Labor Force Exit in Denmark, 1980–2016: Impact from Changes in Incentives

A dramatic trend reversal in employment rates of 60-64 year olds has occurred in many OECD countries, where a declining employment rate in the 1980s and early 1990s has reversed since the mid-90s and has been increasing ever since. This “U-shape” in elderly employment is also present in Denmark. We examine how much of the reversal of labor market trends among the elderly can be attributed to the changing incentives of the social security program. We find that the subsidies to continuing work just before the earliest eligibility age and the subsequent tax discouraging working just after the earliest eligibility age in Denmark have been reduced substantially, mainly as a result of the 1999 reform, the 2006 Welfare agreement and the 2011 Retirement reform. In addition, results of simple aggregate regression models show a significant negative and robust relationship between the implicit tax rate and the employment rate and a role for incentives in explaining the trend reversal in the Danish labour market. Thus, in the Danish case a reduction in the tax force to retire early has contributed significantly to the reversal in employment among the 60-64 age group.