OECD Reviews of Labour Market and Social Policies: Lithuania

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Lithuania has undergone major economic and social change since the early 1990s. Despite an exceptionally deep recession following the global financial crisis, impressive economic growth over the past two decades has narrowed income and productivity gaps relative to comparable countries in the OECD. But Lithuania faces a massive demographic challenge, mostly as a result of large and persistent emigration driven primarily by low wages and poor working conditions. Income inequality is also very high, and households at the bottom of the income distribution have recently benefited very little from the recovery. Major reforms of the labour code, the unemployment insurance system, employment policies and pensions were recently undertaken within the New Social Model to improve labour maket adaptibility and income security. This report provides comprehensive analysis of Lithuania’s policies and practices compared with best practice in the field of labour, social and migration from the OECD countries. It contains several recommendations to tackle key challenges facing Lithuania. This report will be of interest in Lithuania as well as other countries looking to promote a more inclusive economy.


A flexible labour market needs strong social protection in Lithuania

The Lithuanian social protection system exposed substantial weaknesses during the economic crisis, and while the economy recovered quickly, households at the bottom of the income distribution failed to reap the full benefits of the recovery. As a result, Lithuania’s society is more unequal – and poverty rates higher – than at any time over the last decade. Over the last years, Lithuania has gone a long way in addressing the deficiencies of its social protection system, however. Under the New Social Model, Lithuania strengthened its unemployment insurance system to balance the further flexibilisation of its labour market. A reform of the minimum-income benefit system enhanced targeting, strengthened work incentives and reduced fraud, though adequacy will have to improve further for high poverty and material deprivation to decline. The recent pension reform will reduce old-age poverty in the short run and improve financial sustainability, however at the cost of a further reduction in long-term adequacy. To achieve lasting improvements in social outcomes, Lithuania will need to make its tax-benefit system more redistributive. This will require strengthening tax progressivity and raising greater tax revenues to permit boosting low public social spending.


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