The Unemployment Trap in Lithuania: Among the Highest in Europe

Prior to the crisis triggered by the COVID-19 outbreak, the Lithuanian economy had been enjoying a rapid growth. Yet, while the number of available jobs had been increasing, the number of unemployed had remained steadily high. The reasons for this may have been twofold: (1) government-funded measures aimed at retraining and professional reorientation of workers and jobless people were not targeted and implemented properly; and (2) people lacked motivation to join the labor market. This study analyzes the latter reason in greater detail.

The motivation and willingness of unemployed people to work, rather than survive on social benefits, is reflected in the “unemployment trap” indicator, or the level of income received by a jobless person in benefits, as a share of the individual’s potential income from employment. The wider the unemployment trap, the less attractive and beneficial it appears for people to earn a living by joining the labor force.

When the unemployment trap is high, the opportunity costs of employment are too high: a person finds it more beneficial to simply continue living on social welfare and remain unemployed. While short-term unemployment is mainly an economic problem, long-term unemployment becomes a social concern. People who remain unemployed for a long period of time lose their social skills and are especially vulnerable to different addictions and mental health problems. A job is the main way to ensure a decent living and well-being. Unemployed individuals lose opportunity of social mobility. Their expectations of being fairly assessed and accounted diminish, and motivations shrink even further. This creates a vicious circle of income inequality, because inequality cannot be reduced without a motivation to work.

A more general issue evolves as the unemployed may join the shadow economy to supplement their benefits. Although the unemployment trap among the lowest-wage earners had shrunk slightly prior to the COVID-19 crisis, this reduction was so small that the incentives for people to take up employment remained low. For comparison, in 2019 the unemployment trap in Lithuania stood at 87.8 percent, compared to the euro area average of 74.5 percent.1 The general trend is unfavorable: over the last year the unemployment trap has grown by 1 percentage point.

Full position can be found here.