EUROPEAN CO MMISSION REPRESENTATION IN LITHUANIA
INCLUSIVE LITHUANIA: THROUGH ANALYSIS-BASED POLICY DIALOGUE TOWARDS EFFECTIVE DECISION MAKING
Economic Crisis Poverty and
Social Impact Analysis (PSIA)
Assessment Report
Vilnius 2009
1
© United Nations Development Programme (UNDP) Lithuania
Ministry of Social Security and Labour of the Republic of Lithuania
European Commission (EC) Representation in Lithuania
The opinions expressed in this Report do not necessarily reflect the views and opinions of the Ministry of Social Security and Labour of the Republic of Lithuania, the United Nations Development Programme and the European Commission Representation in Lithuania.
2 TABLE OF CONTENTS
Introduction...... 4
Executive summary...... 6
1. Social impact of the economic recession in Lithuania ...... 17
1.1. Dynamics in the labour market...... 17
1.2. Characteristics and dynamics of the number of social assistance beneficiaries ...... 21
1.3. Indebtedness of the population and developments ...... 23
1.4. Most vulnerable groups of the population...... 25 2. Analysis of policy measures implemented in the country during the economic
decline ...... 27
3. Survey on opinions of the most vulnerable groups of the population and experts ...... 31
4. Long-term social consequences of the economic decline...... 44
4.1. Macroeconomic developments and their influence on the country's social
development in 2009-2015 ...... 44
4.2. Long-term negative social consequences of the economic decline...... 44
4.2.1 Increase in long-term unemployment and associated problems in the country ...... 45
4.2.2 Reduction in investment in human capital...... 40
4.2.3 Increase in the emigration of the population and associated problems
in the country...... 41
4.2.4 Escalation in addiction and related problems in the country...... 48
4.2.5 Increase in the crime rate in the country ...... 48
4.2.6 Growth of the shadow economy and corruption in the country ...... 49
5. Cost analysis of measures mitigating the negative social consequences of the
economic recession...... 51
5.1. Securing jobs...... 51
5.1.1. Public sector...... 51
5.1.2. Private sector ...... 54
5.2. Measures for integration into the labour market...... 57
5.3. Support for the most vulnerable persons...... 59
Conclusions...... 66
Recommendations...... 69
Sources...... 79 3 INTRODUCTION
With Lithuania's economy still in decline, an increasing number of the population encounter various socio- economic problems (unemployment, social insecurity, income decrease, etc.). Seeking to assess possible long-term social consequences of the economic decline in Lithuania and to foresee feasible preventive and mitigating measures, the Institute of Labour and Social Research, under the request of the United Nations Development Programme in Lithuania, the Ministry of Social Security and Labour of the Republic of Lithuania and the European Commission Representation in Lithuania, carried out an assessment of the long-term consequences of the crisis in May-September 2009 (hereinafter referred to as the Assessment).
The aim of this exercise is to assess possible long-term social consequences of the economic recession in Lithuania (with focus on the most vulnerable groups of the population) and put forward recommendations on the implementation of measures aimed at mitigating the consequences of the recession on the most vulnerable groups of the population in the country.
For the purpose of the assessment, the survey entails the following key tasks:
1) to conduct the analysis of the socio-economic situation in the country, based on data from different national institutions (Lithuanian Labour Exchange, Bank of Lithuania, Statistics Lithuania under the Government of the Republic of Lithuania, etc.) and identify most socially vulnerable groups in Lithuania;
2) to conduct the analysis of measures implemented in the country to address poverty and social exclusion under the conditions of the economic decline (with emphasis on ongoing and newly designed measures in the country) and the analysis of interaction among these measures;
3) to estimate the impact of the economic decline on changes in poverty and social exclusion, as well as income inequality in the country;
4) to estimate the expected long-term consequences of the economic decline in Lithuania if no actions are taken to protect the most vulnerable groups of the population;
5) to conduct the cost-benefit analysis of alternative solutions:
A) when implementing socio-economic policy measures launched since 1 January 2009 (after the change of the Government) and primarily aimed at balancing the national budget 1;
B) when incorporating and implementing measures targeted at protecting socially vulnerable groups of the population (seeking to secure the current jobs, intensify (re)integration into the labour market, increase minimum income guarantees, etc.).
6) taking into account the results of the analysis of alternatives and the costs of different alternatives, to propose measures to mitigate the long-term consequences of the economic decline on the population (firstly protecting the most vulnerable groups of the population in Lithuania).
For the purpose of the survey, long-term consequences mean consequences that will arise during the next six years, i.e. until 2015. Due to the specific character and rather short duration of the period under analysis, the assessment of the social impact of the economic decline given in Chapter 1 of the Report is based on the current statistical information (2008 – first-second quarters of 2009) which allows measuring the impact of the economic decline on the country's socio-
1 The forecasts presented in the Report do not cover amendments to the Law of the Republic of Lithuania on Support for Employment effective from 1 August 2009 as a time period is too short for assessing possible impact on labour market developments
4 economic development and reveals major changes in the national economy. Then, based on this information, projections for likely long-term social consequences of the economic downturn are made.
