7. Financial incentives

Welfare policy faces the challenge of balancing three key goals: providing sufficient standards of living, ensuring adequate work incentives, and keeping government costs low. This challenge is sometimes referred to as the iron triangle of welfare reform, a term that reflects the difficult trade-offs between these dimensions. Improvement in one area often comes at the expense of another (Bruun Jonassen, 2013).

In this chapter, by examining how various financial incentives affect labour market participation, we investigate whether the literature demonstrates such implicit trade-offs. Previously in this project, financial incentives were identified as a barrier to employment among vulnerable groups in the Nordic countries (Højbjerre et al., 2023a). However, our findings suggest that it does not constitute the most central employment barrier. For example, our research shows that only 7 pct. of individuals outside the labour market in the Nordic countries face earning replacements (benefits) that are too high relative to their expected wages, whereas more than 30 pct. lack education that provides necessary skills (Højbjerre et al., 2023b).

The chapter is organised in three parts, each presenting the most recent Nordic literature on the topic:  

7.3 Wage subsidies 

We present perspectives from caseworker interviews in section 7.4 and end the chapter with some concluding remarks in section 7.5. The literature from the systematic review is summarised in Table 7.1 at the end of the chapter.

Monitoring and sanctioning refer to employment instruments designed to influence the behaviour of welfare recipients. Monitoring and sanctioning involve tracking the activities and job search efforts of individuals and eventually imposing penalties, such as reducing or terminating benefits, on those who fail to meet these requirements.

The identified literature on the employment effects of monitoring and sanctioning primarily covers young people.

Overall, the literature points to a positive screening effect of monitoring and sanctioning on young people. Individuals with good labour market prospects respond to the threat of activation, whereas there is no screening effect or programme effect among individuals with weaker labour market prospects. For example, Hall et al. (2022b) examine a major nationwide youth activation programme among unemployed young people less than 25 years old in Sweden. The programme was mandatory for individuals unemployed for more than 90 days. They study the effect of the activation programme and how it affected the young people’s job search behaviour. The authors find that programme eligibility increases the probability of finding employment before the programme starts by 6 pct. (threat effect) and that the effect is mainly driven by groups with better labour market prospects. The main effect of the programme appears to be that it motivates some individuals with the ability to find work on their own to intensify their job search before the programme starts, whereas the individuals who remain in the programme do not benefit from it one year after participation. This also demonstrates that the individuals with the weakest labour market prospects might not benefit from activation programmes. Dahl & Hernæs (2022) find similar effects in Norwegian research. They study a law change which made the benefit receipt conditional on participation in an activation programme for all young welfare recipients (aged 18–29). Welfare benefits represent a benefit of last resort. Those who have no or low income from work or other benefits and little or no other means of income through savings or their household are eligible for welfare benefits. Due to lock-in effects, Dahl & Hernæs (2022) expected to see results 6 months after the intervention at the latest. They study the outcome of welfare benefit receipt, exit and entry, labour income, and the enrolment in educational programmes. They do not find any effects, and the authors’ explanation of the results is that the change in the law only impacted the type of recipients who had a low expected gain from activation.

Looking beyond the literature included in the systematic review, other studies find positive effects from imposing sanctions for not meeting obligations. For example, Ahmad et al. (2019) study the possible effect of benefit sanctions in helping unemployed insured workers in Denmark find a job sooner than those who do not get any activation. The obligations for receiving unemployment benefits include: signing up at a PES centre; registering, submitting, and regularly updating one’s CV; actively searching for jobs, etc. If these requirements are not met, various sanctions can be imposed, e.g., loss of UI benefits for 2–3 days, for 3 weeks, or until the unemployed individual has worked for 300 hours within a 10-week period. The authors find that the individuals being sanctioned are single, relatively young, and have less experience compared to individuals participating in activation programmes. The findings revealed that the imposition of sanctions increases the exit rate from unemployment for unemployed insured individuals. The authors conclude that the findings suggest that tightening the job search requirements and increasing the use of sanctions – together with more emphasis on private sector employment subsidies – can possibly reduce unemployment duration. Similar results are found in older Danish research, where the effect of sanctions imposed on unemployment insurance benefits recipients on their exit rate from unemployment is also investigated. They find that even moderate sanctions have considerable effects on the exit rate from unemployment (Svarer, 2010). 

