Cutting away at the unemployment safety net

A new 'benefits cap' has been introduced by the government to encourage more Danes to work. Critics are concerned that it will further impoverish many who are unable to enter the labour market

‘It must pay to work,’ has been the mantra of the Liberal Party (Venstre) since taking office in June 2015.

Concerned that generous unemployment benefits discourages Danes from working, the government implemented an unemployment benefits reform  in October. It estimated that at least 700 Danes would find employment as a result, but there is widespread concern that the changes will just cause vulnerable individuals, who are unable to work, to make do with even less. This could have far reaching consequences, especially for struggling families with children.

The reforms target recipients of the least generous unemployment benefit kontanthjælp, which is the final safety net in the multi-layered Danish welfare system. To qualify for kontanthjælp, applicants must have less than 10,000 kroner on hand and must sell any other valuable assets, such as their car, before being eligible.

Kontanthjælp recipients may also qualify for other benefits such as child support (børnepenge) and rent allowance (boligstøtte). This means that some recipients may receive a total that is comparable to a low paying job – excluding holiday allowance and employer paid pension.

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The reform consists of two parts. Firstly, it places a cap on the total amount of government assistance a recipient can receive each month. Secondly, it penalises unemployment recipients who have worked less than 225 hours the previous year – more than half of the 175,000 kontanthjælp recipients are exempt from the latter requirement as they have been deemed unfit to work.

The reform is expected to affect more than 33,000 people, of which the vast majority are families with children. After tax income will be capped at between 11,000 and 15,575 kroner per person, based on the number of children and relationship status. This corresponds to a full time job with a 70 to 97 kroner an hour salary.

A socio-economic ragbag
Jørn Neergaard Larsen – who lost his position as employment minister after the formation of the new coalition government in late November – argued that the reform was needed to get more people into the labour market.

“We have a baffling number of people of working age, who are being supported by the government. That isn’t sustainable,” he told Altinget.dk while still acting as minister.

Larsen pointed out that the number of kontanthjælp recipients has risen from 145,000 to 175,000 people since 2012, despite the fact that unemployment has  fallen during the period.

“The best we can do is to create clear incentives for these people to get a job – either full time or part time,” Neergaard Larsen said.

But the problem with kontanthjælp might not be its generosity. Professor Bent Greve, a labour market researcher at Roskilde University, argues that years of reforms have transformed the scheme into a dumping ground for a ragbag of people who might not qualify for other benefits.

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“The rise in the number of kontanthjælp recipients is largely due to the fact that since 2012 it has become virtually impossible to get early retirement when you are under 40, unless you’re born with a handicap that makes it impossible to work,” Greve says.

Kontanthjælp recipients are a very diverse group of people, many of whom don’t qualify for other benefits. It is a mistake to believe that all of these people are able to work. On the contrary, many of them can’t, since they are struggling with a myriad of problems.”

Thorkild Olesen, head of Disabled People’s Organisations Denmark (Danske Handicaporganisationer) – an umbrella organisation for people with disabilities – agrees.

“Way too many people with disabilities are stuck in the system. It has become too hard to get early retirement and more and more people are forced into work assessment trials by municipalities. The system, and the job centres in particular, doesn’t know how to handle the many different problems our members have,” he says.

According to Olesen, kontanthjælp recipients often suffer from a wide variety of conditions – from spasticity to arthritis, and autism to severe depression.

“Many of these people are sick or are handicapped. Cutting their income won’t get these people into jobs. That requires investments,” he says.

Danske Handicaporganisationer estimates that more than half of the people affected by the cap have disabilities or an illness.

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Unable to support themselves
The Ministry of Employment admits that almost three quarters of kontanthjælp recipients cannot support themselves because they suffer from an affliction.

Therefore, Greve fears that the reform will push people even further away from the labour market.

“If people are constantly under pressure and stressed out, then they are less likely to find the resources to consider their job opportunities. If people live on the edge of poverty, they’re much less likely to prioritise their job or career opportunities and spend their energy on entering the labour market,” he says.

But according to the outgoing employment minister, the reform takes into consideration the difficulty many Danes have joining the labour market. Jørn Neergaard Larsen points out that the goal is not necessarily to get people into full time work.

“Our goal with this reform is not to make people poorer. We want people to break out of kontanthjælp. Either by getting an ordinary job, or through flexible jobs or light jobs suitable for them,” Larsen told DR when the reform was passed in March.

“A significant number of these people are able to find a job of some kind.”

Driving people from work
Critics of the reforms also warn that they could literally increase the distance between the unemployed and the labour market. A reduction in income will make it hard for people to pay their rent, and force them to look for cheaper accommodations further from urban hubs. In October, a DR poll found a 13 percent increase in the number of tenants who couldn’t pay their rent on time compared to last year.

“The reform can create a mechanism, where people move out of the cities, because they’re looking for affordable rent. However, people will often move to areas, where it is even more difficult to find a job,” Professor Torben M. Andersen, from the Department of Economics at Aarhus University, told Ugebrevet A4.

Dragging wages down
An added result of the reforms might be a change to the wage structure of the economy.

Several economists have argued that cutting unemployment benefits drags down wages at the bottom.The Danish Economic Councils – the government’s independent economic advisory body – wrote in a report last autumn that benefits for the unemployed acted as a de facto minimum wage. Cutting benefits would, therefore, eventually reduce the lowest wages.

“Lowering benefits will increase the incentives for getting a job, but will eventually drag the lowest wages down as well,” they stated.

That assumption is shared by Mads Lundby Hansen, chief economist of the free-market think tank CEPOS.

“The market will correct itself relatively quickly, so the minimum wage will mirror kontanthjælp,” he told Ritzau, adding that lower wages will also increase employment.

“When the minimum wage goes down, it makes it easier to access the labour market for some of the less productive groups in our society. It is positive, if some of the otherwise weak or marginalised groups, such as immigrants, can get a foothold in the labour market.” M


By Jon David Finsen

Born and raised in Copenhagen, Jon holds an M.A. in journalism from Aarhus University.

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