Since economic fluctuations mostly affect socially vulnerable groups of the population (such as the unemployed, recipients of social benefits, persons having financial obligations, etc.), the assessment exercise entailed not only the analysis of statistical data but also the survey on opinions of the most vulnerable groups of the population and experts. The survey of focus groups representing the most vulnerable population was aimed at identifying measures intended to protect the most vulnerable groups and mitigate the long-term social consequences of the economic decline. In total, three focus groups were organised representing the most vulnerable groups of the population, namely:
(a) persons who lost their jobs during the economic crisis (this group was chosen because its members felt the biggest direct negative impact of the economic crisis);
(b) families having children and receiving social assisstance (this group was chosen as facing a considerable threat of poverty in different phases of the economic cycle);
(c) persons having loans and experiencing difficulties in repaying them (this group was chosen as a newly- emerged, i.e. conditioned by the economic crisis, social group facing the threat of poverty).
Moreover, two experts' interviews (economists, finance analysts, social policy experts, representatives of NGOs; approximately 20 experts' interviews) were organised within this assessment exercise. The purpose of the first experts' interview was to identify vulnerable groups of the population mostly affected by the economic recession and to assess the impact of ongoing or newly designed national measures on the quality of life of these groups in Lithuania. The purpose of the second experts' interview was to identify the likely long-term social consequences of the economic recession in the country (if adequate actions are not taken) and to propose measures to mitigate the negative long-term social consequences for the most vulnerable groups of the population in Lithuania. The data from the survey of the focus groups are analysed in comparison with the data from the experts' interviews.
Furthermore, the assessment included the cost-benefit analysis of the long-term consequences of the economic recession and responses. The cost analysis covered those consequences of the economic recession and responses to them which were strongly related to social exclusion in the country. The cost analysis was mainly focused on the following measures:
• securing jobs;
• integration into the labour market;
• improvement of the existing network guaranteeing minimum income in the country 2.
Finally, the report gives the cost-benefit analysis of the measures proposed and already applied by the Government of the Republic of Lithuania within the scope of the listed priorities, as well as the cost analysis of measures not taken (cost of passiveness) in order to assess how much adequate non-response or response to the challenges posed by the crisis will or would cost to the society.
Assessment carried by: Prof. Assoc. Dr. B. (HP) Gruževskis, Prof. Dr. Habil. R. Lazutka, Prof. Dr. Habil. A. Šileika, Dr. R. Zabarauskaitė, Dr. A. Pocius, V. Rosinaitė
Data from experts' interviews processed by: R. Junevičius
Report commented by: Prof. Dr. Arūnas Poviliūnas, R. Svarinskaitė
2 These priorities comply with the EC approach to urgent anti-crisis measures.
5
EXECUTIVE SUMMARY
As in many countries worldwide, the economic recession in Lithuania has a significant adverse impact on the national social economic development. The major negative social consequences of the economic downturn in Lithuania manifest themselves in job losses and income decrease, which respectively results in rising long-term unemployment and growing social exclusion, as well as boosts emigration and shadow economy in the country. All these circumstances increase poverty of the population and reduce the quality of the labour force (lost qualifications and reduced work motivation) in the long run, as well as weaken the growth (recovery) potential of the national economy. Lithuania could mitigate the long-term negative consequences of the economic recession by addressing two vital issues, namely, job losses and decrease in household income at least among the lowest income groups of the population facing the threat of poverty or already living on the poverty line.
I. Context
1. Unemployment and employment trends. In the period of the economic recession in Lithuania, the situation in the labour market worsened significantly. According to the data of the Labour Force Survey, the unemployment rate in Lithuania stood at 11.9% in the first quarter of 2009 and was one of the highest in the EU. The national unemployment rate more than doubled as compared with the first quarter of 2008 (from 4.9% to 11.9%). As a result of an increase in unemployment, the number of the employed in Lithuania decreased by 74 thousand (or 5%) in the first quarter of 2009. In the first quarter of 2009, the employment rate in Lithuania constituted 61% and was 2.9 percentage points lower than the previous year. Despite the fact that employment and unemployment variation trends are affected by many factors such as internal (households’ consumption changes, lending opportunities for business and etc.) as well as external ones (recovery of other countries’ economies, competitiveness of Lithuanian production in foreign markets) it should be noted that employment of Lithuanian population will be the most dependent on Government’s implemented employment policy and promotion of economic activity of relevant population groups.
The labour market dynamics examined by the survey allow stating that failure to take more active relevant labour market policy measures may increase the unemployment rate to 15.4% in 2010 (according to the data of the Bank of Lithuania - as much as 19%). This means that the number of the unemployed in the said period would amount to some 260 thousand residents, while the average annual number of the employed would decline to 1340 thousand persons (see Table 1). Country's labour force variation in numbers during the forecasted period will be influenced not only by economic processes but also by intensity of emigration processes as well as by registration activity of economically non-active persons of employable age (as per the eligibility criteria set for social assistance). Thus, labour force variation in numbers may not be consistent with the changing numbers of employed and unemployed persons. Bearing this in mind, after the recovery of the national economy in the long run (2015), the number of the employed will remain lower, and the number of the unemployed will be nearly one third higher than those before the beginning of the economic downturn. Young people and people aged above 50 would be faced with particularly difficult situations – the number of the unemployed in these age groups could amount to respectively 31 thousand and 71 thousand in 2010, while the tension in the labour market would be felt in these groups (especially among senior population) as long as until 2014-2015. It is worth paying attention to the fact the forecasted share of unemployed youth in comparison with the increased total number of unemployed appear as relatively inconsiderable, however this does not reflect the seriousness of youth unemployment problems that have long-term negative consequences not only for individual persons or their groups but also for national
6 economy. Researches carried by the Labour and Social Research Institute (Lithuania) indicate that 25 thousand young unemployed persons cost annually for the state for about 2.2 billion Litas (indirect costs – not created GDP, not paid taxes; direct costs – social allowances, financing labour market policy measures, prevention of criminality and others).
