Indirect labour market effects

The active labour market policy is designed to get unemployed into jobs, but the policy also shows a lot of effects upon the employed and non-employed outside the labour force and thus on the economy as a whole. 

The indirect effects are difficult to measure, and there is a lack of research on the subject. No Danish empirical analyses show the connections between activation and the participation rate. The substitution effect has most thoroughly been analysed with Swedish data (Calmfors et al. 2001), but a quite new Danish study makes an attempt to clarify the phenomenon. Hussain and Rasmussen (2007) measure a substitution effect of 0.4. This means that the number of ordinary employees falls by 0.4 every time a person is employed in a wage subsidy scheme. 

For methodological reasons, it has only been possible to show this substitution effect for firms with a reasonably constant level of production. 

The Danish labour market system has been through a long period of reforms. The reforms have been characterised by an increased degree of orientation towards labour market needs, decentralisation, the provision of a right and a duty to activation, earlier efforts to mobilise the unemployed persons, and a shortening of benefit periods. 

The Danish reform strengthened the role of the social partners, especially at the regional level, increased the influence of the labour market organisations, and established decentralisation and a more flexible and responsive administration, which have formed the main instruments of the reform. 

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However, we do not know what would have happened without activation. There may be indirect positive effects of activation on overall employment which are hard to identify. First, activation may have slowed down increases in benefit dependency. Second, activation as a credible threat tends to lower reservation wages not only of the unemployed but also of wider groups of the labour force, which can stimulate labour demand and facilitate faster matching on the labour market. 

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