Ways to increase employment in Denmark 25. marts 2015

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1 Ways to increase employment in Denmark Ways to increase employment in Denmark 25. marts In brief Danish prosperity is challenged. Low growth is expected for the coming decades and from the middle of the 22s, a deficit on the public finances is also expected to an extent that will not fulfil the Budget Law. The actual labour supply is lower in Denmark compared to other countries. There is a need for reforms, that will increase the labour supply in Denmark one way is to reduce the number of people on public benefits. There are one million persons on public benefits between the ages of 16 and 66 - the same was the case in However, more persons have moved further away from the labour market. The Confederation of Danish Employers (DA) proposes reforms that impact especially the visitation into public benefits, financial incentives and the total number of public benefits programmes. It is estimated that the reforms will be able to increase the effective labour supply by 85, people. The potential comes from 25, people from disability pension (førtidspension), 1, people from flex jobs (fleksjobs), 2, from cash benefits (kontanthjælp), 1, people from sickness benefits (sygedagpenge) and 2, people from unemployment benefits (arbejdsløshedsdagpenge). There is also potential in other schemes, especially among the elderly, but they will not be discussed here. Major challenges many years into the future Low growth in Denmark for many years to come Danish prosperity is challenged. For many years, Denmark has had low growth compared to other countries. From 1998 and up to today, we have had the third lowest growth in OECD and it will not be much better in coming years. Up towards 23, OECD predicts that only six countries in the OECD area will have a lower growth than Denmark - and these are all countries with greater demographic challenges than Denmark, cf. figure 1.

2 Iceland Luxembourg Spain Canada Italy Norway Denmark Germany Portugal Ireland Japan Belgium Switzerland Austria Slovenia United States New Zealand Finland France Netherlands Hungary Israel Mexico United Kingdom Sweden Australia Greece Poland Slovak Republic Korea Czech Republic Estonia Turkey Chile Page 2 Figure 1 DK: 7th lowest growth in OECD towards 23 Annual growth in real GDP per capita, , percent NOTES: The growth rates are calculated on the background of GDP per capita, which is measured in fixed prices, american dollars and PPP-adjusted. SOURCE: OECD (214): Economic Outlook 95. Public sector does not fulfil the Budget Law from mid-22 Economic recovery can quickly lead to labour shortages At the same time, from the mid 22s and several decades ahead, there will be a deficit on the structural budget balance every single year, which exceeds ½ percent of GDP. This means that Denmark neither fulfils the Danish Budget Law nor the EU's regulations on public deficit. This could have a negative influence on the credibility of Danish economy. Denmark is challenged, also in the short-term. Despite almost seven years of low growth in GDP and employment, unemployment is relatively low - both historically and in comparison to other countries. Therefore, there is a risk that even with minor economic recovery, a situation could arise with a lack of labour, just like it did in Thus, Denmark will miss out on growth and prosperity. In both the long and short run, the challenges can be met by the increase of the actual labour supply in Denmark. We have previously had a unique position with a very high labour force participation rate, but we are being overtaken by other countries to a greater extent. In combination with relatively low annual working hours among employed people, the actual labour supply in Denmark is below the middle in an European context, cf. figure 2.

3 Iceland Switzerland Estonia Czech Republic Tyrkey Slovenia Austria United Kingdom Poland Sweden Slovak Republic Hungary Luxembourg Denmark Germany Finland Portugal Netherlands Norway France Belgium Greece Ireland Spain Italy Page 3 Figure 2 Danes' actual labour supply far from the top 1,4 1,2 1,,8,6,4,2, Total annual working hours distributed between all year olds, 1, hours, 213 1,4 1,2 1,,8,6,4,2, NOTES: Total annual working hours distributed between all people are calculated as the annual working hours per employed person * employment rate for year olds. Data for working hours is non-publiced data from OECD where the calculation method follows the same main principles as recommended by the Productivity Commission (213), Denmark's Productivity. Where are the problems? SOURCE:OECD.stat and figures for working hours are unpublished OECD estimates, which are based on the calculation method that is used in OECD Employment Outlook 24 (table 1.5) as well as own calculations. The higher actual labour supply in Sweden is not the result of a higher number of annual working hours. Employed Danes and Swedes work more or less an equal number of hours on average per year. In Denmark, the average annual working hours calculated by OECD is 1,452 hours, while in Sweden they work 1,454 hours per year. Higher labour supply in Sweden due to more people working The reason for the larger actual labour supply is that a higher proportion of the population have a job in Sweden compared to Denmark. Where 72.5 percent of the population of the ages have a job in Denmark, the corresponding proportion i Sweden is 74.4 percent. This figure has increased in the past ten years, while the development in Denmark has gone in the opposite direction. In Denmark, employment rates dropped for all other age groups than for the eldest, while employment rates have increased for all age groups in Sweden in the past ten years, cf. figure 3.