A considerable increase in the number of the long-term unemployed since 2009 is also forecasted in Lithuania. In 2010, the share of long-term unemployed persons in Lithuania could constitute about one third of all the unemployed (i.e. approximately 78 thousand persons). A high rate of long-term unemployment is predicted to persist even after the recovery of the national economy (in the period from 2012 to 2015) as most unemployed persons will be less competitive on the market due to poorer or lost qualifications or professional skills.
Alongside this scenario, more optimistic and pessimistic scenarios are also likely; their realisation would mainly be determined by the implementation of active labour market policy (ALMP) in the country. The implementation and better financing of active labour market policy measures, as well as a policy aimed at job preservation could allow keeping the number of the unemployed at 190-210 thousand (in 2010-2011), and the number of the employed – at 1400 thousand. In this case, the number of the unemployed (especially the long-term ones) would be cut by 30-40 thousand in 2010-2012.
Otherwise, drastic economic decisions (making substantial job cuts in the public sector, increasing the tax burden on business entities and individuals) make a more pessimistic scenario likely according to which the average number of unemployed persons could reach 300 thousand or more in 2010, while long-term unemployment may continue growing and account for 40% of all the unemployed in 2012-2013. This may be conditioned by further decline in the overall demand (consumer demand in particular), the shrinkage of the construction sector, deterioration in the activities of the transport, food processing and trade industries. Such tendencies (according to the pessimistic scenario) may limit opportunities for agricultural activities, which would significantly add to employment problems in rural areas.
2. Trends for change in earnings and income . With the gross domestic product (GDP) still falling, it is hard to make accurate forecasts for changes in income of the population in 2009-2015 in Lithuania; however, it can be stated that the average disposable income in the given period will be affected by two key factors, namely, changes in earnings and unemployment rate (possible changes to social security benefits not being taken into account yet).
Table 1
Dynamics of labour market and living standard indicators in Lithuania in 2008 – 2015
(Reference point is August 2009. An assumption is made that any additional employment promotion measures will not be implemented in the country)
Indicator 2008 2009 2010 2011 2012 2013 2014 2015 General Economy Indicators GDP growth/chain-linked 3.1 -18.2 -2.6 2.3 3 3.5 4.2 4.5 volume growth (percent)*
HCPI (average annual)/ 11.1 3.6 -3.0 -2.8 -0.5 0.9 1.4 1.8 Consumer price index (percent)* Labour Market Indicators Average annual unemployment rate (percent) (according to the data of labour force surveys) 5.8 14.4 17.0 13.5 11.8 10 8.7 7.6 Average annual number of the employed (thousand) (according to the data of labour 1520 1311.7 1270.5 1340 1417 1438 1468 1502 force surveys)
7 Labour force (thousand) (according to the data of labour 1614.3 1532.1 1531.5 1550 1607 1598 1608 1636 force surveys) Average annual number of the unemployed (thousand) (according to the data of labour 94.3 220.4 261 210 190 160 140 124 force surveys) Share of the youth under the 13.4 13.2 11.9 12.4 12.1 13.1 12.9 12.9 age of 25 in the total number of the unemployed (percent) Share of persons aged over 50 25 26 27 26 25 23 23 23 in the total number of the unemployed (percent) Share of long-term unemployed 21 26 30 28 26 25 24 23 persons in the total number of the unemployed (percent) Number of the long-term 19.8 57.3 78.3 58.8 49.4 40.0 33.6 28.5 unemployed (thousand) Earnings and household income indicators Changes in earnings (percent) - -13.0** -5.0** 2.5** 3 4 5 5 Earnings (Litas) 2319 2017.6** 1916.7** 1964.7** 2023.6 2104.5 2209.8 2319 Average disposable income 986.8 858.6 815.7 836.1 861.2 895.6 940.4 986.8 (taking into account changes in earnings) (Litas) Average disposable income 986.8 783.9 737.4 771.7 812.1 858.0 913.1 970 (taking into account changes in earnings and unemployment) (Litas)
Poverty and income inequality indicators Absolute poverty line 4.8 7.5 13.2 11.5 9.8 8.1 6.4 4.8 (percent)** Decile coefficient of 8.0 7.9 7.5 7.6 7.8 8.1 8.5 9.0 differentiation*** (Actual data for the year 2008)
* Forecasts made based on the data of the Ministry of Finance of the Republic of Lithuania (http://www.finmin.lt/web/finmin/aktualus_duomenys/makroekonomika. Forecasts adjusted by authors taking into account the latest data on the GDP drop and changes in consumer price index (CPI)
** Source : Lithuanian Macroeconomic Review. SEB Bank. June 2009. No 36. P. 29. Forecasts for household income are based on the assumption that, as a result of the crisis, income will fall to a similar degree in all income groups (like it rose before the crisis).
