Danish Labor Market Policy: Is it Worth it?

Abstract

Denmark has been quite successful in reducing unemployment. At the same time the costs of creating activation and other schemes have been very high. OECD judges that total costs are about 5% of GDP, which is the highest amount among OECD-countries. This paper presents a comprehensive description of the recent Danish labor market policies. The paper goes through all the different programs and shows that most of the measures introduced have increased the reservation wages of job seekers. The result was a sharp growth in the number of participants on a number of new programs for the unemployed and for those seeking alternatives to work. The total number of people on some sort of passive or active scheme rose until late in the 90's where admission to programs was restricted and a strong economic upswing created new demand for labor. A final analysis of the probability that an unemployed person becomes employed, based on individual transition data, shows that the new labor market policies introduced after 1993 did not increase the probability that an unemployed person would get a job. However, there is a positive effect in 1997 and 1998 coinciding with the attempts to tighten admission to labor programs.