Basic Income Support for Jobseekers Statements and Comments. 1. Policy context in Estonia ESTONIA

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1 Basic Income Support for Jobseekers Statements and Comments Lauri Leppik Tallinn University PRAXIS Center for Policy Studies 1. Policy context in Estonia 1.1 Labour market situation Estonia is characterised as a small open economy. Economic growth rates in recent years have reached two-digit numbers, 10.5% in 2005 and 11.4% in Favourable economic climate has significantly reduced unemployment and increased employment rates. The total labour force in Estonia is about 650 thousand persons. In 2006, the employment rate in the age group was 67.7% (data of the Labour Force Survey), exceeding the EU average. The unemployment rate had dropped to 6.0%, the lowest annual average over the last decade. Employment situation has steadily improved over the last 5 years (starting from 2000), backed by strong economic growth. This has led to a shortage of labour force, which is particularly serious in some economic sectors. At the same time, high competition for labour between companies has fuelled wage growth. These developments place labour market reforms in a somewhat different context compared to several Western European countries, where the emphasis in recent years has been to improve incentive structure of benefits schemes in order to increase supply of labour. In the Estonian context, the challenge for the labour market is how to meet the demand for labour. Another feature of the Estonian labour market is that the registered unemployment is about 3 times lower than the unemployment rate according to the Labour Market Survey. In the first quarter of 2007, registered unemployed counted for about 2% of labour force. This means that a significant share (about two-thirds) of unemployed persons do not have contacts with labour market offices. 1.2 Unemployment benefits Estonia has a two-tier system of unemployment benefits comprising of a contributory earningsrelated unemployment insurance (UI) scheme and non-contributory flat-rate unemployment allowances (UA). Estonia was the last of the Central and Eastern European countries to introduce an UI scheme in 2002, first benefits being paid out in The UI scheme provides earnings-related benefits, albeit in the European context at a relatively low replacement rate (50% of the former wage for 1

2 the first 100 days, 40% thereafter up to a maximum of 180 to 360 days depending on the length of insurance record) to unemployed who have a sufficient insurance record (12 months of payment of contributions over the last 36 months). The Estonian UA is in social protection parlance a mixed-type benefit, having simultaneously characteristics of social security and social assistance. While providing protection against the risk of unemployment, the contingency is in legal terms defined more broadly than for the UI scheme. For the latter, only persons who have previously worked and paid contributions may qualify. There is also a qualification period for UA benefit 180 days of work or equalized activities over the last 12 months but consideration of numerous equalised activities make UA accessible also to several categories of formerly economically inactive persons, e.g. students, parents on childcare leave, disabled etc. At the same time, the UA scheme has some characteristics of a social assistance. The allowance is income-tested, being paid only to persons whose income is below the unemployment allowance rate. After introduction of the UI scheme, the UA plays a residual (however, not insignificant!) role visà-vis the former. UA is payable, in case the unemployed person does not qualify for the UI due to the lack of sufficient insurance record or reasons of termination of the last employment contract 1. UA is also payable after expiry of the right to UI benefit due to exhaustion of the maximum period of payment, but no longer than for up to 270 days, or due to refusal of the offer of suitable work. UA is time-limited, being paid, a rule for up to 270 days, but payment may be extended for another 180 days if less than 180 days remain until the pension age. The UA scheme includes also activation measures. Benefit recipients are obliged to undertake activities as agreed in the job search plan and shall avail themselves to the control procedures as indicated in the job search plan. Nevertheless, the benefit value of the UA is rather low. In 2007, the UA rate is 1000 EEK (64 EUR) a month. This is only 28% of the minimum wage, and only marginally above the guaranteed minimum income (subsistence level of the social assistance scheme), which in 2007 is 900 EEK (57 EUR) a month for a single-person household. Hence, the impact of the allowance on the reservation wage of beneficiaries is rather low. However, for the period of participating in labour market training or work practice, the UA can be supplemented with the training stipend, as well as with accommodation and travel grant, if participation in training involves travel to another location. Recipients of UA are covered with health insurance, but do not acquire pension rights for periods of unemployment. Introduction of the UI scheme improved income maintenance for a relatively small share of unemployed persons. At the same time, as can be seen from Figure 1, the UA remains the prevalent benefit for unemployed persons in Estonia. However, the coverage of unemployment benefits in Estonia remains low. In 2006, about 15% of all unemployed persons received UA, recipients of UA counting for 0.8% of labour force in age group 16 to pension age. 1 For example, persons who terminated the employment contract at their own will, do not qualify for the unemployment insurance, but may qualify for the unemployment assistance, albeit a prolonged waiting period is applied (60 days instead of the regular 7 days). 2