To sum up, the identified literature indicates that making welfare receipt conditional on participating in an activation programme has a positive motivational effect among young people with good labour market prospects. However, young people with more complex employment barriers do not benefit from the activation one year after participation (Hall et al., 2022; Dahl & Hernæs, 2022). Similarly, imposing sanctions on unemployed insured workers, who can be said to generally have stronger labour market prospects, reduces their unemployment duration (Ahmad et al., 2019; Svarer, 2010).

There is generally evidence that monitoring and sanctioning are effective tools to encourage jobseekers close to the labour market to actively engage in finding work and participating in training programmes (Ahmad et al., 2019; Svarer, 2010). However, the literature has primarily examined the effect among individuals close to the labour market (i.e., individuals with unemployment insurance), whereas the literature among individuals farther away from the labour market is scarcer (Andersen & Arendt, 2015; Simonsen & Skipper, 2017; Beskæftigelsesministeriet, 2024). 

The threat effect from sanctioning has been shown to increase employment among young people closest to the labour market (Hall et al., 2022b; Dahl & Hernæs, 2022). These individuals, who typically face fewer barriers to employment, respond positively to the possibility of sanctions by intensifying their job search efforts. However, for those who remain unemployed, subsequent activation efforts appear less effective. This group often face a more complex set of barriers, such as various sorts of health issues and lack of education and skills (Højbjerre et al., 2023b). As a result, their path to employment requires more comprehensive and supportive measures beyond the threat of sanctions. Thus, while sanctioning can be a useful tool for some, there is a need for tailored interventions for those farther from the labour market, which is a topic we will cover in chapter 8.

Benefit schemes refer to the level and duration of unemployment benefits and other forms of social assistance and how these affect the work incentives for welfare recipients. Benefit schemes are a central part of the Nordic welfare states, and the level and duration of benefits in the schemes are central in providing sufficient standards of living, as well as ensuring adequate work incentives and keeping the government costs low.

It is a well-established fact in micro-econometric literature that a significantly lower benefit level has a significant positive effect on the exit rate from unemployment (Andersen & Arendt, 2015; Simonsen & Skipper, 2017). The literature review based on recent literature from the Nordic countries recovers these findings to some extent, but also demonstrates that it is complex since many considerations must be balanced. The literature from the systematic review covers young people, immigrants and refugees, individual with disabilities, and seniors. 

Drange & Jakobsson (2019) investigate young welfare recipients’ response to a 38 pct. increase in the cash benefits that occurs upon turning 19 years old in Norway. Contrary to what one would expect they find no effect on programme take-up or employment rates. Hence, benefits do not work against the aim of ALMPs, and young people’s responsiveness to financial incentives cannot explain such lack of effects in the programmes. The authors, however, point out that the young people who receive benefits in general have a weaker position, which might explain these counterintuitive results. For example, they come from more disadvantaged family backgrounds, in terms of their parents’ education level, reliance on social assistance, disability insurance (DI), and single-parent households, as compared with young people on other types of benefits and those who do not receive benefits. Further, the young people themselves have lower levels of education and a more marginalised labour market position.

Looking at how individuals with disabilities react to financial incentives, the evidence from the identified literature is rather mixed, which can be partly explained by the fact that the literature studies various reforms targeting various groups. On the one hand, Fevang et al. (2017) analyse a reform of the temporary disability insurance (TDI) programme, covering workers who exhausted their one-year sick pay but were not permanently disabled. The reform increased the benefit level by 14 pct. on average, which resulted in a decrease in the transition rate into employment. 

