Executive summary

The Estonian labour market has performed relatively well over recent years placing the country among the top performers in the European Union (EU) both in terms of employment and activity rates. In 2019, the employment rate among 15-64 year-olds rose to 75.2%, well above the EU average of 68.4% and above its highest value prior to the Global Financial Crisis.

Despite this remarkable performance, the country faces a number of structural challenges, such as a shrinking labour force, substantial regional disparities and low employment rates among vulnerable population groups. About one-quarter of 15-64 year-olds in Estonia were weakly attached to the labour market in 2018, i.e. they were potentially available for work but did not work at all or were working in jobs that were low paid, temporary or intermittent. The economic consequences of the COVID-19 outbreak have further exacerbated some of these challenges, at least temporarily. The unemployment rate rose to 7.8% in the third quarter of 2020, an increase of 3.8 percentage points in comparison with the third quarter of 2019, with larger increases among youth and low-skilled.

In this context, ensuring a well-functioning and effective system of active labour market policies (ALMPs) will play an important role in paving the way for sustained and successful labour market outcomes in the recovery from the COVID crisis and beyond. This review focuses on the institutional and regulatory set-up of ALMP provision in Estonia, the outreach strategies and the support provided to people weakly attached to the labour market. Its objective is to provide an assessment of the system of ALMP provision, identify challenges and make recommendations. It draws on consultations with the relevant stakeholders, an analysis of the institutional and regulatory setup of ALMP provision and a number of relevant examples and good practices from other countries. A substantial part of the review is based on the analysis of rich linked administrative data. This unique data set that was compiled specifically for this review comprises extensive individual-level information on employment, income, health, socio-economic background, contact with the public employment service and access to ALMPs for Estonia’s entire population. It provides important insights on people’s attachment to the labour market and common labour market obstacles they face. Most importantly, it can be used to match the employment barriers individuals face with the ALMPs provided to them.

Over the years, Estonia has boosted active labour market policies and fine-tuned their targeting. At 0.47% of GDP in 2018, expenditures on ALMPs in Estonia were close to the OECD average and slightly below the EU average of 0.51%, while expenditures on passive labour market policies (PLMPs), i.e. income support, were still lagging behind both the OECD and EU average. This makes Estonia one of the few OECD countries spending more on ALMPs than PLMPs. Furthermore, the diversity of ALMPs provided by the public employment service (the Estonian Unemployment Insurance Fund, EUIF) has increased considerably to meet the individual needs of the jobseekers. The composition of ALMPs is well aligned with the international evidence on which types of policies are most effective and efficient, relying relatively more on counselling and training, and not at all on mediating public work schemes. Employment counsellors identify individual needs for ALMPs by well-established work-focused counselling and quantitative profiling tools, and the impact of ALMP provision is continuously monitored and evaluated.

Although the EUIF has become more active in advertising the support it can offer and reaching out to the groups in need, many of the people with weak labour market attachment do not have established contact with the EUIF. This is an issue particularly among the low skilled and people who, even if they do not have long-term health issues preventing them from working, face other major obstacles to social integration. Nevertheless, once a contact has been established, most of the clients (79% in a three-year-frame) are referred to specific ALMPs targeting their individual obstacles, i.e. beyond regular work-focused counselling and job mediation that are provided to all clients. While these ALMPs generally match well with the actual labour market obstacles faced by individuals with weak attachment to the labour market, some re-design of the training measures and wage subsidies on offer could make them more effective. Extending training provision has become particularly crucial in the context of labour market disruptions caused by COVID-19 to support the reallocation of labour across occupations, sectors and regions and meet the new emerging needs. Training programs can be particularly effective during recessions and, when targeted to vulnerable groups, suppor economic recovery while minimising lock-in effects.

