Working group made extensive study of incentive traps – decisions in mid-term review

A working group reviewing incentive traps and regional mobility has produced for the Government a list of measures that it proposes be studied in greater depth. The working group also identifies measures whose further study it does not consider justified at this stage with respect to raising the employment rate.

In the last budget session, the Government agreed measures aimed at raising the employment rate. The establishment of a working group to study incentive traps and regional mobility was also agreed in the budget session.

The working group saw the need for further study in, for example, the following areas:

• Housing allowances
• Allowances related to reconciliation of work and family-life
• Unemployment security

At this stage, due to incentive traps, the working group does not propose further study of, for example, the following topics:

• Earned income taxation
• Wage subsidies and tax wedge reduction
• Raising the lower limit of value-added taxation
• Rent control

The working group has not proposed new initiatives on measures relating to regional mobility, but recommends focusing on correcting the functioning of the housing market and monitoring the impact of recent reforms.

During its work, the working group has made calculations aimed at illuminating the impact of several example measures as well as the magnitude of the employment and cost effects.

The working group does not at this stage make any specific proposals, because in each subject area the impact assessment of measures should be studied more deeply. In the time given, the working group has not been able to study the constitutionality of the measures identified, nor the impact of the combined measures on certain population groups.

Relationship of social security and low-pay work problematic

The fact that the work is not always perceived to be financially worthwhile is due to the level of social security in relation to the pay obtainable in the labour market.

The working group notes that because pay is mainly determined by the market, the removal of incentive traps requires either a reduction of social security, a differentiation of taxation directed at pay and social security, or a change in social security means testing.

In the removal of incentive traps, reducing social security and stricter means testing are least expensive in terms of public finances, while easing means testing is most expensive. One option in reducing incentive traps is to increase the conditionality of social security.

Proposals of earlier working groups more significant in terms of employment impact

The work of the incentive trap working group was preceded by a labour market organisation working group that examined earnings-related unemployment security. In terms of the magnitude of employment impact, this working group’s proposal is greater than any of the measures studied by the incentive trap working group. A Government proposal on a so-called active model for unemployment security will be submitted to Parliament this spring.

In addition, the raising of the age for the unemployment path to retirement, mentioned in the earnings-related pension agreement, would be very significant in terms of its employment impact.

Neither of these measures affects those on the lowest incomes, and neither is likely to give rise to constitutional considerations.

The working group therefore considers that priority be given to implementing these measures.

Study part of preparations continuing until the Government’s mid-term review

The study is part of preparations that will continue until the Government’s mid-term review. The working group did not make proposals to the Government, not has the Government considered individual measures.

“Working must always be worthwhile. I thank the working group for its comprehensive study of incentive traps. Now it is time for analysis and further preparation. Decisions will be made in the Government’s mid-term review,” says Finance Minister Petteri Orpo.

Further preparation will be coordinated by a negotiating group of Government parties, chaired by Finance Minister Orpo (National Coalition Party) and also consisting of Minister of Social Affairs and Health Pirkko Mattila (Finns Party) and Member of Parliament Annika Saarikko (Centre Party).

Inquiries:

Tuulia Hakola-Uusitalo, Financial Counsellor, [email protected] (working group’s report)
Ville Valkonen, Special Adviser (Economic Policy),  tel. +358 44 56 72 201 (further preparation)