On the other hand, results from Andersson (2018) suggest that the financial incentives provided by a continuous deduction programme for disability insurance recipients have not had any effect on the labour supply among the recipients. The reform allowed certain disability insurance recipients to work while receiving benefits without their recipient status being questioned. Additionally, they could keep some or all their benefits while receiving income from the labour market. The authors explain that these results can be driven by the fact that the financial incentives provided by the programme are not enough to induce the eligible disability insurance recipients to use their residual working capacities and increase their labour supply. Another possible explanation is a lack of credibility with respect to some programme components. The continuous deduction programme involves a promise not to reevaluate recipients’ eligibility for permanent disability insurance benefits. Even if financial incentives are strong, the effect may be absent because recipients do not trust that their recipient status will remain unquestioned after demonstrating a residual working capacity.

There is a general agreement in the identified literature that there are positive employment effects from decreasing the benefit level among refugees in the short run, but the effect seems to disappear in the longer run. Further, such policies seem to have some adverse effects. For example, Dustmann et al. (2023) and Andersen et al. (2019) both study the effects of Denmark’s Start Aid welfare reform from 2002, which targeted refugees and reduced welfare benefits with 40 pct. among newly arrived refugees. The study focuses on both short- and long-run effects, and it shows that the reform doubled the average labour earnings and increased employment rates in the short run, while the effect disappeared in the long run. The study further shows that the reform induced take-up of employment in lower-quality jobs with lower job stability in low-demand municipalities but led to more persistent and higher-quality employment relationships in high-demand municipalities. Furthermore, the reform caused a large and persistent drop in disposable income for most households and a sharp increase in property crime among both females and males. Moreover, children’s likelihood of being enrolled in childcare or preschool, their performance in language tests, and their years of education all decreased, while teenagers’ crime rates increased. Finally, the reform further led more females to drop out of the labour force because they became ineligible for transfers when their husband took up employment. Similar results are found in Arendt (2024) and Arendt et al. (2021).

Another interesting point about refugees studied in the literature from the systematic review is about how individual responses to economic incentives vary when they are set at the household and individual levels, respectively. Bratu et al. (2023) show that a shift from means-tested benefit schemes set at the household level to individualised benefits substantially strengthened women’s incentives to participate in an introduction programme for refugees, which later increased their transition to employment. Bratu et al. study a Swedish reform of an introduction programme implemented in 2010, which implied, among other things, that an individual’s benefits would no longer be reduced if another household member found a job, as the benefits now only depended on the individual’s own participation in the programme. Further, the total benefits were also reduced by half if only one adult in a household participated in the programme. Bratu et al. find persistent positive labour market effects for women. At the end of the study period, women were 10 percentage points more likely to be employed, and their total earnings increased by 31 pct. The effects for men are small and insignificant. Furthermore, when separating the effects by marital status, the effects are twice as large for married women than for single women. The authors lastly suggest that individualising benefits and ensuring early registration with the public employment services are key mechanisms explaining the positive results of the reform. 

The literature on seniors primarily focuses on how retirement behaviour is influenced by economic incentives. Laun & Palme (2022) study Sweden’s 1998 shift from a defined benefit to a notional defined contribution pension system, finding that lower replacement levels encouraged later retirement. Ollonqvist et al. (2021) analyse Finland’s 2005 pension reform, which increased the incentives to postpone retirement for some individuals, and demonstrate that these individuals in fact postponed their retirement. Further, they show that less healthy individuals retire earlier on average. Kyyrä & Pesola (2020) discover that raising the eligibility age for extended unemployment benefits in Finland in 2005 increased employment by seven months. Andersen et al. (2021) examine a Norwegian pension reform from 2011, which transformed an earnings-tested early retirement programme into a neutral life-long annuity, with the result that pension wealth was redistributed from early to late retirees. They found that the reform increased employment rates and hours worked for individuals aged 63–67.

