4. Structure and characteristics of wage subsidies: Incentives for employers to enhance the integration of immigrants

In this section, we describe measures that can support employers in integrating immigrants into the Nordic labour market, with a particular emphasis on wage subsidies. Additionally, this section provides examples of national programmes designed to ease labour market integration of immigrants in the Nordic countries, and highlights potential limitations associated with employment subsidies.

A wage subsidy is a financial incentive designed to encourage employers to hire certain categories of job seekers who are deemed to have reduced employability, such as low-skilled immigrants. This subsidy often covers a share of wages paid by the employer to the individual hired for a specified period, thereby reducing the employer’s hiring costs while also compensating for a potential productivity gap or additional training needs (Gustafsson et al., 2014).

Wage subsidies have been shown to have a positive correlation with employment among immigrants (Alasalmi et al., 2019), especially in the shorter term (Hernes et al., 2022). Nevertheless, their adoption remains rather limited across the Nordic countries, except for Sweden (Calmfors & Sánchez Gassen, 2019), where approximately 30% of refugees benefit from subsidised employment during the first three years – a rate considerably higher than that observed in Denmark and Norway (Hernes et al., 2022). This could also be a result of different labour market legislation, e.g. employment contracts being more flexible in Denmark than in Sweden.

In a recent study, the Swedish Employment Service found evidence that providing wage support to employers has positive effects on transitions to unsubsidised work, especially at a lower level of subsidy (i.e. requiring co-financing by the employer). Subsidised employment also has a positive effect on education relevant to the labour market, such as knowledge of Swedish, and ‘feeling at home in Swedish society’, especially among foreign-born women (Arbetsförmedlingen, 2023).

According to the annual report 2022, one of the Swedish Employment Service’s focus areas is to increase the number of long-term unemployed people who are hired with employment subsidies, which could increase the likelihood of these individuals subsequently getting a ‘real’ job (i.e. regular employment). A total of 149,600 individuals had some form of subsidised employment in 2022, which is roughly the same level as previous years (2021: 150,500; 2020: 151,500). Of these individuals, 75,500 were long-term unemployed and/or foreign-born. Two other goals have been set. The first is to increase the share of women (37% in 2022), employed with New Start jobs – a form of state support to employers when hiring a person who is long-term unemployed or a newly arrived immigrant in Sweden. The second is to simplify the application process for employers via a new online service launched in 2022. As a result, the agency recorded an increase in applications by employers from 15,400 in 2020 to 21,300 during 2022 (Arbetsförmedlingen, 2022).  

Earlier studies such as those by Calmfors & Sánchez Gassen (2019), indicate that some employers are sceptical about wage subsidies. And a survey by Andersson Joona (2019) revealed that in Sweden, approximately one-fifth of employers who had not utilized subsidized employment were unaware that such schemes existed. These findings highlight the importance of easier access to information about the benefits of wage subsidies and improving support to employers on how to apply for them and find eligible candidates.

In Denmark, the national employment service, Styrelsen for Arbejdsmarked og Rekruttering (STAR) is responsible for the active employment measures for unemployed (The Danish Agency for Labour Market and Recruitment, 2023), except for refugees within the 5-year “selvforsørgelses- og hjemrejseprogram”(self-sufficiency and repatriation programme) (The Danish Ministry of Immigration and Integration, n.d.). However, municipal job centres are responsible for the implementation of all measures. Job centres are available in every municipality and provide matching services for employers seeking new talents, and for unemployed people of all categories to find work. When it comes to subsidised employment, two types of measures are offered:

This training program can be used to retrain or upskill jobseekers and thereby upgrade their qualifications. The jobseekers continue to receive unemployment insurance benefit or social assistance/benefit throughout their internships. This measure is the most widely used in Denmark (KL, interview 2023).

In both the private and public sectors, wage subsidies are provided to employers when they hire a person who has been unemployed for at least six months. Public and private companies are eligible for a wage subsidy to hire an unemployed person for a period of four to twelve months, depending on the person's category of unemployment. For jobseekers over 50, other rules apply – they can be hired with a wage subsidy from day one of unemployment.

Basic integration training (IGU) allows companies to employ refugees or family reunification beneficiaries as part of a two-year programme that combines paid internship in a company with vocational upskilling and Danish language training. IGU allows companies to employ a refugee for two years at a salary that takes into account the fact that the person’s professional and language skills do not yet meet Danish labour market requirements (Dansk Industri, 2022).