4 Page 4 Figure 3 Sweden has the highest employment rate 1 Proportion of population in employment, percent DK-24 DK-213 SE-24 SE year olds year olds year olds year olds SOURCE: Eurostat, Employment rates by sex, age and nationality (pct.), [lfsa_ergan]. Also higher participation rate in Sweden The same picture is seen for labour force participation in Denmark and Sweden. The labour force participation rate is approximately three percentage points higher in Sweden than in Denmark. The reason for the difference in labour force participation rates compared to the employment rate is due to a higher unemployment rate in Sweden. Labour force participation in Sweden has shown the same tendency as the employment in Sweden - however, not for the group of youngsters. If Denmark had the same labour force participation rate as Sweden, this would correspond to an increase in the labour force of almost 1, people. A higher actual labour supply in Denmark can be achieved in many ways. This can be done by increasing working hours, increasing the number of foreign employees, ensuring a better integration of immigrants and reducing the number of people on public benefits via effective reforms of the labour market. The latter is the focus of this paper. Fewer people on public benefits can both contribute to higher growth and to lower public expenses. There would even be a double gain with both fewer public expenses and higher tax income. 1 million year olds on public benefits in DK One reason for the lower performing output in Denmark is the very large proportion of the population on public benefits. On the whole, there are about one million people aged who receive public benefits, cf. figure 4.

5 Page 5 Figure 4 Large increase in benefit recipients since 197 Recipients of public benefits year olds, 1, full-time equivalents Cash benefits Leave of absence Flexjob etc. Maternity benefits Sickness benefits Unemployment benefits Activation Early retirement, flex-benefits etc. Disability pension, unemployment benefits for flex-jobbers and Pension NOTES: The retirement age was reduced from 67-years old to 65-years old from 24. Therefore, year-old pensioners are included in the figure. State education grant (SU) recipients are not included. Unemployment benefits (Arbejdsløshedsdagpenge) include holiday benefits (Feriedagpenge). Flex-jobs, etc. also cover other supported employment, including public supported jobs (skånejob). There was also supported employment before 1995, but there are no detailed statistics. The development over time must be interpreted with caution as it is not possible to make an entirely consistent time series for the whole period due to changes in the labour market policy and restructuring of the statistics. SOURCE: Ministry of Economic Affairs and the Interior's response to the Finance Committee's question no. 176 of 13 February 213, Economic Survey, December 214, ADAM and Statistics Denmark. Since 197, 7, more people are on public benefits The value of women in the labour market is a lost opportunity The high number of people on public benefits is a relatively new phenomenon. From 197 and up to 1995, the number of people on public benefits increased by almost 7, people. At the same time, more types of benefits programmes came into existence. The increase in benefit recipients does not reflect a drop in the labour force participation rate. The participation rate is basically unchanged from 197 to 213. The very large resource that came from women's increasing participation in the labour market has been mismanaged. Parallel to womens entrance to the labour market, men are to an increasing degree outside the labour market, cf. figure 5.

6 Page 6 Figure 5 Lower male participation, increased among women 1 Labour force participation rate, year olds, percent 1 8 Men 8 6 Total Women NOTES: The figures from Statistics Denmark is extrapolated with the development in the labour force from the labour force survey. SOURCE: Statistics Denmark, 6 years in figures, Eurostat, Population by sex, age, nationality and labour status (1 ) [lfsa_pganws]. This also means that Danish men have been surpassed by men in 12 OECD countries, all of whom now have higher labour force participation rates than Danish men in contrast to previously, see OECD.stat. Danes have become healthier The lower actual labour supply is not a result of poorer health in general in 213 than in 197. The average life expectancy has increased significantly and Danes' own assessment of their health over many years has become more positive. Since the mid-199s, the number of people on public benefits has been relatively stable despite changing business cycles and various reforms of the labour market. The situation has even worsened over this period given that the proportion of people on public benefits who are available for the labour market is significantly reduced. Unemployed people who are available for the labour market thus currently comprise approx. 16 percent of all people on public benefits against more than 4 percent at the beginning of the 199s and around 33 percent in 1995 where the number of people on public benefits was about the same as it is now, cf. table 1.

