measures, it is important to learn from these experi-ences and to support further work on effect evaluations. Despite a growing number of studies, a better understanding
of the effects of active labour market programmes on differ-
ent types of unemployed workers is still needed. The chair-
manship therefore supports the efforts that are put into
making sure, that the Danish active labour market policy is
founded on empirical evidence.
Active labour market policy for the marginalized unem-
ployed

The active labour market policy has had different roles
during the past two decades. In the 1990s the policy was
aimed at reducing the high level of unemployment, whereas
the policy during the last decade has been focused mainly
on increasing the labour supply in the long run and on
reducing the risk of an overheated economy by increasing
labour supply in the short run. This implied a main focus on
unemployed workers with a strong attachment to the labour
market.
The current recession carries a risk that especially marginal-
ized unemployed workers lose their attachment to the labour
market. This can lead to a decline of work experience, a loss
of productive resources and have distributional conse-
quences. Therefore, it is important to ensure that the active
labour market policy is designed to maintain the attachment
to the labour market of the marginalized unemployed
worker as well. This can reduce the long-term costs of
government transfers and increase future tax payments.
Previous Danish studies have indicated that programmes in
the private sector, such as subsidized jobs or corporate
internships, are beneficial to the marginalized unemployed.
The study of unemployment durations for individual unem-
ployed presented in the chapter confirms this and shows that
in a recession it is especially corporate internships, which
increase employment for the recipients of social assistance
that are furthest away from ordinary employment.
The municipal administration of the active labour mar-
ket policy

The active labour market policy is now administered by the
98 municipalities through job centres, while the state re-
funds part of the expense for both disbursed benefits and the
arrangement of active labour market programmes. This
reimbursement is necessary to be able to smooth the overall
expenses across the business cycle, as municipalities are not
allowed to finance their expenses by credits.
Earlier, the administration of the active labour market
policy for unemployed deemed ready for employment was
handled by the state employment service. The current
system with municipal job centres means that all unem-
ployed can get a similar treatment. However, it has to be
ensured that the implementation of the active labour market
policy does not vary more across municipalities than the
local characteristics of the unemployed demands. New
knowledge on optimal labour market policy programmes
must also be conveyed to all job centres.
Fourteen municipalities took over the responsibility for the
active labour market for all unemployed already in 2007,
while the remaining municipalities gained this responsibility
in 2009. By exploiting this differentiated introduction of the
current system, we can evaluate the municipal management
of the active labour market policy against a governmental
management through a difference-in-difference approach,
but find no significant difference in the transition from
unemployment to employment across the two groups of
municipality. The analysis controls for municipal fixed-
effects, yearly and monthly time indicators as well as the
educational composition of the unemployment in the mu-
nicipalities.
The current state reimbursement of municipal expenses on
the active labour market policy entails higher reimburse-
ments for unemployed in active labour market programmes,
and restarts the reimbursement at 100 per cent when an
unemployed moves to another type of income transfer. This
may lead to the unemployed being send into active labour
market programmes to optimize the reimbursement of
expenses rather than to optimize the employment opportuni-
ties of the individual unemployed. The chairmanship there-
fore supports the initiative of the government to revise the
system in order to make the state reimbursement dependent
only on the time the individual unemployed is on public
transfers. This increases the focus of the municipal job
centres on the ultimate goal of the active labour market
policy, i.e. to get unemployed into employment.
The recent reform of unemployment insurance