*** Absolute poverty line means a poverty threshold set by political methods – the amount of the state supported income (i.e. 350 Litas). It is calculated by authors on the basis of the household budget survey data.
**** An assumption is made that benefits will not be cut for the most deprived groups of the population (persons receiving minimum pensions, disabled persons and other similar groups).
****The given forecasts do not embrace amendments to the Law of the Republic of Lithuania on Support for Employment effective from 1 August 2009. A time period is too short to evaluate labour market developments.
It is forecasted that due to rising unemployment, declining consumption and production levels of earnings in Lithuania will continue falling in 2009 and 2010, but then will start slightly going up and should reach the level of the year 2008 in 2015. Even when Lithuania comes out of the economic decline (2.3% GDP growth is forecasted in 2011) a growth
8 in earnings will be slow as large-scale unemployment puts pressure on salaries and wages, therefore, business entities are in no hurry to raise them in the first post-crisis years (see Table 1).
Similar trends will be observed in analysing the dynamics of per capita disposable income in the period from 2009 to 2015. The assessment of changes in earnings and unemployment allows making a forecast that household income will go down in 2009 and 2010 but then will start slightly rising. However, the income level of the year 2008 will not be reached even in 2015. Such a slow growth in household disposable income can be explained by the fact that in the post- crisis period business entities aim at improving productivity and production without substantially increasing the number of employees. Such a trend was also observed in the case of the Russian crisis in 1999 when, despite the growth of the national economy, Lithuania saw a further increase in unemployment in 2000-2001; the said downturn halted a steady annual income increase for four years.
3. Dynamics of poverty and income inequality. Changes in the average disposable income are expected to have a modest effect on the relative poverty line, provided income will change to a similar degree across all population sectors. The experience of previous periods shows that the relative poverty line measured as 60% of the median income depends little on changes in GDP and average disposable income and is more a reflection of inequality in household income distribution. In this light, this indicator seems likely to increase moderately or even decrease during the economic downturn (2008-2010) in Lithuania. A more marked trend towards higher rate of relative poverty in Lithuania is anticipated much later - in five years or even more, after the recovery of the national economy when more apparent increase in economic inequality across different population groups can also be expected.
When per capita disposable income is falling in all or most income groups during the economic recession absolute poverty is more relevant. The national absolute poverty threshold is expected to increase during the economic recession as the decrease in income will increase the share of households unable to secure even basic personal needs. In 2008, some 160 thousand persons in Lithuania (or 5% of the total population) lived in poverty according to the absolute poverty line 3. Average incomes of persons living in poverty were 120 Litas below the poverty line. It can be forecasted that the absolute poverty line in Lithuania will reach 7.5% during the economic decline (in 2009), and will touch as much as 13.2% in 2010 (i.e. it will reach the level of the year 2006). This situation will be primarily caused by lower household income, mounting debts of the population, higher number of the long-term unemployed and their reduced chances of employment due to lost professional skills or qualifications. Only at the end of 2015, the absolute poverty line is expected to go back to the pre-crisis level (see Table 1).
The analysis revealed that the decile coefficient of differentiation measuring per capita consumption expenditure decreased from 9.3 in 2007 to 8 in 2008. The decrease of this coefficient was mainly caused by a slower growth in consumption expenditure within the richest sector of the population (in fact, a slight reduction in consumption expenditure is observed in the top tenth decile). Economic inequality across the population could be expected to decline in the short run (2009-2010), provided any income received by the most deprived groups of the population (namely, pensions, disability allowances, social benefits, minimum monthly wages) is not reduced. However, once the national economy recovers, a rather sharp increase in economic inequality across the population is expected in 2011 already, and it is likely to continue till 2014-2015. This can be explained by the fact that the richest sectors of the population who have temporarily reduced their consumption expenditure will recover faster than people with average and lower income who have been more affected by the economic downturn (in particular, vulnerable groups of the population – unemployed people, single parents raising children, large families, etc.).
3 Absolute poverty line means the amount of the state supported income, which is 350 Litas (i.e. political methods are applied for calculating poverty threshold).
9 II. Long-term consequences of the economic recession
Increasing unemployment and poverty in the country bring about other long-term negative social consequences.
During the economic crisis, a decrease in per capita income leads to lower household investment in human resources (i.e. education, health care, recreation and culture). According to the data of the Household Budget Survey in 2008, the average expenditure per capita per month on education in Lithuania went down 22.8% . Reduced chances of acquiring education and qualifications naturally lead to negative consequences in the long run. Low or none professional qualification markedly reduces competitiveness on the labour market, conditions low pay, as well as promotes income inequality and poverty in the country. All these conditions give rise to a vicious circle of poverty where poverty is transferred from generation to generation.
The economic decline increases the extent of emigration of the population from Lithuania. In the period of January-September, 2009 net migration was negative and entailed for about 11 thousand persons (16.2 thousand emigrated; 5.2 thousand immigrated) whereas the same indicator composed 7.7 thousand persons in 2008 (in 2007 – 5.2 thousand). Bearing in mind that the Lithuanian economy is foreseen to recover only in 2011-2012, Lithuania is likely to see even higher rate of emigration at the end of 2009 and in 2010, along with the recovery of economies of foreign countries. By then rates of emigration may reach 20-25 thousand a year. Thus, as a result of increasing migration, Lithuania may lose additional 100-150 thousand residents in the long run. After the economic recovery, a greater extent of emigration entails a decline in population, "brain drain", demographic ageing and other problems.