7 Page 7 Table 1 More people are further away from the labour market today The proportion of public benefit recipients year olds, percent The more grey the marking of the programme is, the further the people are from the labour market. Gross unemployed (unemployment benefits and social assistance benefits incl. activation) and holiday allowance benefit Maternity benefits and leave of absence Sickness benefit Social assistance (for people unfit for work, incl. activation) etc. Pension, early retirement, flex allowance and transition benefits Disability pension, flex and light jobs etc., unemployment benefit, rehabilitation and resource programme Total, percent Total on public assistance, 1, full-time equivalents The proportion of population year olds, percent NOTES: Figures for 1995 and 213 are based on ADAM's data bank with the exception of year old pensioners in 213, which is based on Statistics Denmark. Gross unemployed include holiday benefits. Supported employment can also be included in non-market-labour-ready cash benefits. Flex and light jobs include other supported employment and re-training. Estimate for 23 is based on the Ministry of Finance's projection, which is not age limited. Therefore, benefit recipients aged 67 in 23 will be included. However, this does not apply to oldage national pension where only year olds are included. There are no year old people on old-age national pensions in 23 due to the withdrawal reform, which increases the old-age pension retirement age. The Ministry of Finance's projection does not include an estimate for the non-labour-market-ready cash benefits and the figure is calculated residually based on the overall number of bridging benefit recipients (total includes supported employment and excludes study grants). The breakdown of the various public benefit groups and the development over time is encumbered with uncertainty due to changes in schemes and different source basis. SOURCE: Own calculations on the basis of ADAM, Statistics Denmark and the Ministry of Finance's updated 22 programme (August 214). The proportion of non-labour-market-ready cash benefit recipients, in particular, has increased as well as more fully withdrawn from the labour market on early retirement and pension today compared to Large drop in unemployment has only given a minor drop in the proportion on public benefits The large drop in unemployment in the past 2 years as a result of numerous reforms (shorter income maintenance period, etc.) has been positive. The problem is that the gain has not been reaped because the other schemes have increased correspondingly. Despite a drop in the structural unemployment of 8.6 percentage points from 1995 until today, the total proportion on public benefits in the period has only decreased from approximately 28 percent to approximately 27 percent. The large share of people on public benefits is a serious problem, for both the individual outside the labour market and for society as a whole, which misses out on growth and prosperity and has large expenses for public benefits that are financed by taxes. In line with people living longer and the increase in the number of elderly, it will be crucial

8 Page 8 for Danish society to change these structures. Withdrawal reform gives fewer people on public benefits In Denmark, a couple of larger and smaller reforms of the labour market have been implemented in recent years. In particular, the retirement reform, which in the coming years will mean that the number of people on public benefits among the year olds, according to projections, will be reduced towards 23. Here, the proportion on public benefits in the age group will drop to 2 percent, cf. table 1. However, it is only for the older age groups that a significant decrease is expected to occur. The number in the other schemes will increase slightly or remain unchanged in the coming many years, cf. figure 6. Figure 6 Fewer people on early retirement in 15 years Number of year olds, 1, full-time equivalents 1. Disability pension Sickness benefit Cash benefits (excl. activation) Activated receivers Supported employment Maternity benefit Unemployment benefit og holiday benefits Pension (65-66-year old) and early retirement NOTES: Supported employment is, among others, flex-jobs. Pension and early retirement are included in flex-benefits. Estimate for whole-year persons is based on the Ministry of Finance's projection with the exception of year old pensioners, which is based on DREAM's projection. See also the notes to table 1. SOURCE: Ministry of Finance (214) Updated 22 programme, Statistics Denmark and DREAM's projection. This also means that it is primarily among the population over 6-years old that labour force participation will increase, while almost nothing happens for the group of year olds in absolute terms. Other countries spend much less money on public benefits The large number of people on public benefits also means that public expenditures for income support is far higher in Denmark than in our neighbouring countries. Thus, the countries around us spend a considerably smaller proportion of GDP on supporting people of working ages. Denmark spends 7.9 percent of the GDP while Sweden spends 4.5 percent and Germany 3.8 percent, cf. figure 7.

9 Page 9 Figure 7 Large expenses for social benefits in Denmark 8 Public expenditures for income support to the working age population, Percent of GDP, Denmark Netherlands United Kingdom Sweden Germany NOTES: The figures are gross expenses. The average tax on social security is approx. 8 percentage points higher in Denmark than in Sweden. When adjusted for this, the additional expenditure in Denmark is DKK 6 billion net compared to DKK 65 billion gross. Study grants, housing benefits and subsidies for child-care are not included in the calculation. SOURCE: OECD (214), Social Expenditure Database, SOCX, Income Support to the Working Age Population. DKK 6 billion can be saved if level was the same as in Sweden If the expenses for public benefits for people of working age in Denmark was the same proportion as in Sweden, the public expenditure in Denmark every year would be DKK 6 billion lower - after correction for tax differences. In addition, there is also the gain from more people becoming employed. The reason for the higher public costs in Denmark is both a larger proportion on public benefits and that the benefit level in Denmark is higher than in Sweden. Inspiration from Sweden Over recent years, Sweden has implemented a number of reforms of the public benefits schemes, which have reduced the number of recipients significantly. After the very deep crisis in Sweden in the 199s where they held the record in attractive benefit schemes and people on early retirement pensions, changing Swedish governments have continuously implemented a comprehensive reform programme, which is about reducing the so-called "Utanförskapet" (Alienation). The reforms were particular-

10 Page 1 ly notable with the right-wing four-party government from 26 under the leadership of Frederik Reinfeldt. 2, fewer public benefit recipients in seven years In seven years, the work towards "Utanförskapet" (Alienation) has resulted in almost 2, fewer Swedes on public benefits, cf. figure 8. Figure 8 2, fewer benefit recipients in seven years Full-time equivalents in the "bidrags-ersättningssystem", 1,, year olds Early retirement benefit Sickness benefit Unemployment benefit Activation Cash benefits "Flex job" NOTES: "Flex-job" in Sweden is a time-limited wage subsidy scheme. SOURCE: Statistics Sweden (SCB), Arbetsformidlingen (Swedish National Employment Agency), Jobindsats and own calculations. Tax on work reduced The Swedish reforms were not only one reform of "Utanförskapet" (Alienation) but a number of reforms. A strong element is that economic incentives to work should be strong. The incentive to take a job is, among other things, increased by reducing the tax burden from 51 to 44 percent of the GDP. In relation to including more on the labour market and having fewer on public benefits, the Swedes have implemented reforms on disability pension, sickness benefits and unemployment benefits. Political decision to regular public benefits In addition, Sweden has chosen not to automatically regulate the socialbenefit levels. If social security is to be regulated from the current krone amount, a political decision in parliament is required. For example, the rate for unemployment benefits has not until recently changed over 15 years. In the disability pension area a change has occurred in the way of thinking the entire system so, as far as possible, it is about being able to support oneself and to the extent one is unable to, there is the pos-

