Study abstract:

This study analyses an immigration reform in Denmark that tightened refugee immigrants’ eligibility criteria for permanent residency by requiring minimum years of cumulative employment and raising the bar for the passing of the existing language test.

Contrary to what the reform intended, individuals with low pre-reform labour market performance decreased their labour supply while those with high pre-reform labour market performance became more likely to pass the language test at the required level. The findings thus suggest that stricter permanent residency rules, while effective in incentivising high-performance individuals, may have no or even opposite effects on low-performance individuals.

One of the charts shows the numbers of refugees in full-time employment, before and after the new criteria. Three years after the introduction of the new criteria, there was a total reduction of 31% for the group which was under the new and stricter criteria, compared to the group which was still under the old criteria.

Background:

Refugees are only granted temporary stay in Denmark, which must be renewed every 1-3 years. After a certain period, it is possible to pay a fee and apply for permanent residency. The criteria have been changed many times over the years, and currently some of the main criteria include having eight years of legal stay, three and a half years of full-time employment, and successful passing of the Danish 2 exam*.

Conclusions:

The study looks into the consequences of the aforementioned immigration reform. In addition to seven years of residence in the country, the reform newly required two and a half years of cumulative employment experience (in annual FTE), as well as passing the Danish language test at the intermediate level (rather than basic level, as previously required).

Contrary to what the reform intended, the study finds that employment of the sample subjects decreased relative to that of the control cohorts; a decline driven by the response of low productivity individuals, particularly those with jointly low employment and language potential, who constitute two-thirds of the sample.

The unintended consequence of the 2007 reform illustrates that policies that are aimed at improving refugees’ skill acquisition by rewarding a specific performance will be effective only if the bar is set at an appropriate level. If the requirements are deemed too costly to fulfil, the reform could be ineffective or result in disincentive effects.

This is particular concern for populations that are badly prepared for the host country’s labour market. This study advocates that policies aimed at improving immigrants’ labour market outcomes need to carefully consider potential disincentives that may discourage individuals and possibly lead to outcomes inferior to those obtained in the absence of the policy.

*The Danish language education system for foreigners does not start at level 1 and continue to level 3 – it consists of three parallel educations, designed to meet the background of the students, each one ending with a final exam. Level 1 is for illiterate people or people with no knowledge of the Latin alphabet, level 2 is for people with only a primary school-level education from their home country, and level 3 is for people with an education.