The institutional and regulatory framework of ALMP provision is flexible, permitting to adjust policy measures and services swiftly to changing labour market needs. However, the co-existence and overlap of different legal regulations on ALMP provision make the system unnecessarily complex. Both the Labour Market Benefits and Services Act and the Employment Programme have detailed regulations addressing similar types of ALMPs but with different conditions and amendment processes. The complexity of regulations can potentially cause administrative inefficiencies. Furthermore, the legal framework is somewhat vague regarding the responsibilities of the Ministry of Social Affairs and the EUIF, which share responsibilities related to ALMP design and the organisation of ALMP implementation. This can compromise co-operation between the two institutions.

Overall, the Estonian ALMP system responds well to labour market needs and changes in those needs, and produces good labour market outcomes. However, the following policy directions could contribute to addressing the remaining challenges and further improving ALMP provision in Estonia:

  • Improve the outreach strategies particularly to the low skilled and people with obstacles to integrate into the society (e.g. people who have been away from the labour market for a long time). To reach out to people with low skills, promote up-skilling and re-skilling together with the institutions in the education system and through the network of career counsellors, relying systematically on the results of the Skills Assessment and Anticipation exercise OSKA. Continuously build co-operation practices with the municipalities and consider scaling up the Youth Guarantee Support System tool to reach out to discouraged workers more generally.

  • Increase access to training measures among the low skilled. Provide further training and ensure the implementation of guidelines to employment counsellors to detect training needs and convince the low skilled with a weak labour market attachment to take up training. Extend train-first approaches, where training needs are identified, particularly when tackling the labour market challenges caused by the COVID-19 outbreak. Adapt training programmes to fit better the needs of the low skilled, minimising discouraging aspects and preventing drop-out.

  • Revise the design of wage subsidies. Most importantly, Estonia could consider restricting the target groups to the most disadvantaged or granting and adapting the rates of wage subsidy reimbursements to the employer upon the decision of the employment counsellor (e.g. the counsellors could consider the assessments of the quantitative profiling tool used in the EUIF to predict clients’ probability of labour market integration). Additionally, caseworkers of the unemployed who are particularly discouraged about finding work should devote more efforts to present these clients to the employers (potentially in co-operation with the counsellors for employers), and promote wage subsidies for the employers as a tool to cover potentially lower productivity in the first months.

  • Build the capacity of institutions providing health care and social services to tackle challenges concerning caring obligations and other barriers that limit the possibilities to engage in paid work or expand hours worked. The most critical link in the system are the municipalities, which have the greatest potential to understand and respond to the individual needs of people, particularly in smaller communities, but their capacity needs to be strengthened. The role of the EUIF and its employment counsellors should be to assist persons weakly attached to the labour market to overcome their obstacles by networking with the relevant organisations and finding solutions together.

  • Make the legal framework for ALMP provision less complex without reducing its flexibility. Restrict the Labour Market Benefits and Services Act to include only key aspects of ALMP provision, such as a general description of the aim of ALMP provision and target groups of ALMPs, while setting the details in a more flexible regulation, similar to the Employment Programme. The fine details, particularly concerning the operational design of ALMP provision should be decided by the organisation implementing the ALMPs, i.e. the EUIF (e.g. whether to outsource or provide in-house specific ALMPs, channel management, counselling frequency, etc.). In addition, ALMPs regulated by the ESF Programmes should be incorporated into the Labour Market Services and Benefits Act and the Employment Programme, once the programming period ends and if proven to be effective and efficient. Agreement should also be reached between the key stakeholders on the principles of the new legal framework, the division of responsibilities between the main institutions and co-operation mechanisms.

  • Increase co-ordination of employment policy with social, health and education policy. Coordinate the use of inter-ministerial working groups to address common strategic challenges more systematically and effectively. Consider changes in the composition of the EUIF Supervisory Board to cover a more relevant and diverse range of stakeholders, while keeping the balance of the three social partners and preferably also the total number of members close to the current level. Involve key stakeholders of education, social and health policy as necessary as observers in the meetings of the EUIF Supervisory Board. Set up an (informal) advisory group for the EUIF Management Board to discuss strategic issues and the EUIF operating model systematically with a wider group of stakeholders before the EUIF Supervisory Board meetings. The advisory group could meet when needed and involve researchers and practitioners in addition to policy makers.

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