The statistical data analysis has showed that during the economic decline, accompanied by rising unemployment and decreasing household income, the crime rate is increasing . Although in the first quarter of 2009 the total crime rate in Lithuania went up about 4%, the number of economic crimes increased considerably: the number of cases of the production of counterfeit currency and securities increased 158.6% (from 237 to 613 cases), the number of frauds grew 59.1% (from 915 to 1456), etc. Furthermore, the unlawful production of alcoholic beverages and the number of crimes committed by persons under the influence of alcohol nearly doubled during the said period (as compared with the previous year). If such trends persist, the total number of criminal acts in Lithuania may increase by 27% in 2012 (against 2008) and constitute about 3 thousand criminal acts per 100 thousand residents. An increase in crime is expected to continue till 2012-2013 as, based on the Lithuanian and foreign experience, restraints on economic crimes are more time-consuming and related to a rise in the standard of living in the country.
The number of suicides and attempted suicides was down in Lithuania in 2007, but it went up again in 2008; this increase was rather significant and amounted to 8.4% in 2008 . 1111 suicides and attempted suicides (i.e. 3.3 suicides and attempted suicides per 10 thousand residents) were recorded in Lithuania. Negative effects of the economic decline on living conditions, mounting debts to banks (especially difficulties in paying off mortgage loans) and rising unemployment may further contribute to such trends and this indicator may grow up to 1500 persons a year in 2011-2012.
In the face of the economic downturn, an increasing number of business entities are encountering financial difficulties and some of them turn to the shadow economy , seeing it as one of business rescues. This is particularly relevant in the area of labour relations where shadow economy means employment without formalising labour relations and failure to pay relevant taxes (income, social insurance). According to the data of the Statistics Lithuania, in 2004- 2008, the shadow economy in Lithuania accounted for about 15%. It can be forecasted that the declining profitability of business entities, raised taxes and the worsening macroeconomic environment could increase the scope of the shadow economy to 20-22% by 2015 . It is noteworthy that shadow activities develop very fast (usually 12 to 18 months), their restraint (elimination), however, requires a much longer period (3 to 5 years on average).
10 III. Proposed measures to mitigate the long-term negative consequences of the economic recession
The findings of this analysis and recommendations on measures were publicly presented and discussed at round-table meetings held in Vilnius and Kaunas with representatives of different stakeholders: ministries, municipalities, county administrations, associations of employers, trade unions, various institutions of studies and research, as well as NGOs. General recommendations integrating proposals of participants of the discussions are summarised below.
The analysis revealed that, with the view of mitigating long-term negative social consequences of the economic recession in Lithuania, the key measures at the policy level should be aimed at:
1. Securing jobs;
2. (Re)integration of the unemployed into the labour market;
3. Development of the support (social security) network in the country.
1. Securing Job Places
In this regard, it is advisable to distinguish between measures intended for the public and private sectors.
• Public sector – it is advisable to limit job cuts during the economic decline by promoting flexible forms of employment (e.g. shorter working day/week), primarily protecting the most vulnerable groups (single parents raising children, large families, etc.).
• Private sector – it is recommendable to allow for a wider application of: a) tax deferrals; b) wage subsidies to enterprises having orders in hand. However, the implementation of these measures will entail a wider application of various control mechanisms and possibilities envisaged in collective agreements.
Securing jobs (both in the public and private sectors) would bring direct benefit to families of employees retaining their jobs and help them maintain the quality of life, as well as have an indirect positive influence on the entire population as it would prevent losses related to an increase in unemployment.
As regards the public sector, it is estimated that it would be more economical to cut salaries of employees rather than reduce their number. This measure would allow preserving nearly 50 thousand jobs in 2010. Naturally, the objective to secure job places is not self-intent. Structural restructuring of public sector should be carried as well as the number of job places should be optimized. Inspection of inefficient job places or not filled positions leading to their abolishment should be a permanent process that is not directly associated with anti-crisis measures. The authors put the particular stress on securing job places that are in necessity and there wouldn’t be advisable to lose them due to public expenditures’ economy during the economic crisis especially having in mind the long term consequences of such decisions.
Subsidies for jobs would help to preserve jobs in the private sector. Estimates showed that subsidies for jobs with the view of safeguarding jobs for at least 10% of the expected number of unemployed persons during the relevant year would cost from 60 to 125 million Litas a year, depending on the total number of the unemployed. However, it would reduce expenses on unemployment benefits by 42% and decrease the number of persons living in poverty (several thousand persons a year) (see Table 2).
