No signs that a shorter unemployment benefit period leads to increased employment protection

There have been proposals in the economic debate to shorten the unemployment benefit period, as well as to decrease the benefits by 10 percent. The argument has been that this would increase employment. In addition, those receiving maximum unemployment benefits have a very weak incentive (of 300 DKK per month) to take low-paying jobs. A common counterargument against these proposals is that if job security is reduced through lower unemployment benefits, wage earners will respond by demanding, for example, longer notice periods (less flexibility). This would clash with the Danish flexicurity model.

This is just speculation as to what would happen if unemployment benefit amounts or periods were reduced. No “hard facts” have been presented to back up this speculation. If we examine developments in Denmark over time, the shortening of the unemployment benefit period has not led to increased employment protection. Since the 1990s, the benefit period has been reduced from having no upper limit at all to 2 years. This has reduced security for wage earners, since they cannot be on unemployment benefits for such a long period of time. It has not, however, led to increased employment protection, which has remained essentially unchanged since 1985.

We can observe another indication that less unemployment benefit coverage does not result in longer notice periods if we examine the situation across all OECD countries. Here, there is a positive correlation between the level of unemployment compensation (benefits compared to wages) and employment protection: if lower unemployment benefits lead to increased employment protection (less flexibility and, e.g., longer notice periods), then we would expect to see a negative correlation. This means that, across OECD countries, there is no indication that lower unemployment benefits result in increased employment protection. In other words, these “hard facts” do not back up the speculation.