The study gives an overview of labour supply incentives present in the Estonian social security system and how changes in the unemployment insurance organization have influenced these incentives.
As Estonia belongs to those of European Union countries where social costs are quite small, therefore the motivation to participate in the labour market is high. Estonia has through time implemented many aids for working and earning money. This is often associated with higher labour supply and bigger revenues from working which leads to less envelope wages.
The growth of labour force preceeding the economic crisis showed that the organization of labour supply incentives did not inhibit the motivation to work. Although, with the conditions present in the economic crisis, the aids and support mechanisms are more important. According to the study, the prescribed raise of the retirement age has increased the employment of older workers. At the same time disability pension and early retirement has had an effect too. The economic crisis increased unemployment insurance payments to the state, but the various benefits to employees was in decline.
Raising the retirement age raised the average employment of older workers, at the same time, but also retirement by other means, the most common of which is the disability pension and early retirement. The economic crisis, increased unemployment insurance payments to the state, but declined various benefits to employees.
„The most likely outcome of the reforms is the increase of unemployment, as the discharging of people becomes more easier to the enterprises“ – Andres Võrk
In some situations the Estonian pension scheme does not favour higher working efficiency and reduces the motivation to find work which affects people with high and low incomes. This results that disability pension and early retirement causes a situation where even with a low income no support is given. Therefore, this does not support working with partial time.
To solve the labour supply problems, different solutions have been proposed. Limitation of parental benefits, support for unemployed parents and changes to the income tax system. Although, the implementation of the aforementioned mechanisms largely depends on the tax compliance.