11 Page 11 sibility for full or partial public support. The specific changes in the system are: Six major changes in the disability pension area Permanent loss of ability to work required. Graduated benefit percent depending on degree of loss of ability to work. Reduction of the rate for maximum disability pension (the Swedish rate is currently around 7 percent of the rate in Denmark). The insurance fund was previously independent regional units - now it is a state central authority with de-central units (this part was actually implemented earlier). Now only medical requirements - before domicile, social reasons and age. Time-limited disability pension discontinued. Requirement for permanent loss of ability to work The requirement for permanent loss of ability to work excludes, e.g. the granting of many early retirement pensions on the basis of mental ailments. Thus, Sweden also has fewer recognised occupational injuries as a result of mental ailments than in Denmark and the level is declining, see The Confederation of Danish Employers (DA) (214), Labour market report 214. The large municipal difference that previously existed in Sweden is reduced as it is now a state authority that awards disability pensions. Previously, it was possible to get a disability pension in Sweden on the basis of where you lived in Sweden, if you were close to the retirement age, or if you had social problems. This is no longer possible. Sweden has also discontinued the time-limited disability pension. This is, however, logical in connection with the requirement for permanent loss of ability to work. Important to limit influx to disability pension Sickness benefit is a major 'source' for disability pension in both Denmark and Sweden. Therefore, together with the reform of disability pension, Sweden also made a reform of sickness benefits with the following main elements:

12 Page 12 Three important elements in the reform of sickness benefits Rehabilitation programmes, which assess ability to work. Up to 9 days' focus on previous jobs days focus on all jobs in the company. After then, focus on all jobs in the labour market. After 2½ years, the sick person must go to the employment centre for three months to find a job - afterwards a new period is possible. 8 percent of previous wage at the most with a ceiling for one year. Then 75 percent of previous wage at the most with a ceiling for 18 months. Sharp drop in the number of sickness benefit recipients From 26 to 213, the number of sickness benefit recipients dropped by almost 5, people - however, with an increasing tendency in the past couple of years. The Swedish government has assessed that the reforms that have been implemented since 27 will increase the labour force by 3.5 percent up towards 22 - the most part before 218. Besides the effects of the labour market reforms, there are also effects of, e.g. the introduction of an employment allowance, see Sweden's government (214): The Government's Proposition 213/214:1 Large potential in Denmark for fewer recepients The large number of public benefit recipients in Denmark and the large amount of money that we spend in comparison to other countries shows that there is potential in reducing the number of public benefit recipients and, instead, get more people included in the labour market. On the whole, the same proportion of public benefit recipients as in Sweden will mean 2, fewer public benefit recipients in Denmark. A part of this potential exists, however, in the early retirement scheme where a reform has already been adopted, which will reduce the number of people on this scheme. Consequently, in the long term there will be about 2, people remaining in the scheme compared to about 9, people today. However, there continues to be a significant labour potential among the elderly - especially in the coming decades. If we only look at benefit schemes that are not primarily for older groups, the potential in relation to Sweden as a minimum is around 15, fewer on public benefits. Conversely, the employer-paid period for employees who become ill is two weeks in Sweden compared to four weeks in Denmark. Therefore, there will be more sickness benefit recipients in Sweden for this reason only. Large municipal dif- Another perspective on the potential for fewer public benefit recipients

