The response of youth unemployment to benefits, incentives, and sanctions Peter Jensen a,b , Michael Rosholm c, * , Michael Svarer c a The Danish National Institute of Social Research, Denmark b Department of Economics, Aarhus School of Business, Prismet, Silkeborgvej, 8000 A ˚ rhus, Denmark c Department of Economics, University of Aarhus, Building 322, University Park, 8000 A ˚ rhus, Denmark Received 21 April 2001; received in revised form 8 March 2002; accepted 28 May 2002 Abstract The decline in the youth unemployment rate in Denmark is nearly unique among OECD countries and merits study. In 1996, a radical labour market reform was implemented, the Youth Unemployment Programme (YUP), directed towards unemployed, low-educated youth. This paper analyses the effects of the implementation of the YUP. We investigate the duration of unemployment spells and the transition rates from unemployment to schooling and employment. Three effects are analysed: an announcement effect, a direct programme effect, and a sanction effect. We find that the YUP has been partially successful. D 2003 Elsevier Science B.V. All rights reserved. JEL classification: C41; I21; J64; J65 Keywords: Youth unemployment; Education; Grouped duration model; Competing risks 1. Introduction Youth unemployment is a source of considerable concern in many countries. Very few countries have managed to reduce youth unemployment which remains a chronic problem in many countries. Hence, it is of interest to look at the experiences of the countries that have succeeded in reducing youth unemployment. Since 1993, the Danish youth unemployment rate has declined dramatically, which is a unique experience among OECD 0176-2680/03/$ - see front matter D 2003 Elsevier Science B.V. All rights reserved. doi:10.1016/S0176-2680(02)00171-4 * Corresponding author. Tel.: +45-8942-1559; fax: +45-8613-6334. E-mail address: MRosholm@econ.au.dk (M. Rosholm). www.elsevier.com/locate/econbase European Journal of Political Economy Vol. 19 (2003) 301–316