In the period July 2016–May 2023, a total of approx. 3,000 IGU agreements were registered. This means that just over 8% of the estimated target group entered into an agreement on an IGU programme. The evaluation report by the Ministry of Immigration and Integration (2021) shows that around four out of 10 programmes were completed, both in the public and private sector. The completion rate was slightly higher for women than for men, with six out of 10 IGU agreements signed with women. A year after completing the programme, approximately 25% of participants were again receiving unemployment benefit (basically a self-sufficiency and return benefit or transition benefit).

The number of registered new IGU programmes has dropped significantly since 2017 due to Covid19 and the declining number of asylum seekers in Denmark. During the first nine months of 2023, an average of 18 new IGU programmes per month were registered. In response to this, from 1 January 2024, the target group eligible for IGU will be expanded to include refugees and all categories of family connections aged 18-50 years who have lived in Denmark up to 20 years (KL, interview 2023).

Various types of support and assistance are available in Finland for both the jobseeker and the employer, in connection with the recruitment of persons with partial work ability or who are experiencing obstacles to entering the labour market (Finnish Institute for Health and Welfare, 2022).

The national pay subsidy reform, launched in July 2023, provides financial assistance to employers that hire unemployed individuals, equalling to 50% of payroll costs. For those hiring individuals with reduced work capacity, the subsidy increases to 70%. Associations, foundations, and registered religious communities are eligible for a full 100% subsidy. Although not aimed specifically at immigrant workers, the subsidy targets individuals with skills gaps, permanent disabilities, or those aged over 60 facing long-term unemployment. The subsidy is provided to employers to compensate for the possibly lower productivity and the extra guidance time needed for these employees.

In terms of overall costs to the national economy, pay subsidies for private-sector organisations are considered effective tools for improving employment, along with apprenticeship training (Alasalmi et al., 2019).

Work try-outs are a practical way for employers to evaluate if a person is a good fit for a specific job. This programme offers assistance to individuals returning to work after a prolonged absence or considering a career change. Work try-outs, often coordinated by institutions like TE Offices (national public employment and economic services), are not formal employment arrangements. Instead of a salary, individuals in these programs receive an expense allowance and unemployment benefits. While the maximum duration for a work try-out is 12 months, contracts typically range from 1 to 3 months.

The primary wage subsidy in Iceland is known as the Recruitment Grant for Employers. This grant enables employers to claim between 50% to 100% of the basic unemployment benefits and an 11.5% pension fund contribution for new hires for up to six months. The maximum subsidy amount is ISK 369,397 (ca EUR 2,451). To qualify, employers must not have made any layoffs from the intended position within the previous six months. The subsidy amount is progressive, with longer periods of unemployment (six months or more) resulting in higher benefits for the employer (The Icelandic Directorate of Labour, n.d.).

A similar system exists for refugees who have not yet entered the labour market. Those receiving financial assistance from municipalities are often eligible for job training grants with a duration of up to six months. Public Employment Service (PES) counselors facilitate the introduction of these grants to both refugees and potential employers. The grant amount may vary by municipality, generally hovering around ISK 230,000 (ca EUR 1,526).

In Norway, various financial grants and support schemes are available for employers:

The purpose of this grant is to simplify the hiring process for individuals involved in NAV initiatives (e.g. individuals with disabilities) or those with specific adaptation and support requirements. The grant is designed to reimburse employers for various costs, including assistive technology, training programs and personal equipment. NAV’s contribution covers these expenses up to a maximum of NOK 143,900 (ca EUR 12,045) per person (NAV, 2023a).

NAV

NAV is the Norwegian Labour and Welfare Administration, a government agency responsible for a wide range of welfare and employment services in Norway. It provides services related to unemployment benefits, social welfare, pensions, child benefits, and more.

offers temporary wage subsidies to cover part of an employee’s salary for a defined period, allowing employers to hire candidates

Temporary wage supplement may be applicable for: 1) people with difficulties in entering the job market 2) people at risk of losing their job after being on full or partial sick leave for 12 months.

 for standard full-time or part-time positions with regular pay. While employers benefit from the subsidy to mitigate wage costs, the primary goal of this initiative is to enhance employment opportunities and encourage job stability for a wider range of workers (NAV, 2023b).

The subsidy period generally extends up to one year, with the length being determined through ongoing discussions between NAV and the employer.  Individuals with reduced work capacity can be subsidised for up to two years. Initially, the subsidy covers 40% of the employee’s salary for the first six months, which then drops to 30%. For those with reduced work capacity, the coverage starts at 60% for up to one year, which is subsequently reduced to 50%. Employers can apply for reimbursement at the end of the subsidy period. Both NAV and the employer share responsibility for supervising the employee’s work during the subsidy period, with the employer providing daily oversight to ensure adherence to the agreement.

