Evaluating Labour Market Effects of Wage Subsidies for the Disabled – the Danish Flexjob Scheme

We evaluate the employment and disability exit effects of a wage subsidy program for the disabled in a setting characterized by universal health insurance and little employment protection. We focus on the Danish Flexjob scheme that was introduced in 1998 and targeted towards improving the employment prospects of the long-term disabled with partial working capacity. We 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, but no discernable effects on the probability of disability exit. For the target group employment probability is raised by 33 pct. points after the scheme is introduced relative to a mean employment rate at baseline of 44%. One explanation for a strong employment entry effect concomitant with a non-existent disability exit effect could be that subsidized jobs in this period were mainly granted to the inactive long-term disabled with partial working capacity, i.e., the required medical examination and visitation were able to efficiently separate the more able disabled from the less able disabled. While the former obtained employment through the Flexjob scheme, the disabled with more serious work limitations continued to exit via disability pension even after the introduction of the scheme.