Unemployment as a Consequence of COVID-19: A Comparative Study between Denmark and Sweden

Michelle Overgaard Hansen

Student thesis: Master thesis

Abstract

This paper examines the consequence of the COVID-19 pandemic on unemployment in Denmark and Sweden throughout 2020. As Denmark and Sweden relied on different strategies to cope with the pandemic, hereunder differences in government restrictions and subsidies, the paper investigates whether one strategy was more optimal than the other in terms of labor market impact. To do this, the paper relies on both a theoretical and an empirical investigation.
The effect of the pandemic on unemployment is analyzed theoretically through the Diamond-Mortensen-Pissarides model. The results indicate that Denmark experienced a lower impact on the labor market, as the shock to GDP was lower, resulting in a dampened shock to productivity and job separations. Furthermore, the theoretical effect in Denmark was alleviated by the fact that the matching productivity, 𝑘, is higher than in Sweden. After the theoretical investigation, the impact is examined empirically through difference-in-differences regressions. These conclude that the ‘treatment’ imposed by the Danish government was optimal in relation to keeping unemployment low during the pandemic. Thereby, the empirical investigation confirms the theoretical inference, concluding that the labor market impact in Denmark was significantly lower than in Sweden.
Through a discussion, the paper argues that the ‘treatment’ effect apprehends both Denmark’s stringent policies, as well as its implementation of subsidies and expansionary fiscal policy. The difference in labor market impact is, however, also attributed to the fundamental differences between Denmark and Sweden, as shown in the theoretical model. This comprises the higher matching productivity in Denmark, corresponding to a lower unemployment duration. Further, the difference in labor market impact can partly be attributed to Sweden’s exports being more dependent on international fluctuations. The paper contends that other differences, hereunder differences in industry composition or the use of monetary policy, are not significant in explaining the difference in labor market impact during the pandemic. Thereby, the difference in unemployment impact is ultimately attributed to the differences in (i) restrictions, (ii) subsidies, (iii) expansionary fiscal policy, (iv) exports, and (v) matching productivity.
Overall, the paper concludes that Denmark’s COVID-19 policies, entailing more severe restrictions and more extensive subsidies have, to some extent, mitigated the pandemic’s impact on the labor market. Nevertheless, these differences cannot explain the entire discrepancy in the unemployment impact, as the disparities between Denmark and Sweden further comprise other mechanisms.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2021
Number of pages109
SupervisorsKarl Harmenberg