3 Figure 1. Recipients of unemployment benefits UA UIB SUM Sources: Labour Market Board, Unemployment Insurance Fund Notes: UA unemployment allowance; UIB unemployment insurance benefit; SUM = UA + UIB; unemployment insurance benefits were introduced in Besides income maintenance, declared aims of the UA include to motivate unemployed persons to turn to employment offices, to actively search for jobs and to participate in active labour market policy measures. However, it is questionable to what extent the UA actually meets these aims. The main labour market function of the UA is to make unemployed persons contact employment office. In practical terms, more than the allowance itself (due to its low value) the stimulus is coverage with health insurance deriving from the beneficiary status. 1.3 Social assistance As noted above, UA has some characteristics of social assistance (SA), being targeted to lowincome persons, whose regular income is below the UA rate. However, UA is an individual benefit, while SA is based on means-test of household income. Subsistence level, which is the basis of calculation of the SA benefit, is currently 900 EEK (57 EUR) a month for the first member of the household, for other members (regardless of age) equivalence scales of 1:0.8:0.8 are applied. The Estonian SA scheme integrates in a particular way also an element of housing benefit. Subsistence level (the minimum guaranteed income) is defined as net income after the payment of housing costs (within certain limits). In case the equivalised income of the household falls below the subsistence level, the SA scheme compensates the difference, plus any housing costs (in part or in full). Despite the different function, assessment base and individual versus household approach of the UA and SA schemes, in practice there has been quite considerable overlap between the two schemes. In 2005, 42% of recipients of SA were unemployed. In turn from them about 44% were 3

4 recipients of UA. Even though the nominal value of the UA is above the SA level 2, many recipients of UA received also SA either due to dependent family members or housing costs. At the same time, a significant number of unemployed persons, who were not eligible to UA, received SA. The SA scheme includes also some sticks-and-carrots to motivate job search. Local municipalities, who administer the scheme, have the right to refuse granting of SA benefit to working age persons (18 to pension age), who neither work nor study and have more than once refused an offer of suitable work or an offer to participate in labour market training or in social services or learning programmes organised by local municipalities. However, in practice the latter sanction is applied relatively seldom. 1.4 Reforms Several amendments were introduced to the Labour Market Services and Benefits Act from These characterise a shift towards a more individual approach on re-integration of unemployed persons, in particular long-term unemployed. Case management method is applied for specific risk groups (prescribed by legislation): Disabled; Carers of disabled persons; Youth (16-24); Persons in pre-retirement age (55-pension age); Ex-prisoners; Long-term unemployed; Persons with insufficient knowledge of Estonian language. Implementing of the case management approach also entails extended cooperation of public employment offices with local municipalities (who administer social assistance and social services) and other service providers. The new Labour Market Services and Benefits Act from 2006 also: introduced new types of labour market services: work practice, job exercise and specialised services for disabled persons; specified the criteria of suitable work; made payment of UA conditional on fulfilling the job search plan, and clarified the types of income, which are disregarded in income test for UA (e.g. training stipend, social assistance, family benefits, alimonies, social benefits for disabled persons etc.). 2 In fact, the UA rate was increased above the SA (guaranteed minimum income) level only from In 2006 the UA was only 400 EEK a month, while the guaranteed minimum income was 750 EEK for a single-person household. 4

5 2. Remaining challenges, transferability of German policy Despite the recent efforts to extend the package of labour market services, take more individualised approach towards activation of long-term unemployed by applying casemanagement method, and improving the incentive structure of the UA scheme, a number of challenges remain. Whereas too high benefit levels may impose too high reservation wage, the Estonian case vividly illustrates that a too low benefit level also creates problems. Firstly, a very low level of benefit limits the practical possibilities for active job search. Secondly, a low benefit level limits the possibilities to add extra conditionalities to the benefit scheme. In simple words, the question is to what extent it is possible to burden a very low benefit with extra conditions without risking with the effect that the unemployed do not turn up at employment offices at all. Another challenge is how to reach to inactive persons to return them to the labour market. This has become more important in the context of shortage of labour witnessed by the Estonian economy recently. It is clear that mere policy refinement to improve the incentive structure of benefit schemes would not suffice to solve the issue of shortage of labour. Finally, although somewhat reduced by reforms (incl. raising the UA rate above the SA level) overlapping of UA and SA schemes remains an issue. The idea of merging the two schemes has been discussed, but no consensus has been reached and practical solutions are still being searched. Besides political and financial aspects, there are also institutional obstacles as the UA is administrated at the state level (through employment offices), while SA is administrated by local municipalities. With recent reforms, this institutional division has only been strengthened, as the UA scheme has been more closely integrated with the system of labour market services, while with the SA scheme links are built to the system of social services. Albeit extended cooperation between labour market and social services, these remain institutionally separated domains. 5