Macroeconomic Aspects of Unemployment Benefits: Evaluating the Danish Policy

Abstract

ABSTRACT This article provides an assessment of the Danish public policy of lowering unemployment benefits, adopted by the Danish government in the tax reform of 2012. To do so, we employ a stock-flow consistent model in which we incorporate the central features of the Danish labour market and the unemployment insurance system. We estimate the model using quarterly data over the period 2005Q4–2020Q1. To evaluate the effects of an unemployment insurance policy, we perform counterfactual analysis by reversing public policy in relation to unemployment insurance and compare the results with the original (baseline) scenario containing the policy effects. Overall, our findings suggest that when the aggregate demand channel, amongst other relevant macroeconomic channels, is included in the assessment, the effects of unemployment benefits on economic growth, employment, and fiscal balance tend to be weaker. These findings clearly question the political decision of suppressing unemployment benefits in general and more specifically in countries with low unemployment rates such as Denmark.