Unemployment insurance premiums to rise again

On 1 August 2009, unemployment insurance premiums in Estonia increased from 2% to 2.8% of wages for employees and from 1% to 1.4% of the payroll for employers. The increase was explained as being necessary for the Unemployment Insurance Fund to cover the growing expenses caused by the continuing economic recession and by new redundancy regulation that has raised unemployment levels and the number of benefit recipients.

In Estonia, unemployment insurance is regulated by the Unemployment Insurance Act (Töötuskindlustuse seadus). As of June 2009, it has been financed through mandatory unemployment insurance premiums that can range from 0.5% to 2% for employees and from 0.25% to 1% for employers. The government establishes the size of unemployment insurance premiums each year based on a proposal by the supervisory board of the Unemployment Insurance Fund (Töötukassa), which comprises an equal number of representatives of government, trade unions and employer organisations.

Changes in unemployment insurance premiums

From 1 August 2009, unemployment insurance premiums in Estonia increased from 2% to 2.8% of wages for employees and from 1% to 1.4% of the payroll for employers. This is the third time during 2009 that the government has decided to raise unemployment insurance premiums (see table). Compared with the situation at the beginning of the year, premiums have increased almost fivefold.

Changes in unemployment insurance premiums, 2002–2009
Period when in effect % for employees % for employers
2002–2005 1 0.5
2006–31 May 2009 0.6 0.3
1 June 2009 2 1
1 August 2009 2.8 1.4

Source: Unemployment Insurance Fund, 2009

At the beginning of 2009, it was planned to raise the unemployment insurance premiums in July to 1% for employees and 0.5% for employers, as the new labour law would be put into effect (EE0812019I, EE0901019I). However, the changes involving unemployment insurance premiums and benefits in the new labour law were postponed due to a lack of resources. Furthermore, as the financial resources of the Unemployment Insurance Fund were being depleted faster than expected, the supervisory board of the fund proposed that the government should increase the premiums from June, by twice as much as initially planned, up to 2% for employees and 1% for employers. Since the economic situation deteriorated further, it was agreed in July to increase the premiums again in August, up to 2.8% for employees and 1.4% for employers.

Before the economic recession started, there was discussion about terminating the payment of the premiums, as the Unemployment Insurance Fund had extensive financial reserves and collecting more premiums seemed unreasonable.

Impact of continuing economic recession

The ongoing economic recession has increased unemployment and the number of unemployment benefit claimants has grown significantly. Moreover, legislative changes such as the new labour law, which changed redundancy regulation, are assumed to be having an impact on unemployment levels. According to Statistics Estonia (Statistikaamet), the unemployment rate in the first quarter of 2009 was 11.4% and it is expected to rise further in the following months. In 2007, the unemployment rate stood as low as 4.7%.

According to the Unemployment Insurance Fund, the number of unemployment insurance benefit recipients has increased, amounting to 23,517 people in the first half of this year. This is about four times higher than the total number of benefit recipients in 2007 (6,467 persons) and almost 50% higher than in 2008 (15,743 persons). The number of collective redundancy benefit recipients has also risen, as the number of benefit recipients in the first six months of this year (7,160) exceeds last year’s total number of recipients (5,864) by 22%.

Reactions from social partners

As trade unions were against the implementation of the new labour law without the changes involving unemployment insurance premiums and benefits, they opposed the premium increases. Instead, they proposed that the premiums should be increased only for employers. However, the supervisory board of the Unemployment Insurance Fund rejected this idea. Trade unions also proposed to increase income tax but the government has so far refused to discuss this matter.

The employers supported the government’s decision in order to ensure the necessary reserves that the Unemployment Insurance Fund needs for the country’s currency transition to the euro, which is one of the employers’ main objectives. However, the Chair of the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETK), Tarmo Kriis, announced in May 2009 that the maximum unemployment insurance premium that employers would tolerate is 1.5%. Mr Kriis suggested that politicians should come to an agreement on reducing employees’ benefits if unemployment continues to rise.

Liina Osila and Marre Karu, PRAXIS Centre for Policy Studies

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