How benefits affect willingness to work

A study by the Praxis Centre for Policy Studies analysed the effect of welfare benefits and their impact on people’s motivation to find work. It found the incentive to work was generally high but there were some exceptions. The receipt of several benefits at the same time meant it was better for some people not to work. There was a similar story for some part-time and low-paid workers. It was also found that low benefits meant the poverty risk among unemployed people was high.

About the study

Researchers at Praxis Centre for Policy Studies have looked at how Estonia’s benefits system affects the willingness of people to work. The study (in Estonian, 4Mb PDF) on the impact of social benefits on work incentives analysed how the payment of different social benefits encouraged and supported unemployed people in their return to work.

A total of 21 types of social benefits were examined. Researchers made an analysis of legislation, carried out 11 expert interviews and four focus group interviews with stakeholders. The study looked at various indicators characterising work incentives. These were calculated based on the Estonian Social Survey of 2006–2008 and using the EUROMOD microsimulation model.

Key findings

Low levels of welfare payments

According to the study, the incentive to find work is generally high in Estonia. This is partly because the net rate of replacement of income by benefits and allowances is low compared with other European countries. The study also found that poverty rates were much higher among unemployed people, standing at 29% in 2009. The corresponding figure for people in employment was 17%. These findings indicate that the welfare benefits provided in Estonia did not replace income sufficiently for the unemployed and did not fully serve their purpose.

Unemployment insurance benefit is currently paid at 50% of the previous average wage for the first 100 days and 40% after that. A flat rate unemployment allowance is also paid, which in 2012 was around 15% of the daily rate of the national minimum wage for a full-time worker.

As well as low benefits, only half of the newly registered unemployed meet the eligibility criteria to receive the money. According to the study, in 2011 unemployment insurance benefits were paid to 20% of newly registered unemployed people and unemployment allowances to around 30% of those newly registered. This left 50% of unemployed people without any benefit. However, the eligibility criteria are strict; for example, those who left their previous job voluntarily are not eligible. For those unemployed, other social security benefits offer replacement income during unemployment.

Keenness to work?

Although Estonians are generally keen to find work, there are exceptions. Some Estonians receive several welfare payments at the same time such as unemployment insurance benefit and a superannuated pension. This can make it more profitable to stay unemployed than to find work. In addition, the current system does not motivate the unemployed to take part-time or low-paid jobs, as this leads to the withdrawal of unemployment benefit or subsistence benefit, even if the earnings are very low.

Estonia’s unemployed are required to actively search for work and to take advantage of labour market services. The study revealed that monitoring and sanctions against those not looking for work were only applied to those receiving unemployment insurance and allowance benefits. And even where the system was being abused, sanctions such as the suspension or termination of benefits were only rarely applied.

Employment of older people

The study also found that people receiving an old age pension, early retirement pension and rescue worker’s allowance did not have the right to participate in labour market services such as extra training. It was felt this did not support the employment of older people, even though the country’s ageing population meant it was vital to prolong their working life.

Clash with sickness benefit

Strict rules preventing a person working while receiving sickness benefit were also a problem according to the research. The assumption that the person was unable to do any work during an illness may not always be true. The employee may be able to work part-time or work remotely in the case of sickness that restricts their movement.

However, the analysis showed that financially it was more profitable to accept sickness benefit rather than taking on a reduced workload during an illness.

It was also pointed out that, for those receiving incapacity benefit, no rehabilitation measures were in place to encourage their employment.


The study results will be used as a basis for reforms of the current social protection system. The Ministry of Social Affairs is compiling a draft act of social law codification in which it also plans to revise the eligibility conditions for welfare benefits. The ministry hopes these changes will help people avoid unemployment and poverty traps. It also wants to support people’s motivation to go out to work by creating financial incentives as well as widening access to labour market and rehabilitation services.

Liina Osila and Reelika Leetmaa, PRAXIS Centre for Policy Studies

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