This literature generally supports the idea that seniors, on average, respond to financial incentives through changes in the eligibility criteria for various benefit schemes. These findings are supported by literature reviews investigating how the retirement behaviour is affected by economic incentives. Among other things, these reviews conclude that there is strong evidence suggesting that the participation tax affects retirement decisions and that individuals with physically demanding jobs are less responsive to economic incentives (Schultz & Andersen, 2019).

Lastly, we have also identified literature which does not directly study the employment effects of changing the benefit level but rather studies the effect of providing an employment bonus for long-term unemployed social assistance recipients in Denmark. Arendt & Kolodziejczyk (2019) study a programme which pays benefit bonuses to persons in the target group for any hours they work in regular employment or subsidised employment schemes. The programme pays up to 6 pct. of post-tax earnings if these people enter regular or subsidised employment over a specific two-year period. The authors are not able to identify any positive employment effects from the programme, which is generally at odds with the overall findings in the literature on employment bonus programmes. The authors argue that the null effect can be explained by the fact that the employment bonus is relatively low and that the social assistance level is relatively high compared to similar programmes. For example, in the Canadian SSP programme for long-term unemployed persons, individuals can be paid up to 20 to 30 pct. of gross earnings for full-time employment.

In general, individuals react to financial incentives, meaning that a higher benefit level will decrease the employment rate, and vice versa. However, the effect seems to be strongest among individuals closer to the labour market and appears heterogeneous across different groups. For example, Fevang et al. (2017) find negative employment effects from increasing the benefit level among individuals receiving temporary disability insurance. In contrast, other studies find zero effects on labour supply from providing various financial incentives for (young) individuals with disabilities (Drange et al., 2019; Andersson, 2018). These differing results might be driven by various financial incentives in the programmes or by the fact that the disabilities among the recipients in the latter study are more severe compared to the disabilities of those in the former study.

Further, the literature agrees that immigrants and refugees respond to financial incentives, at least in the short run (Dustmann et al., 2023; Andersen et al., 2019; Arendt, 2023). In the longer run, the effect seems to be determined by the demand in the local labour market, meaning that the employment effect disappears after one year for refugees allocated to municipalities with low demand for the type of work refugees can supply, whereas the effect remained significant until year 5 after residency for those allocated to municipalities with high demand (Dustmann et al., 2023).

Implementing policies that reduce the level of benefits can, as demonstrated above, increase the employment. However, it is important to consider unintended consequences of such policies, both in the short and in the long run, as these can be detrimental to the overall socio-economic impact of reducing benefit levels. For example, several articles have demonstrated that reducing the benefit level among refugees increased the property crime among the refugees who were affected by the reform. Further, their children’s likelihood of being enrolled in childcare or preschool decreased, their performance in language tests were poorer, and they had fewer years of education compared to children whose parents were not exposed to the reform (Dustmann et al., 2023; Andersen et al., 2019; Arendt, 2023; Arendt et al., 2021). Similarly, research from Iceland demonstrates a positive relationship between material deprivation and depressive symptoms (Einarsdóttir et al., 2022). Such unintended consequences are important to consider when evaluating the overall socio-economic impact of reducing benefit levels. 

The implementation of policies requires many considerations, but a central part is to directly consider how the individual will perceive the policy. For example, the structure of the incentive must be straightforward and relatively easy to understand in order for the individual to react on the incentive. Further, it is generally preferable if the financial incentives are set at the individual level rather than, e.g., the household level, which is also demonstrated in literature from the review. For example, when a Swedish introduction programme changed the financial benefits from the household level to the individual level (e.g., an individual’s benefits would no longer be reduced if another household member found a job, as the benefits now only depended on the individual’s own participation), the participation among immigrant women increased. The effect was largest among married immigrant women, who are often the secondary earner (Bratu et al., 2023). Similar results are found in Denmark (Dustmann et al., 2023).

