Are benefit reductions an effective activation strategy? The case of the lowest benefit recipients in Denmark

Decades of commitment to the basic principles of the Danish welfare state have been discarded with a new social policy reducing the benefits for people already at the bottom of the income ladder. The political intention is to increase job search via economic incentives that increase the gap between benefit income and market income. Using a panel dataset with benefit recipients, we show that the intended job search effect did not materialise to any significant extent; rather, the affected people became poorer because the vast majority of individuals could not respond to the economic incentives in the intended manner. Joblessness was not due to lack of incentives. This study confirms the importance of employability and self-efficacy, but it shows that health is an underlying variable that explains both of these factors and the recipients' difficulties in getting a job. The results have two major social policy implications. Access to early retirement schemes should be easier for recipients who have serious health problems and therefore cannot respond to economic incentives, and there should be an increased focus on how to help the recipients without major health problems to develop self-efficacy.