Employers and government promote incentives to work

The financial crisis has led to increased unemployment, growing numbers of illegal workers and a higher proportion of workers on the minimum wage in Lithuania. However, there is concern that the current system of social benefits does not encourage people to join the labour market. In November 2010, the Lithuanian Confederation of Industrialists broadly backed the recommendations made by a government working group set up by the Prime Minister to promote incentives to work.

Economic and social conditions reduce incentives to work

The global economic and financial crisis, which took effect in Lithuania at the end of 2008, has hit the labour market severely.

In the third quarter of 2010, the unemployment rate reached almost 18%. Compared to 2008, the number of unemployed people registered by the public employment services quadrupled and the average wage in the country dropped by around 10%. In addition, the number of employees receiving the minimum wage grew; in 2009, the share of employees receiving the minimum wage increased to 20% compared with 13% in 2008.

The proportion of long-term unemployed people in total unemployment has been gradually increasing, with unskilled individuals accounting for a large share. This situation in the labour market has led to an almost fivefold increase in the number of the recipients of social benefits in the period from 2008 to 2010 (up from about 40,000 to 180,000 people).

The number of illegal workers in Lithuania also grew between 2008 and 2010; the incidence of illegal work identified by the authorities was 20% higher in 2009 than in 2008, and 40% higher in the first half of 2010 year-on-year.

In this context, the antagonism between the system of social cash benefits prevailing in Lithuania and incentives to work appears extremely threatening. This was the conclusion of a working group comprising officials from different state institutions (Prime Minister’s Office, ministries, public employment service, etc) set up in August 2010 in response to a decree from the Prime Minister, Andrius Kubilius (‘For tackling the issues relating to the integration of disadvantaged people receiving social cash benefits into the economically active population’).

In its opinion (in Lithuanian, 538kb PDF) issued in October 2010, the working group stated that provision of social cash assistance, which is related to a family’s average monthly income (social benefit in Lithuania is equal to 90% of the difference between state-supported income fixed by the government and a family’s actual income), functions as a ‘trap’ of inactivity and low earnings. This is because it is not worth:

• an unemployed recipient of social benefits going to work;

• a low-paid employee receiving social benefits to seek a higher wage because any wage rise reduces the size of the social benefit correspondingly.

The working group put forward a number of recommendations designed to change the existing ineffective system of social cash benefits. The recommendations included:

• increasing the monthly minimum wage;

• tightening sanctions on the use of illegal workers;

• promoting the involvement of unemployed people in public and other works benefiting society;

• reducing the amount of social benefits for working-age individuals who remain unemployed for prolonged periods;

• reducing the tax burden on low-income earners.

LPK supports government’s initiatives

The recommendations of the government’s working group were discussed at a meeting of the Lithuanian Confederation of Industrialists (LPK) in November 2010.

Following the meeting, LPK submitted an address (in Lithuanian, 199Kb PDF) to the Minister of Social Security and Labour (SADM) supporting the reforms and explaining its views on the issues tackled by the recommendations.

Although in principle LPK supports the initiatives put forward by the working group, the address makes the following observations.

• Any decision to increase the monthly minimum wage would require a thorough evaluation of the existing labour market situation, paying specific attention to other initiatives to promote employment.

• To promote integration of unemployed people in the labour market, subsidised employment should be applied on a wider scale to support both employees and their employers.

• More attention should be paid to the cooperation between companies and unemployed people in relation to vocational training.

• Measures to prevent illegal work should be linked to increased possibilities for companies to tender for government contracts.

Commentary

Presumably, this support by LPK on the part of the employers will be followed by legislative amendments to encourage currently unemployed people of working age to join the labour market more actively.

Inga Blažienė, Institute of Labour and Social Research