Wage subsidies are financial incentives provided by governments to employers to encourage them to hire certain groups of workers, such as unemployed people in general or individuals with health issues specifically. These subsidies help offset the cost of wages, making it more attractive for employers to hire individuals who might otherwise struggle to find employment. Additionally, wage subsidies provide financial incentives to employees, as the wage (combined with benefits) is typically higher than the benefit rate.

Wage subsidies, either temporary or permanent, are utilised in various programmes. Temporary subsidies are often used to equip unemployed individuals with relevant labour market skills and experience. Permanent wage subsidies, on the other hand, last longer and aim to encourage employers to hire and retain workers by reducing overall labour costs. This distinction is crucial for determining the success of such programmes. For instance, while regular employment is a primary goal for both temporary and permanent wage subsidies, a lower proportion of individuals transitioning to permanent disability pensions can also signify success in permanent wage subsidy programmes.

An illustrative example is the flex job scheme in Denmark, where wage subsidies play a pivotal role. This scheme aims to provide job opportunities for individuals who cannot obtain or maintain regular employment in the labour market due to permanent and significantly limited work capacity.

We have already touched upon time as one type of work accommodation in chapter 6. In this literature, time is viewed from the employer’s perspective (e.g., in relation to training) and is considered a central aspect of work accommodations for improving employment among vulnerable groups. Wage subsidies are a key employment instrument used to compensate the employer for the additional time required to hire and train vulnerable individuals.

The identified literature on the employment effects of wage subsidies primarily considers the employment effects among individuals with various sorts of health issues, including sick-listed workers and individuals with functional impairments.

The literature demonstrates positive employment effects from wage subsidies for individuals with varying sorts of health issues. However, the mechanisms seem to be very different across the literature. For example, Angelov & Eliason (2018) study Sweden’s wage subsidy programme (lönebidrag) and find that it significantly increased employment rates for people with functional disabilities. In the year of enrolment, the employment rate was 54 percentage points higher for participants, and an 11-percentage-points difference remained 10 years later. However, when excluding subsidised jobs from the employment outcome measure, the picture changed dramatically. After two years, the employment rate was instead 11 percentage points lower among the participants than among the non-participants, and then the gap vanished gradually. Hence, any positive employment effect of programme participation seems to have been outweighed by considerable lock-in effects, not only in the short run but also in the longer run. However, the study also discovered a lower percentage of disability insurance receivers among the participants than among the non-participants, which indicates that the wage subsidy programme has promoted labour market inclusion.

These results are supported by a recent report from Norway, which concludes that permanent wage subsidies have positive employment effects. Moreover, the report finds that the overall socio-economic impact is positive, despite relatively large lock-in effects. These findings are primarily driven by the fact that the alternative to permanent wage subsidies is typically permanent disability pensions (Proba Samfunnsanalyse, 2024).

On the other hand, von Simson & Hardoy (2020) find that participants among young people (aged 18–29) in wage subsidy programmes had higher probabilities of obtaining work or starting an education. Also, the lock-in effects were minimal, indicating the success of the programme in facilitating employment or education both during and after participation. Further, the participants in the wage subsidy programme had lower probabilities of transitioning to social security compared to non-participants, as in Angelov & Eliason (2018). Similar results are found in Holm et al. (2017), who study wage subsidies for sick-listed workers, which can be considered a less permanent condition compared to that of individuals with functional impairments. Holm et al. find significant and positive employment effects, with wage subsidies facilitating transitions into non-subsidised employment both during and after programme participation, with no significant lock-in effects. This supports the effectiveness of wage subsidies in promoting employment among individuals with varying degrees of health issues.

Looking beyond the literature from the systematic review, several studies have investigated the Danish flex job scheme. In this scheme, a central part is temporary wage subsidies to employers for hiring individuals with reduced working capacity. They find a substantial positive employment effect of the scheme in the 1994–2001 period within the target group compared to a control group of closely matched ineligibles. However, contrary to the results in von Simson & Hardoy (2020) and Angelov & Eliason (2018), they find no discernible effects on the probability of disability exit. They argue that this could be driven by the fact that the subsidised jobs are granted mainly to inactive long-term disabled individuals with partial working capacity, whereas the less able individuals continue to exit via disability pension (Datta Gupta & Larsen, 2010).

