Experts disagree over whether cutting benefits will increase workforce

Employers’ association says unemployment benefits are too generous to encourage work, but others say cutting benefits will marginalise society’s vulnerable

20 million kroner earmarked for independent media in developing countries (photo: iStock)
February 5th, 2013 1:06 pm| by admin
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Unemployment benefits need an overhaul in order to create a greater economic incentive for people to find work, according to the Danish association of employers, Danmarks Arbejdgiversforening (DA).

In a report released this weekend, DA argued that the generosity of unemployment benefits – combined with the number of people who claim them – are a burden on government finances and an obstacle for Denmark’s economy to grow.

“It should always pay to work and say 'yes' to a job,” DA’s managing director, Jørn Neergaard Larsen, said. “That’s not the case today because of the generosity of the welfare system.”

According to DA, if Denmark had the same proportion of the population in work as Sweden, its workforce would increase by 270,000 and generate a savings of 50 billion kroner a year.

The report concludes that if the government expects to make any economic progress, it needs to use the upcoming reform of the least-generous cash welfare benefit, kontanthjælp, to get more Danes into work.

“If more isn’t done to enact significant reform in Denmark, we will continue to see industrious foreigners take jobs in Denmark while Danes capable of working stay on welfare,” the report stated. “Over time, this will cause the welfare model to break down.”

DA is not alone in the belief that generous unemployment benefits play a significant role in suppressing the national economy. The liberal think-tank Cepos and the libertarian opposition party Liberal Alliance have both called for decreasing the generosity of kontanthjælp in order to increase the incentive to find work.

But it is far from a universally-held belief, and many experts that The Copenhagen Post spoke with argued that reducing kontanthjælp could have grave consequences for society’s most vulnerable.

Among them was Lisbeth Pedersen, head of employment and labour market research at the national centre for social research, SFI. She explained that individuals receiving kontanthjælp do so for a variety of reasons, and are in different stages of preparedness to re-enter the labour market.

“Some are unemployed simply because they are out of a job, while others can’t work because of health issues such as mental illness,” Pedersen said, adding that cutting welfare for the people with health issues who are not ready to re-enter the labour market would do little except make them poor.

“What research shows is that you cannot get people like this into work by using incentives like [cutting their benefits],” Pedersen said.

Pedersen’s position was supported by social sciences professor Bent Greve from the University of Roskilde.

“The issue is that the majority of people on social benefits have other problems, and it is this group of unemployed – those who are not ready for the labour market and belong to a low income group – that face the greatest risk of ending up in poverty.”

Kontanthjælp is a constitutionally-guaranteed benefit for people with no other form of income. Single and childless individuals over the age of 25 can claim 10,500 kroner a month before tax while those under 25 can only claim 6,660 kroner a month. It is significantly less than unemployment insurance, dagpenge, which is roughly 17,000 kroner per month before tax. Individuals have to pay an unemployment insurer, an A-kasse, for a year before being entitled to dagpenge payments for two years.

According to Jyllands-Posten newspaper, people earning a minimum wage of around 100 kroner an hour enjoy only a marginal economic benefit of about 1,000 kroner a month from taking a job rather than staying on dagpenge.

But Greve argues that for those on kontanthjælp, there is far more significant economic motivation to take a job.

“The vast majority of people would gain quite a bit economically from joining the labour market rather than moving the other way,” Greve said. “But economic motivations are not the only incentive people respond to, and many people choose to take work for social reasons or in order to increase their chances of getting a better job.”

Around 160,000 jobs were lost after the financial crisis took hold in 2008, and those jobs currently show no sign of returning. But according to Frederick Pedersen, chief analyst at the Economic Council of the Labour Movement (AE), the problem with the Danish economy is not that unemployed workers have it too easy.

“The problem is that domestic demand has not recovered from the economic crisis and households and business are hesitant to spend money,” Frederick Pedersen said. “Our exports have almost returned to pre-crisis levels, but private investment is still low. Public consumption could also be higher as local authorities didn’t spend as much money as they could have last year. So that reduced employment and growth.”

He added that despite flat-lining economic growth and unemployment, other economic indicators, such as high household earnings and low government deficit, show that Denmark’s economy is not in poor shape.

“Denmark is still one of the wealthiest and most stable countries in the OECD despite having high taxes, a benefit system and a large public sector. We are consistently in the top ten.”

Part of Denmark’s success could be attributed to wide-ranging welfare reforms carried out over the past decade. Kontanthjælp for under-25s was reduced, the user-subsidised early retirement scheme efterløn was phased out, the length of dagpenge was shortened and kontanthjælp and the student grant system, SU, are next on the agenda.

No specific proposals for the upcoming kontanthjælp reform have yet been released, but the employment minister, Mette Frederiksen (Socialdemokraterne), last month stated that she was opposed to reducing its generosity and would rather focus on ensuring that young people do not end up having to rely on it in the first place.

“If you grow up with a mother who doesn’t have an education but receives kontanthjælp, there is a high probability that you will face great challenges in your life,” Frederiksen said in January. “This is fundamentally opposed to the idea of a modern welfare state that provides equal opportunity.”

Factfile | Kontanthjælp

Kontanthjælp is secured by the constitution as a universal right afforded to citizens and residents who are unable to provide for themselves or their family.

To be eligible for kontanthjælp you must:

- Be at least 18 years old and available to work. You lose your entitlement if you turn down a ‘reasonable’ job opportunity.

- Not have any savings or fixed assets greater than 10,000 kroner. Cars and apartments, for example, count as assets that must be sold before accepting 

The value of kontanthjælp varies depending on your circumstances (all amounts per month before tax):

- Under 25, living at home: 3,214 kroner

- Under 25, living alone: 6,660 kroner

- Under 25 with children: 13,732 kroner

- Over 25: 10,335 kroner

You are entitled to five weeks of holiday while receiving kontanthjælp

People under the age of 25 receiving kontanthjælp can be forced to take an education if they do not have one.

Depending on your age, you may be forced to accept work (aktivering) after between six and nine months of receiving kontanthjælp

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