The Effect of Sanctions on Exit from Unemployment: Evidence from Denmark

Abstract

This paper investigates the effect of sanctions of unemployment insurance benefits on the exit rate from unemployment for a sample of Danish unemployed. The findings are that even moderate sanctions have rather large effects. For both males and females, the exit rate increases by more than 100% following an imposition of a sanction. The paper exploits a rather large sample to elaborate on the basic findings. It is shown that the effect of sanctions wears out after around three months and that some groups of unemployed are more responsive to sanctions than others.

The effect of receiving supplementary UI benefits on unemployment duration

“…However, as already discussed above, the availability of such benefits may induce forms of fraud -when persons who would never be interested in full-time employment suddenly qualify for them -and 'moral hazard behaviour' -an individual receiving supplementary UI benefits has a financial incentive to intentionally delay getting a full-time job by searching less intensively than what is optimal from society's point of view. On the other hand, an intensive active labour market policy may actually induce unemployed individuals to search actively for employment (Rosholm, 2008), so to the extent that the availability for full-time employment of supplementary UI benefit recipients can be tested, the fraud and moral hazard risks of a generous income compensation regime (such as the Danish Flexicurity model) may be overcome to quite some extent by intensive monitoring and sanction policies, see also Svarer (2007).…”

The impact of monitoring and sanctioning on unemployment exit and job-finding rates

“…• for men, has smaller effects than sanctions received later and effects are larger for married men • for women, has larger effects than sanctions imposed later and the job entry rate [9], [10]. In Switzerland, unemployment benefit recipients receive sanction-warning letters in advance of the imposition of a sanction, so the two studies using Swiss data are able to separately identify the effect of receiving a warning letter from that of receiving a sanction [2], [11].…”

“…Figure 2 summarizes ten empirical studies of the effects of sanctions that have a clear strategy for dealing with the main identification problem: separating the effects of sanctions from the effects of differences in observed and unobserved characteristics between unemployed workers who receive a sanction and those who do not (selection effects). Specifically, it seems likely that unemployed workers who receive a sanction have characteristics that would otherwise reduce their probability of unemployment exit or job entry [9], [10]. Failure to account for this selection effect is likely to lead to underestimates of the effects of benefit sanctions on these outcomes.…”

Carrot and Stick: How Reemployment Bonuses and Benefit Sanctions Affect Job Finding Rates

“…Jensen et al (2003) find a small effect of the sanctions that are part of Danish youth unemployment program. However, also using Danish data Svarer (2007) finds that the unemployment exit rate increases by more than 50% following enforcement of a sanction. Boockmann et al (2009) investigate the effectiveness of benefit sanctions applied to welfare recipients in Germany.…”