13 Page 13 ferences in proportion of public benefit recipients in Denmark could be looking at the considerable differences in the proportion of public benefit recipients across municipalities in Denmark, eventhough they administer the same set of rules. This is also the case for municipalities with the same framework terms (i.e. the same expected proportion of public benefit recipients given the inhabitant composition in the municipality). If municipalities with the same framework terms - in the same cluster - reduce the proportion of public benefit recipients, corresponding to the municipality in the cluster with the lowest proportion on public benefits, the number of recepients can be reduced by almost 8, full-time persons, cf. table 2. Table 2 Potential for more people in the labour force 1, persons year olds In total on public benefits, excl. early retirement and maternity Of which: Number in 214 Reduction if proportion same as in Sweden 213 Reduction within cluster ofmunicipalities Possible extra effective labour supply Disability pension Flex-job Cash benefits, non-labour-market-ready Sickness benefit Gross unemployed - cash benefits and unemployment benefits NOTES: All figures are rounded-up to the nearest 5, people due to uncertainty. Non-labour-market-ready cash benefits is based on Jobindsats and includes youngsters on education benefits and the match category disclosed. Disability pension includes resource programmes and flex-jobs include unemployment benefits. The 214 figure is the average of the first to third quarter 214 for the calculation of full-time public benefit recipients (Statistics Denmark). Reduction with cluster of municipalities is based on a cluster analysis. There is the potential if municipalities with the same framework terms reduce the proportion in the benefit group to the municipality in the cluster that has the lowest proportion. The cluster analysis for the overall potential includes all benefits except for early retirement and maternity benefits. It is less than the sum of the individual benefits because consideration has been taken of the difference in the distribution of the individual benefits between the municipalities. For more information about the method see SFI (213). For gross unemployed, the potential is calculated for unemployment benefits (incl. re-training). The comparison with Sweden can only be done for disability pension and flex-jobs as the other schemes are not comparable. The assessment of extra labour supply is, among other things, based on studies on the effects of various reforms and actual retirement patterns from the individual schemes for the labour force. Increase labour supply can reflect both more people and increased working hours. The grey figures have been used for the calculation of the potential. SOURCE: Statistics Denmark, Jobindsats and own calculations. Since the set-up of many of the benefit schemes are different in Sweden and Denmark, it is not possible to compare the proportion on public benefits scheme by scheme. However, it is possible for disability pensions and flex-jobs, which are relatively comparable schemes. Here, Swedish experiences indicate that there would be considerable potential

14 Page 14 in reducing the Danish scope. Lower proportion on disability pension in Sweden 25, disability pensioners can join the labour force Adjustment from labour force to employment is four to five years Currently there are 23, disability pensioners, which corresponds to 6.6 percent of the population in the age group. This is a larger proportion than in Sweden, where the proportion is 5.4 percent given that Sweden has been able to bring down the number of disability pensions significantly over recent years. If Denmark could reduce the extent of disability pension to the same proportion as in Sweden, this will correspond to 55, fewer people on disability pension. On the background of a number of studies on the effects of disability pension reforms in Denmark and abroad, The Confederation of Danish Employees (DA) assess that approx. 5 percent of the disability pensioners who will no longer be on the scheme, can be transferred to the labour force - this corresponds to almost 25, people. Historic experiences in Denmark dictate that an increased labour force leads to a correspondingly higher employment. This adjustment occurs relatively fast - typically in the course of four to five years, see The Ministry of Finance (214): Finance Report 214. The proportion in relation to people in flex-jobs is also lower in Sweden than in Denmark. In Denmark, 2 percent of all year olds are given a flex-job compared to 1.2 percent in Sweden. If we had the same proportion as in Sweden, there would be 3, fewer people in flexjobs. The effective labour supply can be increased by 1, via fewer in flex-jobs People in flex-jobs are already in the labour force, but their working hours are significantly below the average working hours among other employees. If the group that will no longer be in flex-jobs increase their working hours to the average number of working hours, this will correspond to the increase of the effective labour supply with 1, people. There are large municipal differences in the proportion of non-labourmarket-ready cash benefit recipients. For example, Egedal has a proportion of approx. 1.3 percent of the population between 16 and 66- years old while the proportion in Brøndby is approx. 5 percent. If municipalities with the same framework terms reduce the share of nonlabour-market-ready cash benefit recipients, which corresponds to the municipality in the cluster with the lowest proportion, the number could be reduced by approximately 3, people. 2, more cash benefit recipients in the labour force Among them, about 7 percent would transfer to the labour force, which corresponds to approx. 2, people. It is a slightly lower proportion than what is typically used in model calculations for analyses of changes to the early retirement scheme. On the contrary, it is slightly higher than the proportion that is assessed as being able to be in the labour force instead of on disability pension.

15 Page 15 Fewer on sickness benefits can increase labour supply by 1, Reduction of unemployment gives 2, in effective labour supply The total number of people on sickness benefits is approx. 6, fulltime people. DA assesses that there is potential in reducing sickness absence in the region of 1, full-time people from the current population. Again, based on municipal differences in the use of sickness benefits. Even among the unemployed there are large municipal variations where, for example, Copenhagen has a relatively high unemployment rate despite the fact that Copenhagen has a large job creation. If municipalities with the same framework terms reduce the number of unemployed people, which corresponds to the municipality in the cluster with the lowest proportion, the number could be reduced by in the region of 2, people. Reform programme for fewer public benefit recipients There are many parameters that are critical to the number of public benefit recipients of working age. The demographic composition means something in combination with the population's state of health. Moreover, the structure and set-up of the welfare system is, of course, very important. Many elements central to the number of public benefit recipients Most important features of a benefit system are: Visitation into and assessment of the benefits - how strict are the requirements to get a benefit and how well are they enforced? The economic incentives in the system - for both the individual in relation to the benefit level compared to wages in the labour market and for the awarding authority in the form of refund from the state etc. The requirements to receive a benefit to which degree should people be available for jobs, should efforts be provided that correspond to having a job, should the health be poor, etc.? Checking up on benefit recipients - to what extent should it be checked that they fulfil the requirements that exist to receive a benefit? The scope/number of schemes can in themselves be of importance to the number of recipients - for example, this applies to flex-jobs which have just increased the number of public benefit recipients and not reduced the number on disability pension. The authorities effort to get the people out of public benefits again. DA suggests a number of reforms which, to a greater or smaller extent, would change these parameters within one or more of the benefit schemes. At the same time, DA's approach is that the starting point

