Effects of strengthened economic incentives in a decentralized active labour market policy (ALMP) context – the 2016 reform in Denmark

How the fiscal and administrative relationship between the central and subnational governments should be organised is a core question in the area of labour market policy in in all countries characterised by fiscal federalism. Not least whether changes in these relationships and/or increased use of economic incentives are suitable ways to handle the challenges of labour markets in an era of globalisation of markets, an ageing population and new requirements for labour market skills. Denmark is among the most decentralised countries in the world, and over the last decades labour market policies have been increasingly decentralised and incentivised. The Danish government implemented a major reform in 2016 in order to increase the focus of labour market policies more on results and effects and less on processes and activities. A core element in the reform was to increase the economic incentives for municipalities to prevent long-term unemployment and reduce the length of labour market benefits. This chapter evaluates and discusses the organisational and economic effects of the reform. The evaluation shows that the reform has had both organisational and economic consequences, but also that these vary across municipalities and types of beneficiaries and that the incentives of the reform may overlap at certain points with other incentives and aims in central-local relations. Overall, the reform reduced the time it took for recipients of unemployment benefits and the recipients of social assistance closest to employment to become self-supporting, while the results were neutral or even negative for the recipients of social assistance who were farther away from employment and long-term recipients of sickness benefits.