What does Finnish research tell us about the impact of cuts to unemployment insurance benefits?

25.2.2025 Blog

There is recent empirical evidence on the impact of cuts to unemployment insurance. "Both shorter entitlement periods and lower daily benefits shorten periods of unemployment and accelerate re-employment. The impact of less generous earnings-related benefits on the quality of future jobs is likely to be relatively small," writes Tomi Kyyrä, a research professor at VATT.

Tomi Kyyrä

The cuts to unemployment insurance have drawn a great deal of criticism. A recent article in Helsingin Sanomat suspected that the cuts would force unemployed people to take low-paying part-time jobs, in which case the impact of higher employment on public finances would remain modest.

The research findings do not support the notion that this is the case, at least not on a large scale.

The advantages of earnings-related unemployment benefits

Earnings-related unemployment benefits cushion the financial impacts of job loss and provide unemployed people with the financial means to search for a job that matches their skills for a longer period.

If unemployed persons can find jobs that match their skills, they will benefit from higher wages and more stable employment, and the society will also benefit in the form of higher tax revenues.

If unemployment insurance improves matches between jobseekers and available jobs, longer job search periods are more acceptable and even generous benefits are not a problem.

The disadvantages of earnings-related unemployment benefits

Conversely, unemployment insurance undermines incentives to work by narrowing the income gap between work and unemployment. As a result, unemployment insurance can also lead to passivity, which prolongs periods of unemployment because people are less likely to look for work. As unemployment becomes more prolonged, skills deteriorate and job offers become more difficult to come by.

There is a risk that generous unemployment benefits will lead to longer periods of unemployment without jobseekers being in a better position to find jobs that match their skills.

What Finnish research shows

Economic theory does not tell us whether or not better unemployment benefits help people find better jobs. Instead, we need empirical research. According to a study conducted at VATT (Kyyrä and Pesola 2020), shorter entitlement periods of earnings-related unemployment benefits accelerated re-employment but also led to shorter periods of employment. Due to the research design, the results only applied to a rather specific group of unemployed people with a fragmented recent work history.

Another study (Korpela 2023) examined the reduction of the maximum duration of earnings-related unemployment benefits by 100 days in 2014 and 2017. The first reduction only applied to unemployed people with a work history of less than three years. That reduction did not affect the duration of unemployment or the quality of post-unemployment jobs in this group.

That the reduction did not even affect the duration of unemployment is a surprising result. This result may partly be attributed to the fact that the 2014 reform was implemented unconventionally: the unemployment fund paid an additional 100 days of benefits equivalent to the basic daily allowance to those affected by the cut. The reform therefore did not affect the specific time at which those who had been unemployed for an extended period had to become Kela clients. If people found interacting with Kela more difficult than with the unemployment fund, the way the reform was implemented may explain why it had no impact.

The 2017 reform cut the maximum duration of earnings-related unemployment benefits by 100 days for almost all unemployed people and also changed the time at which people had to switch to claiming the basic daily allowance from Kela. The reform shortened unemployment spells but had no impact on the quality of subsequent jobs.

Less generous benefits lead to shorter unemployment spells

Finnish studies show that the duration of earnings-related unemployment benefits clearly affects the duration of unemployment spells, although the effect may be small among those who have only been in the labour market for a brief period.

Instead, on average, the duration of earnings-related benefits does not seem to impact the quality of post-unemployment jobs, such as the length of employment and wage rates in subsequent jobs. However, the duration of benefits may have an impact on employment outcomes for certain groups, such as those with fragmented work histories.

The Finnish results are in line with findings from other countries. The results on the effects of the level of the earnings-related unemployment benefits are also similar: higher daily benefits delay employment, but their effect on the quality of future employment is unclear – the effect does not exist or it is modest.

Further information:
Heikki Korpela, Tomi Kyyrä and Hanna Pesola (2023): Ansioturvan lyhentämisen vaikutukset vaihtelevat (The effects of shortening earnings-related unemployment benefits vary). On the results of the studies mentioned in the Policy Brief blog.

Studies:
Heikki Korpela (2023): Changing the unemployment insurance duration: heterogeneous effects and an unbudging exit spike. VATT Working Papers 158.

Tomi Kyyrä and Hanna Pesola (2020). The effects of unemployment benefit duration: Evidence from residual benefit duration. Labour Economics 65.

Tomi Kyyrä

Blog Blogit labour markets unemployment unemployment benefit