Incentive effects of cash benefit among lowskilled young adults: Applying a regression discontinuity design

Abstract

In 2014, the Danish Government implemented an active labour market reform directed at unemployed young adults under 30 years of age with low educational qualifications. The reform replaced the (unemployment) cash benefits with a lower education benefit for many of the unemployed aged under 30 and obliged the low-skilled in this group to enrol in a regular general or vocational (VET) education program. This paper exploits the sharp discontinuity that occurs at age 30 to estimate the joint effect of higher benefits and the cessation of educational obligations on the share receiving cash benefits and the share enrolled in education. We estimate the effects by applying a regression discontinuity design. We report results for the group of low educated young adults and for subgroups facing different economic incentives. The results establish that reaching age 30 creates an incentive to apply for cash benefits, and we find strong evidence that a significant increase in the share of cash benefit recipients relates to a corresponding reduction in the share of young adults enrolled in education. When including subgroups the size of the effect increases, and the results demonstrate that the effects are strongest among previous education benefit recipients. This indicates that the results are mainly driven mainly by individuals reverting to cash benefits.