11 Table 2
Benefit of less job losses in the public and private sectors in order to prevent an increase in unemployment*
2010 2011 2012 2013 2014 2015
Public sector
Average annual number of the 261 210 190 160 140 124 unemployed (thousand)
Change in the average annual number of - 80.5 90.5 84.2 87.5 88.6 the unemployed, percent (previous year – 100%)
Prevented increase in the number of the 35,200 28,336 25,644 25,192 18,893 16,739 unemployed (number of persons)
Savings on unemployment benefits 61.0 49.1 44.4 37.4 32.7 29.0 (million Litas)
Total prevented increase in the number 46,464 37,403 33,850 28,502 24,939 22,096 of persons living in poverty (number of persons)
Private sector
Number of subsidised jobs/reduced 26.1 21 19 16 14 12.4 number of the unemployed (thousand)
Costs of subsidies for jobs (subsidising 125 101 91 77 67 60 400 Litas per month) (million Litas a year)
Savings on unemployment benefits 52 42 38 32 28 25 (million Litas)
Prevented increase in the number of members of households living in poverty because of a job loss by the head of the 15,660 12,600 11,400 9,600 8,400 7,440 household (number of persons)
Total prevented increase in the number 34,452 27,720 25,080 21,120 18,480 16,368 of persons living in poverty (number of persons)
* An assumption is made that any additional employment promotion measures will not be implemented in the country. The given forecasts do not embrace amendments to the Law of the Republic of Lithuania on Support for Employment effective from 1 August 2009. A time period is too short to evaluate labour market developments.
In addition to the above-mentioned measures, representatives of different stakeholders highlighted during the discussions that the most effective measure aimed at mitigating the long-term social consequences of the economic recession was an investment policy ensuring the creation of high-productivity jobs and a tax policy favourable to
12 employment. Emphasis was also placed on the promotion of entrepreneurship among the population through business incentive services and measures rather than assistance in cash.
2. Integration of the unemployed into the labour market
Since the labour supply considerably exceeds the labour demand, integration measures should not only focus on permanent employment, but also devote much attention to maintaining professional skills of the unemployed and stimulating motivation for getting employment. On the other hand, it should be noted that due to the economic decline and state budget constraints the financing of active labour market policy measures may also be reduced. Thus, taking into account financial resources and changes on the labour market, priority should be given to:
• expansion of public works (extending their range and promoting their organisation in the private sector, using temporarily free productive capacities to the maximum extent). When expanding the scope of public works, more attention should be focused on the organisation of "green jobs" (forestry, organic farms, etc.) and jobs that could be done by persons with higher education (e.g. additional classes at general schools, vocational schools, day care centres, or counselling of persons receiving social assistance and unemployed persons at labour exchange offices and municipalities, etc.). Expansion and diversification of public works would increase opportunities to engaging women and elderly (aged 50+) unemployed persons into participation in these labour market policy measures. It would be particularly useful to develop cooperation between specialists with higher education and NGOs through public works. Furthermore, the financing priority for public works should be given to economically disadvantaged regions suffering from highest unemployment;
• development of vocational training for members of groups least competitive in the labour market (young people from poor families, disabled persons, etc.) who for certain reasons have not acquired or cannot acquire a profession;
• organisation of vocational training under trilateral agreements (an agreement would be concluded among the unemployed, the labour exchange and the employer, i.e. the jobseeker would be trained for a specific place of work);
• development of subsidised employment refocusing employment priorities on support for persons having family obligations (large families, single parents raising children, etc.) as well as for pre-pensioner age persons.
It should be emphasised that control over the organisation and implementation of ALMP should be strengthened to ensure that measures achieve their primary purpose, stimulate cooperation among the population in the area of employment, enhance the confidence of the population in state institutions and help maintain professional skills. The implementation of these measures will highly depend on cooperation between local authorities and local employers in order to ensure that these measures cater to the needs of the local population to the maximum extent and make use of the local production infrastructure.
Possible costs of implementing active labour market policy measures (public works, subsidised employment, vocational training, etc.) are given in Table 3.
13
Table 3
Costs of measures aimed at integration into the labour market
2008 2009 2010 2011 2012 2013 2014 2015
Vocational training of the unemployed
Number of participants 11 5 6 6 5 4 4 4 (thousand)
Expenses (million Litas) 77 35 42 42 35 28 28 28
Subsidised employment
Number of participants 4.9 15.3 19 16 15 12 9 7 (thousand)
Expenses (million Litas) 22.3 69.5 86.4 72.3 68.2 54.5 40.9 31.8
Public works
Number of participants 16.4 29.7 34 29 26 20 20 20 (thousand)
Expenses (million Litas) 39.4 69.6 81.6 69.6 62.4 48.0 48.0 48.0
Overall ALMP (vocational training of the unemployed, subsidised employment, public works)
Number of participants 32.3 50 59 51 46 36 33 31 (thousand)
Expenses (million Litas) 138.7 174.1 210.0 183.9 165.6 130.5 116.9 107.8
GDP at current year 111,499 80,056 77,975 79,768 82,161 85,037 88,608 92,596 prices (million Litas)
Expenses as percent of 0.12 0.22 0.27 0.23 0.20 0.15 0.13 0.12 GDP
If these measures involved 30-50 thousand unemployed persons, their costs would constitute 0.12% to 0.27% of GDP and would be quite low in the context of EU countries, but they would enable to reduce dequalification and desocialisation of the unemployed.
Participants of the discussions also underlined the need to enhance the role of NGOs in implementing the said measures. On the one hand, NGOs create new jobs themselves, while, on the other hand, they can enhance transparency in the use of financial resources for public purposes and ensure higher social benefit.