Further, literature from Finland studies the employment effect of wage subsidies targeted at the employers of older full-time low-wage workers. The results indicate that the subsidy system had no effect on the employment rate, but it slightly increased working hours among those already working. The authors hypothesise that the results might be driven by the subsidy not being sufficiently large or the fact that the demand for these workers might be inelastic. Nevertheless, they stress that these results cannot be regarded as a universal case against low-wage subsidies, which is in accordance with the results from the literature. 

One of the central mechanisms for wage subsidies to be successful is that they should take place on ordinary terms at ordinary workplaces (see, e.g., Forslund & Vikström (2011)). This is supported by recent Danish research on the effect of regular paid hours in future employment in the period from 2017 to 2021. The term regular paid hours means that the individual cash benefits recipient has worked at a company and received actual pay for those (often few) hours while also receiving public assistance. Regular paid hours are not wage subsidies per se, but the primary purpose of this instrument is typically similar to the purpose of wage subsidies. The idea is to bring cash benefits recipients closer to the labour market by providing them with experience, contacts, and increased self-esteem so as to encourage them to work more hours over time. The study shows how activity-ready cash benefits recipients who get regular paid hours fare over time compared (descriptively) to the overall group of activity-ready cash benefits recipients. Hence, the results are not causal by any means and should be interpreted with caution. The results demonstrate that the individuals on regular paid hours fare significantly better than the overall group of activity-ready cash benefits recipients. Two years after the first regular paid hour, more than half have found a full-time job or are contributing to their own livelihood through regular paid hours. In comparison, only 12 pct. of the total group of activity-ready cash benefits recipients have a full-time job or contribute to their own income after two years (Rosholm, 2024).

Recent literature demonstrates that initiatives that largely mimic being in a real workplace, i.e., taking place at real workplaces under regular conditions with real expectations from employers and colleagues, etc. have positive employment effects. This mechanism can explain the positive effects from the initial descriptive evaluations of regular paid hours. This approach mimics real workplaces to a large degree, as it not only operates under regular conditions with real expectations but also provides the welfare recipient with a real wage, meaning that each hour worked is directly associated with corresponding pay (Rosholm, 2024). Similarly, these findings are supported by qualitative data regarding how individuals with disabilities experience social inclusion at workplaces, where it is highlighted that being a valued worker and experiencing social belonging are important aspects of social inclusion (Gustafsson et al., 2018).

Wage subsidies, to some extent, also mimic real workplace conditions. This mechanism can explain the positive results from von Simson & Hardoy (2020) and Holm et al. (2017), which demonstrate positive employment effects from wage subsidies among individuals with disabilities and sick-listed workers, respectively. However, some research raises concerns about employees with disabilities’ perceptions of wage subsidies, as such programs may create feelings of otherness and position their presence in the workplace on different terms. It seems that building strong relationships and mutual understanding is crucial so that employees are not judged by their disabilities but are instead seen as individuals in their own right (Gustafsson et al., 2018).

The lock-in effects of wage subsidy schemes seem to vary across individuals and between programmes. On the one hand, Angelov & Eliason (2018) find considerable lock-in effects in a Swedish wage subsidy programme targeted at individuals with functional impairments, noting that employment in regular jobs was higher among non-participants two years after enrolment, with the gap gradually closing over time. On the other hand, von Simson & Hardoy (2020) and Holm et al. (2017) do not demonstrate lock-in effects to the same extent among young individuals with less severe health issues and sick-listed workers, respectively. The different results in these studies can be attributed to the varying severity of health issues among the groups studied. Further, even though lock-in effects are observed, there might still be a case for wage subsidies. For example, both Angelov & Eliason (2018) and von Simson & Hardoy (2020) find a lower percentage of disability insurance receivers among the participants compared to the non-participants, which indicates that the wage subsidy programmes have succeeded in promoting an inclusive labour market.