16 Minimum wage Unemployment benefits Cash benefits Sickness benefits (available) Job clarification allowance Flex wage subsidy unemployment benefits, flexjobbers Ressource program Disability pension Early retirement benefit/flex allowance Page 16 should be in the individual's duty to initially be self-supporting. DA's reforms will be able to increase labour force by 85, Cash benefits is a constitutional right The reform proposals will be unpacked in the next section. The assessment is that if the entire package is implemented, then the full potential for the labour force could be realised, which corresponds to around 85, people. It would, as a minimum, also be the number of people by which the number of public benefit recipients could be reduced. The potential, however, could also be greater. When people no longer have the possibility to get public benefits in one scheme, they can join the labour force, become self-supporting or transfer to another public benefit scheme. Anyone who cannot support "himself and his family" has a constitutional right to cash benefits. A new cohesive benefit system Complicated Danish benefit system The Danish benefit system is complicated with a whole range of different schemes. At the same time, the terms are the most attractive for those schemes, where people are furthest away from the labour market, cf. figure 9. Figure 9 Many schemes - unhealthy incentives 125 Payment DKK per hour, transfers adjusted for labour market contribution, minimum wage adjusted for employment allowance, NOTES: The starting point is the right to public benefits for a person who has previously had an income that corresponds to the minimum wage in the DA/LO (the Danish Confederation of Trade Unions) area. Cash benefits are for people over 3-years old. SOURCE: The Ministry of Employment, The Ministry of Children, Gender Equality, Integration and Social Affairs, ATP (Labour market supplementary pension) and the national collective agreement for shops between The Danish Chamber of Commerce and HK Handel trade union.

17 Page 17 There must be a gain in order to be close to the labour market Three leading principles in new benefit system In the Danish system, it is almost a gain not to be available for the labour market. It should be the opposite so there is a gain in being close to the labour market and being available for work. Therefore, DA proposes a new benefit system with fewer schemes than today. At the same time, it should be built up around some leading basic principles: One main principle should be that public benefits - unless this concerns insurance schemes - are lower than the minimum wages that are agreed on in the private sector. There should be a financial incentive to take a job and it should be more financially advantageous to be close to the labour market rather than far away. There should be a benefit basis of a reasonable size for people who do not have the possibility to support themselves. Fewer schemes and healthy incentives For a person on minimum wage, DA's proposal for a new benefit system would mean that the benefit for sick unemployed and disability pension, would be lower than in the current system. Thus, there would be an incentive to get closer and closer to the labour market. At the same time, there would be fewer schemes than today, cf. figure 1.

18 Minimum wage Unemployment benefits Cash benefits Sickness benefits for unemployed Disability pension Page 18 Figure 1 Few schemes - healthy incentives Payment DKK per hour, transfers adjusted for labour market contribution, minimum wage adjusted for employment allowance, NOTES: The starting point is the right to public benefits for a person who has previously had an income that corresponds to the minimum wage in the DA/LO (the Danish Confederation of Trade Unions) area. Cash benefits are set rates for breadwinners over the age of 3. Disability pension is for a person who has lost the ability to work and thus receives 1 percent. SOURCE: The Ministry of Employment, The Ministry of Children, Gender Equality, Integration and Social Affairs, ATP (Labour market supplementary pension) and the national collective agreement for shops between The Danish Chamber of Commerce and HK Handel trade union and own calculation. Main priorities where the effect is the biggest The DA community proposes reforms of the following benefit schemes/themes: Disability pension (førtidspension) Flex-jobs (fleksjobs) Cash benefits (kontanthjælp) Sickness benefits (sygedagpenge) Regulating of public benefits (satsregulering) DA finds these schemes to be the most important because there is greatest potential to get more people in employment. At the same time, reforms have been implemented among the older age groups, which would get more people in these age groups out into the labour force in coming years. There continues to be labour potential among older groups, just as there is also potential in other benefit schemes, but they will not be dealt with further in this report.