3. Improvement of the support (social security) network in the country
In the pursuit of this aim, the following measures should be implemented: 14 • simplifying conditions for the payment of social assistance benefits by relaxing additional requirements set for persons and applying just the income and assets test as an eligibility criterion. With the view of expanding the coverage of social assistance benefits, it is advisable to lower requirements on assets and employment attempts, as well as to improve the administration of benefits by providing full and timely information about them and reducing the stigmatisation of applicants;
• extending the coverage of unemployment social insurance benefits (as found by the surveys, unemployment insurance benefits in Lithuania are drawn, on average, by 40% of the unemployed, whereas the poverty risk level of households of the unemployed constitutes about 60%). This could be done by reducing additional requirements set for the unemployed in order to receive assistance in case of unemployment (e.g. shortening the requirement for the unemployment insurance record during the last 36 months from 18 months to 12 months). Account should be taken of the fact that in times of economic recession employees creating lower added value are first given the sack, including employees with little work experience. Thus, the latter fall out of the scheme of social assistance in case of unemployment.
If all people living in poverty were offered the possibility of receiving social assistance in Lithuania (without increasing the amount of the state supported income, 350 Litas, which is an eligibility criterion for support), this would require increasing national expenditure from 0.33% of GDP in 2009 to 0.63% in 2010 (i.e. 489.1 million Litas), but later on (before 2015) these costs would almost go back to the level of the year 1996 (0.23% of GDP). Even at the peak of the recession (2010) the relative costs of social assistance benefits (as percent of GDP) would be below the EU average.
The extension of the coverage of unemployment insurance benefits from 40% to 75% of the unemployed would cost 1.1% of GDP (or 822.2 million Litas) in 2010. Later on, as a result of a decline in unemployment, the costs would go down to 0.42% of GDP in 2015 (or 390.6 million Litas). These costs could be further reduced provided the above-mentioned measures for integration into the labour market are implemented.
Although in the short run (2009-2010) these measures would require additional financial resources (the total costs of measures would constitute 4-4.2% of GDP in 2009, but coming out of the crisis the costs would fall to 1.4-1.8% of GDP in 2015), in the long run, however, they would help reduce the poverty and social exclusion of the population and require less budget expenditure (on social assistance, unemployment benefits, etc.). This would, of course, accelerate economic development in future and ease social tension in the country.
During the discussions representatives of different stakeholders emphasised the importance of more active involvement of rural communities in addressing poverty and social problems and the development of social services in the country protecting residents from the expansion of the "culture of poverty" and social passivity.
IV. Conclusions
Unless the Government takes appropriate measures, the long-term social consequences of the economic recession in Lithuania would be as follows:
• An increase in the number of the unemployed from 94 thousand in 2008 to the forecasted 260 thousand in 2010. The number of the unemployed is likely to stand at about 124 thousand even in 2015.
• A drop in household income in 2009-2010 to the level of the year 2006 , whereas income would return to the pre-crisis level only in 2015.
15 • As a result of a rise in unemployment and inadequate social support system, the number of persons living in poverty in Lithuania would account for 440 thousand in 2010 (160 thousand in 2008).
• The worsening socio-economic situation will accelerate the pace of emigration, increase the crime rate in the country, intensify manifestations of self-destructive behaviour and boost the shadow economy, while these factors will have an impact on the country's socio-economic development in the future.
In order to avoid these consequences, measures aimed at restraining the growth in unemployment and developing the support network for the poor should be taken.
According to the results of the Assessment, the implementation of the proposed measures in the short run (2009- 2010) would require additional financial resources (in 2009, the costs of measures would total 4-4.2% of GDP but when recovering from the crisis would go down to 1.4-1.8% of GDP in 2015); however, the implementation of these measures would reduce poverty and social exclusion in the long run and need lower expenditure from the state budget (on social assistance, unemployment benefits, (re)integration of the long-term unemployed into the labour market, etc.). The abovementioned measures would help to ease the social tension in the country and accelerate economic development.
16
1. SOCIAL IMPACT OF THE ECONOMIC RECESSION IN LITHUANIA
Prior to the analysis of long-term social consequences of the economic decline, it is advisable to assess the impact of this economic decline on the country's socio-economic development in the current (or short-term) period. With this in mind, this Chapter explores the impact of the economic downturn on the employment of the population, their income, as well as analyses changes in household debts.