Lastly, it is worth mentioning that lock-in effects of wage subsidy programmes can vary by programme. Some programmes have a more permanent character, whereas other programmes have a temporary character, which naturally gives rise to different types of lock-in effects.

The caseworker interviews also shed light on the topic treated in this chapter. The overall perspectives emerging from the analysis of interviews can be summarised in the following manner: sanctions can be necessary, but caseworkers are generally sceptical as to their effectiveness in promoting employment. National benefit schemes are more or less taken for granted as they are, but the devil is in the details of these schemes. In several interviews, caseworkers point to how economic incentives also matter to many persons on the margins of the labour market and how specific rules regulating specific benefits may either further or restrain the employment chances among persons with barriers to employment. Finally, wage subsidies could probably take the prize as the employment tool that most caseworkers across Nordic countries find useful as a means to promote employment among persons belonging to vulnerable groups.

Monitoring and sanctioning are a part of employment legislation in all Nordic countries and are thus part of the work of many caseworkers. Often, sanctioning as an administrative act, e.g., withdrawal of benefits for a certain period, takes place in another department, but most caseworkers interviewed are still tasked with explaining their rationale to the citizen that has been sanctioned. Most caseworkers agree that there should be some form of consequences built into the welfare system if persons fail to live up to reasonable obligations concerning participation in training or job search. Still, they are generally sceptical towards the effectiveness of sanctions as a tool to promote employment among persons with complex barriers. 

A Danish caseworker working with long-term cash benefits recipients, some of whom may be immigrants, others with various health problems, explains that she is not happy about sanctioning, because the aim is to make the citizen feel that they are involved. Still, caseworkers can be dependent on it, as they have citizens who clearly do not want to participate in the effort but just want the money. One Danish caseworker says that sanctions can provide an incentive to participate in the activities organised by the job centre even among relatively long-term recipients of case benefits, because they have become accustomed to receiving a public transfer income as a way of life, even if this subsidy is meant to be temporary. 

Finnish caseworkers working with long-term benefits recipients, many of whom are persons with health problems or immigrants, explain that many of these recipients fail to apply for a sufficient number of jobs and/or turn up at meetings. If this happens 3–4 times, they are sanctioned, and then they drop out of the system. In her perspective, strict rules concerning job search obligations do not motivate her citizens. When they fail to live up to the requirements, they are sanctioned, which often makes them lose contact with the employment system, which is unfortunate because many still need help. Still, other Finnish caseworkers argue that the job search requirement helps them monitor if a citizen applies for jobs – and, more importantly, what types of job they apply for. With this knowledge, they are in a better position to have a dialogue with the citizen concerning more specific types of job search and how these searches can become more efficient. 

Benefit schemes are important in the sense that they provide the economic safety net underneath unemployed persons with no other income and in that they define the economic frame in which benefits recipients operate. In the first sense, there is wide agreement among caseworkers across the different Nordic countries that people who worry about whether they have the money to pay their monthly rent or buy essentials like food for their family become less efficient in their job search because of the energy such worries may cause. There is also rather substantial agreement among most caseworkers in all the Nordic countries that, in general, there are relatively strong economic incentives built into the current benefits schemes so that most benefits recipients, also the more vulnerable ones, have an economic incentive to look for work. For example, an Icelandic caseworker working with integration of immigrants explains that most immigrants who have come to Iceland, including refugees from Ukraine or Syria, are motivated to look for and relatively easily find jobs if they speak a little or some English. However, she also explains that there can be economic incentive problems affecting quite particular groups, more specifically women in families with many children, who may receive an amount of public child benefits that makes it unattractive to find a job. 

