To illustrate the effects of changed incentives through income tax and unemployment benefits changes one can look at two labor market statistics releases released today-one from Sweden and one from Denmark.
In Sweden, the number of formally employed persons was roughly unchanged compared to a year earlier, and the number of hours worked actually rose compared to a year earlier (though it is still somewhat below the peak levels of 2008).
In Denmark, employment dropped by more than 5% compared to a year earlier, both in terms of the number of formally employed persons and hours worked. The drop is even more dramatic in the private sector.
This discrepancy is not caused by a deeper cyclical slump in Denmark, as the drop in GDP has been roughly similar. And since the increased employment has all other things being equal increased GDP, it follows that the Swedish slump would have otherwise been bigger than in Denmark. Since it is mainly workers with relatively low productivity that have seen incentives improve, the positive effect om GDP is however smaller than the positive effect on employment.
While there may be other reasons for this discrepancy, the most important reason is the difference in terms of changing incentives for the unemployed. In Sweden, the centre-right government elected in 2006 has implemented significant income tax reductions (and payroll tax reductions), particularly for low earners while at the same time, unemployment and sick leave benefits have been cut and it has become much more difficult to be able to receive such benefits.
In Denmark, by contrast, even though it too has a formally "centre-right government" it has largely refrained from reducing taxes or government hand-outs, and it has more specifically lacked the focus of their Swedish counterparts in strengthening incentives to work by reducing unemployment benefits and taxation of low income earners.
As a follow up, I now link to this article by Casey Mulligan who presents microeconomic evidence on the issue, noting that the number of employed people getting jobs spike dramatically in the week following the exhaustion of their unemployment benefits.
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