In Denmark, unemployment insurance is not mandatory but
requires an active membership of an unemployment fund.
An insured worker pays a quarterly contribution, but the
system is not self-financing and relies in most years on a net
contribution from the State. Unemployed workers not
insured through this system may apply for fully tax-funded
social assistance. The receipt of social assistance is however
conditional on strict requirements first to use up existing
wealth and assets, and is dependent on both own and
spouses’ income.
In 2010 a reform of the unemployment insurance scheme
was enacted, shortening the maximum duration of unem-
ployment insurance from four to two years, and increasing
the required number of months in work to regain eligibility
for unemployment insurance.
The enacted reform will in the longer run reduce the struc-
tural unemployment rate, as the shortened maximum dura-
tion of unemployment benefits will encourage the unem-
ployed to search for work. The reform is overall expected in
the longer run to increase structural employment by 13,000
persons and improve public finances by 4½ billion DKK
yearly. The increase in employment constitutes the net
effect of a larger fall in the number of unemployment re-
cipients as well as an increase in the number of unemployed
on social assistance or being self-supporting. This latter
effect may lead to a reduction of the labour force, as self-
supporting citizen only have a right, but not a duty to look
for work or to take part in labour market programmes.
Through the fall in the structural rate of unemployment and
the increase in structural employment, the enacted reform
improves the efficiency of the economy. Experience sug-
gests that many unemployed find work before the exhaus-
tion of the maximum unemployment duration or shortly
after, but this does not apply to all. The design and enact-
ment of the reform is thus a political choice between an
increased efficiency of the economy and a more equal
distribution of incomes between employed and unemployed
citizens. However, an attempt to undo any part of the reform
would have to be able to advice on other ways to improve
the public finances, and may in themselves have adverse
distributional consequences.
Business Cycle Dependent Unemployment Insurance

The current Danish unemployment insurance system is
independent of the business cycle situation. However, there
is intuitively a higher need for unemployment insurance in a
recessionary period, where it is difficult to find work, while
unemployment insurance is more distortionary in a boom
period where there are sufficient opportunities for employ-
ment. The chairmanship therefore recommends a business
cycle dependent unemployment insurance system, where
the dependence is based on fixed rules instead of discretion-
ary decisions. The consideration of a rule-based business
cycle dependent unemployment system is partly motivated
by the discretionary half-year extension of the maximum
unemployment benefit duration in the summer of 2012, as
well as by the political agreements reached in the second
half of 2012 on an intensified active labour market effort
towards unemployed that risk exhausting their maximum
unemployment insurance duration.
Studies show that business cycle dependent unemployment
insurance, where e.g. the maximum duration of unemploy-
ment benefits is longer during a recession and shorter dur-
ing a boom, can increase overall welfare and lead to a
higher level of structural employment. A longer maximum
unemployment duration in a slump will reduce the incen-
tives of unemployment to look for employment. However,
the socio-economic loss from this increased distortionary
effect is lower than the socio-economic gain from the corre-spondingly higher job search intensity during a boom, as there is a higher need for more workers during a boom. A business cycle dependent unemployment insurance system will however also tend to increase the fluctuations over time in employment and unemployment. The better incentives to look for employment will decrease unem-ployment levels further during a boom, and lead to a lower inflationary pressure on wages during this period. A longer maximum unemployment duration during a slump will tend to increase unemployment levels and reduce the downward pressure on wages, which otherwise through an improved competitiveness could contribute to increased demand. The increased counter-cyclical variation in the level of unem-ployment would also lead a higher overall disbursement of unemployment benefits during a slump and vice-versa during a boom and thus increase the size of the automatic stabilizers in the economy. In order to ensure that all workers and unemployed have a clear and correct expectation on the future design of the unemployment insurance system, a business cycle depend-ent unemployment insurance system needs to be based on previously set rules that stipulate when e.g. the maximum duration of unemployment benefits is increased or de-creased. Discretionary decisions on this may lead to expec-tations of future changes that may or may not take place. This may lead unemployed to abstain from an intensified job search towards the end of the maximum unemployment benefit duration, expecting another extension of the unem-ployment duration. Discretionary decisions on the business cycle dependence of the unemployment insurance system may also lead to an asymmetry in decisions, in the sense that the unemployment insurance system is not tightened as much during an economic upturn, as it is loosened during a downturn. With predefined rules for a business cycle dependent unem-ployment insurance system, it would be known in advance in what situations the maximum duration of unemployment benefits e.g. would be extended. Even though the Danish economy experienced a serious downturn in the turn of the economic-financial crisis in 2007/2008, it is not sure that the current economic situation would prompt an extension of the maximum unemployment benefit duration in a prop-erly designed system. The current gross unemployment level is on par with the unemployment level in the period 2005/2006, which is normally considered to have consti-tuted a neutral business cycle situation. Likewise, the cur-rent number of job openings and the average duration of unemployment are also comparable to 2005/2006. A longer maximum duration of unemployment benefits therefore does not seem to be warranted in the current situation.

Source: http://www.dors.dk/graphics/Synkron-Library/Publikationer/Rapporter/Efteraar_2012/Disk/English_summary_E12.pdf