Institutional moral hazard in the multi-tiered regulation of unemployment in Denmark Background paper

This paper has been written in preparation of a research project funded by the European Commission (on the Feasibility and Added Value of a European Unemployment Benefit Scheme, contract VC/2015/0006). This paper adds information and detailed analysis to the following deliverable of that research project: Institutional Moral Hazard in the Multi-tiered Regulation of Unemployment and Social Assistance Benefits and Activation - A summary of eight country case studies; but it was not a deliverable. We use the concept ‘institutional moral hazard’ to analyse intergovernmental relations within multi-tiered welfare states, specifically the domain of in unemployment-related benefits and related activation policies (the ‘regulation of unemployment’). This paper is one of eight separate case studies, it focuses on Denmark. There are two principal actors in the Danish regulation of unemployment: the central government and municipalities, unemployment insurance funds and regional governments have a less important role. Concern for institutional moral hazard has led to several reforms of the municipal activation system, resulting in increasingly detailed monitoring and a complicated financing method. The trade-off between the complexity of central controls and the need for local flexibility is a source of ongoing reform efforts.