Monday, August 16, 2010

Denmark's Unemployment Benefits

There's a very interesting article in the NY Times on Danish unemployment benefits. Generally, I like the Danish "flexisecurity" model, which provides a strong safety net while still allowing a great deal of freedom to employers to hire and fire. There is a bit of an issue with the problem of make work jobs but that isn't so bad compared to other alternatives. Looking at the numbers, Danish unemployment* looks good and labor force participation seems high, though I couldn't get a good series of numbers on it all in one place.

The Economix blog extends on the original article with some additional information on the length of unemployment. The issue stated here seems to be a very common one for many government policies. Benefits are paid in an all or nothing matter, if you're eligible you do what you're supposed to do and you get a fixed rate of benefits. This results in what anyone would expect, those easily employable get jobs quickly, the rest pretty much stay in the program till benefits expire since they're not willing to settle for a worse job (of course, it's a little different if there's a severe recession since many of those fully employable will not be able to find work, the data in the Economix post isn't for the current sharp recession though). This is quite a common problem, programs are set up so you either qualify, or you don't.

Fixing this incentive problem actually seems pretty easy in the modern digital age. Why not simply have benefits reduce gradually rather than having sharp cut-offs? It would be possible to have checks decrease 1% a month, or depending on what those with greater knowledge of the relevant policies think is preferable a more complex formula could be used, perhaps with a grace period but with sharper benefit drops every four or six months. This would provide strong incentives to find work since benefits are decreasing the longer one remains on benefits but would still provide a strong cushion to the negative effects of unemployment. I'm always surprised that government hasn't caught up with simple solutions like this, it wouldn't have been possible 30 years ago but by now surely all of this is managed electronically, these are simply changes a computer could easily handle.

While I'm on the topic, I'd like this kind of logic to be applied to just about every government program. Rather than all or nothing eligibility requirements make a smooth sliding benefit scale so benefits are gradually, rather than sharply, reduced. Same on the tax side, make it smoothly progressive rather than choppy with large jumps between brackets. It's a simple, logical fix that reduces many of the incentives causing problems with current systems.

Picture Credit: Trading Economics

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