19 Page 19 Reform of disability pension and flex-job The potential to increase the labour force participation is particularly large in the disability pension area where Denmark has a high proportion on disability pension compared to other countries and with great variations across municipalities. Despite the overall improvement in health in the western world, there are different reasons why, all things being equal, disability pension has grown significantly. Disability pension has become more attractive for some groups, e.g. in line with other benefit systems becoming more strict (such as unemployment benefits) and in line with job options for unskilled people decreases. A number of countries, e.g. Sweden, the Netherlands and Great Britain, have implemented comprehensive reforms and shown how reducing access to the scheme, in particular, can be done. 1. Visitation into the scheme It is altogether necessary to reduce the access to disability pension, as is the case in, e.g. Sweden. DA proposes: Proposal 1. The administration of disability pension should be moved from the municipalities to a central authority under the state. 2. A re-assessment of already awarded disability pensions should be done. 3. It should only be possible to get a disability pension if documentation shows that the ability to work is permanently reduced and - based on the existing knowledge - will always be reduced. Significant drop in access to disability pension in Sweden Visitation should be done by a central authority The Swedish reforms have reduced the access to disability pension significantly. Among other things, moving the visitation into disability pension from the municipalities to a state authority has been implemented. The access is thus reduced from a level of around 4, new disability pensioners per month to around 1,, see Forsäkringskassan.se. If a larger proportion of those people who are currently on disability pension are instead included in the labour market and able to support themselves, then the visitation into the scheme should be far more uniform across municipalities so that it is actually the loss of ability to work rather than other reasons that is fundamental for granting a disability pension. Therefore, it must be a central authority that awards disability pension - just like in Sweden. The requirement for permanent loss of ability to work means that in the future, it will not be possible to get a disability pension on the basis of stress ailments, fibromyalgia, whiplash, misuse, impaired vision or

20 Page 2 hearing, muscular and skeletal ailments, etc. The ailment basis on which a disability pension is given is not necessarily permanent. For example, 5 percent of the disability pensions are awarded on the basis of a mental ailment and even though the proportion was lower 15 years ago, nonetheless 3 percent was due to mental ailments. Mental health can be very dynamic Mental ailments are often dynamic so that many people get better after a few years. Of a group of 5-64-year olds who had a serious mental illness in 24, less than a third continued to have a serious mental illness three years later. At the same time, more than a third were cured three years later, cf. figure 11. Figure 11 Mental health is dynamic 4 Proportion of group with serious mental illnesses in 24 after health status in 27 (5-64-year olds), percent No Illness Moderate illness Serious illness NOTES: Data is from OECD s survey Health, Ageing and Retirement (SHARE). SOURCE: OECD (212), Sick on the job? Myths and realities about mental health and work, Paris. Many disability pensioners could have become better It suggests that a proportion of the disability pensioners have become better. This is supported by the analyses of disability pensioners' selfassessed health and analyses from the Labour Market Commission (29), Welfare requires work. It is essential that people who have become healthy are not excluded from the labour market for the rest of their lives. Therefore, all disability pensioners should have their case reassessed. For example, in the Netherlands there have been good results in conducting a re-assessment. It would be an important source to reduce the number of people on disability pensions relatively quickly.

21 Page Simplification of the system Reduced ability to work - a jumble of benefits The disability pension and flex-job scheme is not just one benefit, but several benefits: Disability pension Flex-wage subsidy for people in flex-jobs Unemployment benefit for people who are referred to a flex-job but who are unemployed and only available for a flex-job. Flex-benefit for people who are referred to a flex-job but who withdraw on an early retirement scheme. Today there is a safeguarding of income regardless of the loss of ability to work The system is built up around a support basis of a certain size - regardless of how much loss of ability to work a person has and regardless of whether the person can find a job or not. The philosophy in the Swedish system is another. Here, it is the individual's responsibility to find a job that can provide an income that supplements the public support due to the loss of ability to work. In Denmark, we give money beforehand and then the benefit is deducted in the event of income from work. With the basis in the Swedish system, DA proposes: Proposal 4. Disability pension must be a graduated rate of and 1 percent. 5. The proposal integrates flex-jobs into the disability pension scheme. 6. The unemployment benefit must be phased out and instead, parttime disability pensioners who do not have a job can receive cash benefits if they fulfil the conditions for this. 7. The flex-benefit, which is the special early retirement for flex-job workers, must be phased out. Less ill people must have graduated rates Do away with extra If a person has a permanently reduced ability to work, but still has, e.g. 5 percent capacity to work remaining, the person must be able to be granted a disability pension of 5 percent of the highest disability pension. Therefore, it is up to the person concerned to make use of the remaining working capacity and thus have income from work as a supplement to the disability pension. This could be at an hourly rate that is determined on the basis of productivity, number of working hours and the hourly rate that is paid in corresponding or comparable jobs in the company. In the current flex-job scheme, a parallel system has been created of

22 Page 22 benefits the benefit schemes. This must be stopped and the many extra benefits, such as unemployment benefit and flex-benefit, must be discontinued so the system becomes simple and transparent. A number of the people who are in flex-jobs today will probably be in the target group for a graduated rate for disability pension. The graduated rate for disability pension involves the flex-job scheme becoming an integrated part of the disability pension. In some areas, the labour market parties have created terms that ensure that this can be done. 3. Reduction of the disability pension rate Due to the high benefit level, the very few requirements and the favourable deduction rules for other income, the disability pension is the most attractive public benefits scheme today. It creates an unhealthy incentive structure when the scheme that has the most attractive terms, has recipients that are the furthest away from the labour market. Benefit level is of importance to the number At the same time, analyses from OECD show that the benefit level in the disability pension is of importance to the number of benefit recipients. On this background, DA proposes: Proposal 8. The benefit level in disability pension must correspond to cash benefits. 9. The resource programme benefit must be discontinued. Participants in the resource programme must have cash benefits. The benefit for disability pension will thus be lower than it is today and continue to be spouse-dependent, but not dependent on breadwinner status like cash benefits is. Consequently, future disability pensioners will receive the same rate as the rate for cash benefits recipients over the age of 3, who are breadwinners. In the new system, this rate will correspond to 75 percent of the income maintenance maximum, which in 215 will be about DKK 13,5 per month. 4. Deduction in disability pension The current deduction rules in disability pension are so favourable that it requires income in excess of DKK 75, per year before the disability pension is fully deducted. This means that the combination of public disability pension, coverage from labour market pension schemes and other forms of compensation, e.g. occupational injury compensation, provide the possibility for very attractive annual incomes without having to work. Proposal 1. The basic deduction for other income must be reduced from DKK 73, to DKK 25, for people on full disability pension and the deduction percentage must be increased from 3 to 5 percent. Among the 1 percent of disability pensioners with the highest income, a third of their annual income, on average, originates from private pen-