Summer job grants serve as a support tool for employers to provide temporary jobs to young people who are far from the labour market. These grants allow young individuals to acquire essential work experience, enhancing their future employment prospects. The grants apply to hiring young people aged 16 to 29 who are registered with NAV, which has evaluated their need for additional help to find work (NAV, 2023c).

Employers receive a subsidy from NAV covering 50% of these young participants’ salaries for up to four weeks. For individuals with reduced work capacity, the coverage increases to 75%. Furthermore, employers may also receive a grant for a mentor, if there is a need for assistance or guidance in connection with implementing the programme.

In a 2018 survey among the member organisations of the Confederation of Norwegian Enterprise (NHO), the design and structure of wage subsidies were criticised by companies (Proba samfunnsanalyse, 2018). Companies view the three-month commitment, which needs to be renewed every three months, as a disadvantage. Both survey data and interviews conducted by Proba Samfunnsanalyse reveal the companies’ preference for wage subsidies that are more predictable and flexible, as well as tailored to individual circumstances. Companies point out that training candidates under wage subsidies often takes longer than training regular employees, underpinning the importance of tailored support (Proba samfunnsanalyse, 2018).

In Sweden, Arbetsförmedlingen (the Swedish Public Employment Service) is responsible for providing subsidised employment as a means of accelerating labour market entry for jobseekers with a weaker position on the labour market, including immigrants. From January 2024, employers will be able to apply for two kinds of wage support when offering positions to foreign-born jobseekers:

This is a deduction on the employment tax (arbetsgivaravgift) available to employers when hiring a person who is long-term unemployed or a newly arrived immigrant. Depending on the age of the unemployed person, the employer can receive the tax deduction over a period of six months to four years (when hiring someone over 55 years of age).

This supplement consists of both financial compensation for the hiring employer, plus paid language training or other vocational training/upskilling for the employee during workdays, to enhance the employee’s competencies and CV. The employer also gets compensated for providing a mentor to a new employee. This extended support applies when employing a person who has been away from working life for a long time and has very limited work experience, is young, or has recently arrived in Sweden (Arbetsförmedlingen, n.d.).

Etableringslyftet (www.etableringslyftet.se) is a project aimed at boosting the skills of new arrivals and other foreign-born people who are far from the labour market and matching them with local employers. Through customised language support and mentorship, and by utilizing wage subsidies, it provides employers with opportunities to find individuals with the right attitude, who can develop their competencies on the job. The project is set up as a co-operation between three municipalities in the northern Stockholm region and the Swedish Public Employment Service. It is and is co-financed by the European Social Fund.

As explored in this chapter, the Nordic countries offer various wage subsidy programs aimed at encouraging employers to hire immigrants, who may have limited language skills or limited work experience within the Nordic region. Several countries work to increase the use of subsidised employment, as evaluations have shown that these measures help jobseekers gain valuable on-the-job experience. Such experience significantly improves the prospects of jobseekers to secure long-term employment or transition to other jobs once the subsidies end. Specifically, Denmark has initiated a targeted program for employers to hire refugees and their family members, while other Nordic countries have established broader wage subsidy schemes primarily targeting long-term unemployed – a group which often includes immigrants. In Sweden, this incentive is extended to employers who are willing to hire newly arrived immigrants and young people.

In the Nordic countries, there are notable differences not only in terms of institutional frameworks but also in their respective investments in active labour market measures and the allocation of these funds (Forslund, Forthcoming). Denmark and Sweden, for example, stand out as the largest spenders, with Denmark leading the way in this regard. Denmark allocates a significant portion of its resources to training, public employment services, and programs for individuals with disabilities. In contrast, Sweden places considerable emphasis on subsidised jobs but allocates minimal funding to training programs, especially when compared to Norway and Finland. Both Norway and Finland prioritize training programs over subsidised jobs, with Finland being particularly notable for its substantial investment in training. It should be underlined that while the mentioned programs are not targeted exclusively for immigrants, they typically encompass immigrants as part of population groups with the most difficulties in accessing the labour market.

Despite the demonstrated effectiveness of wage subsidy programs in various countries (Forslund, Forthcoming; Arbetsförmedlingen, 2023), it is crucial to address common issues such as employer awareness about the programs and the bureaucratic complexity associated with them. This underscores the need for improved design and information about wage subsidies to employers, to enhance the overall efficacy of this instrument as a tool to facilitate labour market integration.