Friday, May 25, 2018

Finland: OEDC Working Paper Calls for Narrowing Extended Unemployment Benefits for Older Workers

An OECD working paper finds that, different working-age benefits in Finland reduce work incentives and hold back employment. In Pareliussen, J. and H. Hwang (2018), "Benefit reform for employment and equal opportunity in Finland", OECD Economics Department Working Papers, No. 1467, OECD Publishing, Paris, Finland's extended unemployment benefit for older workers are one of several major disincentives being called out for replacement.

As pointed out in the working paper:
In Finland, those aged above 61 on the day their unemployment insurance expires qualify for extended unemployment benefits until the statutory pension age (the “unemployment tunnel”). The unemployment tunnel increases inflows to unemployment substantially, as employers tend to target dismissals to eligible individuals, and because eligible workers may voluntarily choose to use the tunnel. Furthermore, the tunnel reduces outflows from unemployment, as extended eligibility to unemployment benefits discourages job-search. The tunnel is often used as a bridge to ECO/WKP(2018)15 31 retirement, in practice extending benefit eligibility indefinitely. Indeed, the incidence of unemployment peaks at the age of 62, and the unemployed aged 62 or more tend not to search for jobs (Kyyrä and Pesola, 2017; OECD Economic Survey of Finland, 2016).
While pension reform is increasing the retirement age, its effects are not as significant as they could be because the tunnel hasn't narrowed as much:
A pension reform taking effect in 2017 raises the statutory pension age gradually from 63 to 65 years before linking it to life expectancy from 2030onwards,and increases the age threshold for the unemployment tunnel from 61 to 62 years. Increasing the pension age has put the pension system on a sustainable trajectory, but ageing costs are still expected to show up in unemployment, health and longterm care expenditures. The reform is expected to raise the average retirement age by one year, but only increase time in employment by five months due to higher unemployment.

Source: OECD Working Papers (May 25, 2018)

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