No change in unemployment insurance despite social partner pressure

In recent months, discussions among the social partners have evolved focusing on possible changes in the funding and benefits paid out of the Unemployment Insurance Fund. Due to a build-up of funds, the main questions arose as to whether to increase unemployment insurance benefits or to reduce insurance premiums. However, despite proposals by the social partners, Estonia’s unemployment insurance system will probably remain unchanged in 2008.

Surplus money in unemployment insurance fund

Unemployment insurance in Estonia is regulated by the Unemployment Insurance Act (Töötuskindlustusseadus). It is financed through the unemployment insurance premiums paid by both employers and employees, which are calculated on the basis of employees’ wages; the level of insurance premiums may vary between 0.5% and 2% for employees and between 0.25% and 1% for employers. The government establishes the exact rate of the insurance premium based on a proposal from the supervisory board of the Unemployment Insurance Fund (Töötukassa). In 2007, insurance premiums amounted to 0.6% of employees’ gross monthly salaries and to 0.3% of employers’ payroll.

Unemployment insurance benefits depend on previous earnings and are calculated on the basis of a worker’s average earnings over a period of nine months. The rate of unemployment insurance benefit amounts to 50% of the previous earnings during the first 100 calendar days of unemployment and to 40% during the next 260 days (EE0707029I).

Current discussions on unemployment insurance are driven by the extensively increased cash stock of the Unemployment Insurance Fund as a result of rapid economic growth. Data from the Unemployment Insurance Fund indicate that the average number of persons receiving unemployment insurance benefits during one month has declined by more than 50% from 5,356 people in 2004 to 2,573 in 2007. At present, the funds of the unemployment insurance amount to EEK 2.76 billion (about €176 million, as at 3 December), while only EEK 82 million (€5.24 million) was paid out in benefits in 2006.

Unemployment insurance benefits under discussion

In October 2007, the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) proposed to raise the unemployment insurance benefits to 70% of the previous earnings during the first 100 calendar days of unemployment and to 50% from there onwards. EAKL also recommended widening the scope of persons eligible for unemployment benefits.

As an objection, the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) pointed out that the implementation of such proposals would require a change in the Employment Contracts Act, which is currently being updated. In addition, the Ministry of Social Affairs (Sotsiaalministeerium) indicated that research on collective redundancy benefits shows that increased benefits would not motivate unemployed people to find a new job. Indeed, a study by the PRAXIS Centre for Policy Studies (PRAXIS) examining the situation of those made collectively redundant found that higher redundancy benefits significantly increased the probability of receiving unemployment insurance benefits (EE0709019I). However, exact quantitative estimates on the effects of increased unemployment insurance benefits are not available in Estonia.

Discussions on insurance premium

Both the employer organisation ETTK and the Estonian Taxpayers Association (Eesti Maksumaksjate Liit, EML) support the idea of decreasing insurance premiums in order to reduce the unnecessarily large cash stock of the Unemployment Insurance Fund. According to ETTK, maintaining the insurance premiums at the current level is unreasonable due to the substantial funds currently available in the Unemployment Insurance Fund.

EML proposed to stop any unemployment insurance premiums for both employers and employees until the Fund’s cash stock has reached a level that would cover unemployment insurance benefits for one or two years. Both EML and ETTK have added that they would agree to maintain the current level of premiums, if the Unemployment Insurance Fund’s financial resources were used more widely and eligibility rules for unemployment benefits loosened.

However, the Ministry of Social Affairs, as well as the Ministry of Finance (Rahandusministeerium), and EAKL wish to keep unemployment insurance premiums at the current level since, according to forecasts, the economy will start to slow down. Moreover, the employment legislation for both private and public sector employees is currently being updated, which will most probably bring about changes in relation to the amount and length of unemployment benefits paid and the groups of persons eligible for unemployment insurance.

Position of Unemployment Insurance Fund

After analysing different economic forecasts, the supervisory board of the Unemployment Insurance Fund proposed to maintain the unemployment insurance premiums at the current level for 2008. The government had to confirm the Fund’s proposal by 1 December 2007.

The rates of unemployment insurance benefits will also remain at the current level in 2008. However, the supervisory board of the Unemployment Insurance Fund has agreed to examine the current experience of benefit payments in the first half of 2008 and discuss possible changes accordingly.

Commentary

The supervisory board of the Unemployment Insurance Fund is a tripartite body including an equal number of representatives of the government, trade unions (including EAKL) and employer organisations (including ETTK).

Kirsti Nurmela and Marre Karu, PRAXIS Centre for Policy Studies

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