23 Page 23 sions - approx. DKK 1,. For the other 9 percent, private pensions mean less to the overall income. Disability pensioners with a medium-length and long further education, in particular, have supplementary pensions. It is essential that deduction of this type of income occurs. Alternative to restructuring: Reform of the flex-job scheme Restructuring of the flex-job scheme - next-best tighteningup The change to the flex-job scheme that came about with the latest reform has not made the scheme sufficiently healthy. There is still a lot lacking and possibilities for misuse. DA aim at getting the scheme restructured, see proposal under disability pension. If there is no political willingness for this, then the current scheme must be tightened up and made more practicable. DA proposes: Proposal 1. Lower subsidy in flex-jobs and lower unemployment benefit 2. Visitation into flex-jobs must be moved from the municipalities to a central authority under the state. 3. Flex-job workers must minimum work the number of hours which the awarding authority assesses as possible for the person - or be available for the number of hours. 4. Flex-jobs must also be temporary for people over the age of 4 and minimum every 18 months, the awarding authority must decide whether the person concerned continues to fulfil the conditions for a flex-job. 5. The requirement for 12 months' employment on special terms in order to establish a flex-job at the company, which the flex-job visitation have worked on up to now, is discontinued. 6. The disability protection rules must not be an obstacle to employment of flex-job workers at the companies. 7. The flex-job reward for employing flex-job workers with weekly working hours of less than ten hours must be discontinued. Significant opportunities to misuse the scheme The high subsidy and the low requirements to work entail a considerable risk for de facto misuse of the flex-job scheme. The size of the subsidies must, as a minimum, be reduced. The specific proposal is to reduce the flex-wage subsidy from 98 to 8 percent of the maximum unemployment benefit leveland reduce the flex-job unemployment benefit from 89 to 7 percent of the unemployment benefit level. The consequence of the high subsidy is also that, typically, it is not worth one's while to increase the working hours for people with lower income.

24 Page 24 The assessed possible number of hours must be a minimum requirement It is necessary for the awarding authority to assess how many hours each individual person who is referred to a flex-job can work. The assessed number of hours must be a minimum requirement for the flexjob. The average working hours in the flex-job scheme has been dropping in recent years. People in flex-jobs state that their normal working hours are 21 hours per week. The working hours for new flex-job workers are, however, considerably lower at approx. nine hours per week. Thus, many people have very few hours of work. There is a risk of de facto misuse of the scheme because the recipients can get a high benefit without having to perform anything of note. Here as well, the 4- year old limit is arbitrary Faster requirements for re-assessment of flex-job Today it is difficult to retain employees As with disability pension, there are more favourable rules for people aged 4 and above. After one temporary flex-job for five years, the over 4's can be granted a permanent flex-job. This option must be discontinued so that a flex-job is always time-limited. Today, the municipality every 2½ years has to assess if the person continues to fulfil the conditions for a flex-job. In future, the awarding authority should make this assessment, as a minimum every 18 months. The requirement for 12 months' employment on special terms prior to being able to be employed in a flex-job at a previous company means that very few people are now being retained at the previous company. It is important for companies, and employees, to be able to retain employees with reduced ability to work through the flex-job scheme, which is why the 12-month requirement should be phased out. It is the awarding authority's responsibility to ensure that only people with permanently reduced ability to work will be awarded a flex-job. A precondition for being referred to a flex-job is that the ability to work is significantly limited and that this condition is permanent. These characteristics often mean that flex-job workers are covered by the protection rules in the discriminatory treatment act. The discriminatory treatment act forbids discriminatory treatment, which is due to a disability. This applies in relation to the decision on employment. It applies in all relations where a company makes a decision, takes action or advises in relation to a disabled employee. Disability protection rules often apply to flex-job workers When a company is to change terms for a disabled employee, it has a duty to adapt the tasks to the person. This often involves that the working hours or workload has to be reduced. Very special rules apply if the company wants to carry out a dismissal. The basis is that a dismissal can only take place if the grounds are not the disability. The Danish rules on discriminatory treatment originate from, e.g. a UN convention and a EU directive. Therefore, there are limits to the room for action Danish politicians have.