A Danish caseworker explains that it is important to explain to long-term cash benefits recipients exactly how their economic situation can improve if they find a job or merely start working a few hours a week, because their fear of losing access to various public benefits exceeds their hopes of becoming more economically independent through a higher income. She explains that they have a table to visualise to the citizens how much they earn today through various types of transfer income, housing subsidies, etc., and what they might earn by taking a part-time or full-time job. She also explains that they do all they can in her job centre to secure an approval of these cash benefits recipients for a social free pass (socialt frikort), which allows benefits recipients with certain social problems (such as homelessness, addiction problems, or mental illnesses) to earn up to approx. 41,000 DKK a year without reduction in their public transfer income. This is an efficient scheme to help some of the most vulnerable individuals get some attachment to and experience with the labour market. However, she also explains that citizens who have used up their social free pass can be very difficult to motivate to participate in subsequent activities arranged by the job centre, e.g., an unsalaried internship in a workplace, because there appears to be no economic incentive to do so, even though the caseworker finds this internship important in clarifying the citizen’s chances for further integration into the labour market. The example shows that economic incentives also matter to persons on the margins of the labour market although they can be very hard to calibrate to take into consideration potentials and barriers in both a short-term and a longer-term perspective.

Wage subsidies targeting various groups are used in all Nordic countries. In the interviews with caseworkers, this tool is often singled out as an efficient scheme to help persons belonging to vulnerable groups gain a foothold in the labour market. However, the interviews also show that a wage subsidy job very often is the last step on a staircase towards a job, where other essential steps have had to be taken first (see also the quote in chapter 5 on rehabilitative efforts from a Finnish caseworker talking about a wage subsidy job as the final element in an “ideal palette of tools”). Persons ready for a wage subsidy job are typically both motivated for and capable of taking care of a job with a stability and a productivity that an employer finds acceptable weighted against the administrative tasks involved in this hire and what she must pay the person. Therefore, health, abuse, and language skills problems must typically first be handled to a sufficient degree before a wage subsidy job becomes relevant and realistic. Moreover, even wage subsidy jobs can have hitches in this context. A Danish caseworker told a story about a citizen whose economy was usually partially administered by the job centre, because the citizen kept forgetting to pay their monthly rent. Specifically, the job centre paid this person’s rent by withholding the necessary amount from the monthly cash benefits transfer. In a wage subsidy job, the citizen typically receives a salary directly into their bank account, and in this specific case the citizen forgot to pay the monthly rent, a problem that the job centre later had to help resolve.

In this section, we have examined how financial incentives affect both unemployed individuals and employers. Monitoring and sanctioning effectively motivate those with better job prospects, increasing their job search efforts (Hall et al., 2022). However, for individuals facing complex barriers like severe health issues or low education, these measures often fall short, highlighting the need for broader support. The results are supported by the experience of caseworkers, who agree that sanctions may be necessary but are sceptical towards their effectiveness in promoting employment among those who face complex barriers. 

Reducing financial assistance through benefit schemes can incentivise employment but may also lead to unintended consequences. For instance, lower benefits for refugees initially boost employment but can also correlate with negative social outcomes, such as increased crime rates and poorer educational performance (Dustmann et al., 2023; Andersen et al., 2019). It is crucial to balance financial incentives with broader socio-economic impacts. Several caseworkers point out that financial incentives of benefit schemes also affect individuals on the margins and that some aspects of the schemes may either positively or negatively affect the chances of finding a job for individuals with barriers to employment.

Lastly, various wage subsidy schemes, such as Sweden’s lönebidrag and Denmark’s fleksjobordning, effectively increase employment rates among individuals with health issues and disabilities. Caseworkers find that they might even be the single most effective tool to promote employment among vulnerable groups, even though a wage subsidy job is often among the last steps in the employment assistance programme. However, the risk of lock-in effects, where individuals remain in subsidised positions without transitioning to regular employment, must be considered. 

Overall, while each of these instruments has its merits, their effectiveness is highly dependent on the specific context and the characteristics of the target population. Policymakers must therefore adopt a nuanced approach, tailoring interventions to address the diverse needs of welfare recipients.

Table 7.1 Identified literature in the systematic review related to financial incentives