1.1. Dynamics in the labour market
Unemployment rate . One of the first signs of the economic decline in Lithuania was a fast rise in unemployment. According to the data of the Labour Force Survey by the Department of Statistics under the Government of the Republic of Lithuania (Statistics Lithuania), the unemployment rate in Lithuania stood at 11.9% in the first quarter of 2009 and was one of the highest in the EU. The national unemployment rate more than doubled as compared with the first quarter of 2008 (from 4.9% to 11.9%) (see Diagram 1.1.1). A particularly sharp rise in unemployment was recorded in the first quarter of 2009 when the unemployment rate in Lithuania increased by 4 percentage points, from 7.9% to 11.9%. Diagram 1.1.1 Unemployment rate in 2004 – first quarter of 2009 in Lithuania (percent) (Data of the Labour Force Survey)
30,0 23,2 25,0 25,0 23,0 22,7 21,0 20,0 20,0 16,5 17,3 15,0 15,0 13,0 11,3 12,8 13,6 10,6 10,6 10,8 10,3 10,8 11,9 10,2 9,4 8,7 9,9 8,7 10,1 10,0 8,5 7,1 6,9 7,4 7,9 7,2 6,4 5,6 5,7 4,8 4,9 4,5 5,9 5,0 5,0 4,1 3,9 4,2 0,0 Q I 2009 Q I 2008 Q I 2007 Q I 2006 Q I 2005 Q I 2004 Q II 2008 Q II 2007 Q II 2006 Q II 2005 Q II 2004 Q III 2008 Q III 2007 Q III 2006 Q III 2005 Q III 2004 Q IV 2008 Q IV 2007 Q IV 2006 Q IV 2005 Q IV 2004
Unemployment rate Youth unemployment rate
As seen in Diagram 1.1.1, the unemployment rate over the reference period particularly shot up among young people in Lithuania. In the first quarter of 2009, the youth unemployment rate constituted 25% and, as compared with the same period of the previous year, increased from 10.1% to 25%. Employment rate . According to the data of the Labour Force Survey, the number of employed persons in Lithuania in the first quarter of 2009 amounted to 1 million 433 thousand of the total population. As a result of an increase in unemployment, the employment rate in the country plunged - the number of the employed in Lithuania decreased by 74 thousand, or 5%, over the given quarter. According to the data of the Labour Force Survey, the employment rate in Lithuania in the first quarter of 2009 constituted 61% and was 2.9 percentage points lower than the previous year.
Given a decline in the male employment rate (from 66.8% in the first quarter of 2008 to 61% in the first quarter of 2009), the unemployment rates for men and women became nearly equal (61% for men, and 60.9% for women). Over a year, the employment rate decreased by 5.8 percentage points among men, and by 0.3 percentage point among women. 17 Dynamics and characteristics of the number of the unemployed . According to the data of the Lithuanian Labour Exchange (LLE), the number of the unemployed in Lithuania has started to grow more rapidly in October 2008 already, and accelerated dramatically in early 2009 (January – March). At the end of January 2009 (against the respective period of the previous year), the indicator of the dynamics of the unemployment rate in Lithuania was 1.64, and as much as 2.85 in May.
The comparison of indicators at the beginning of 2009 and 2008 reveals that the number of job seekers increased from 90.9 thousand to 121.3 thousand (or 33%) . The share of the unemployed in the number of job seekers increased by more than one third (36%) from 69.7 thousand to 95 thousand (see Table 1.1.1). Table 1.1.1
Persons registered with the labour exchange (beginning of year, thousand)
Labour market indicators 2008 2009 Change Change (percent (thousan ) d)
Job seekers (total) 90.9 121.3 +33 30.4
including: unemployed 69.7 95 +36 25.3
out of which: women 42.3 45.9 +9 3.6
men 27.4 49 +79 21.6
participating in temporary employment measures 11.4 7 -39 -4.4
drawing unemployment benefits 21.2 32.6 +54 11.4
Ratio of job seekers to the working-age population (percent) 4.3 5.7 +33 1.4*
Ratio of the unemployed to the working-age population 3.3 4.4 +33 1.1* (percent)
* Change expressed as percentage points
Sources: Lithuanian Labour Exchange data.
A particularly vast increase in the number of the unemployed (comparing the indicators of the unemployment rate at the beginning of 2008 and 2009) is observed among men, which constitutes as much as 79%. This situation was conditioned by considerable difficulties faced by business entities in the construction and real estate sectors due to a sharp decline in the demand for real estate and limited business crediting opportunities.
The analysis of the distribution of unemployed persons by educational attainment shows that during the economic decline persons with lower education are at much higher risk of unemployment. At the end of the first quarter of 2009, every second unemployed had secondary education (54.4% in total), including 30.2% with professional qualifications and 24.3% without any professional qualification. However, at the end of the first quarter, every tenth unemployed had higher education. The fact of unemployment hitting residents with higher and higher income during the economic downturn is reflected by a growth trend in the average unemployment social insurance benefit in Lithuania 4. At the end of
4 The unemployment insurance benefit in Lithuania is calculated as the sum of the fixed and variable parts. The fixed part is equal to the amount of the state supported income (i.e. 350 Litas). The variable part is calculated on the basis of the former income of the unemployed. 18 the first quarter of 2008, the average unemployment social insurance benefit amounted to 542 Litas, while in the first quarter of 2009 it reached 713.6 Litas.
Diagram 1.1.2 shows the dynamics of the number of registered unemployed persons and persons drawing unemployment insurance benefits in the period from December 2008 to July 2009. The latter indicators almost doubled over the said period.
Diagram 1.1.2
Unemployed persons and persons drawing unemployment social insurance benefits in 2009
(end of month)
250000
200000 209911 218135 186462 193229 175273 150000 152391 124938 100000 68956 77140 80871 79256 50000 55245 75157 42804 0 January February March April May June July Registered unemployed Number of the unemployed receiving unemployment insurance benefits at the end of a month
Sources: Lithuanian Labour Exchange Data.
It should be noted, however, that at the end of July 2009, unemployment social insurance benefits were drawn by just 34.5% of all the unemployed in the country. Moreover, the share of persons receiving unemployment benefits has started sharply decreasing since May. These figures indicate that approximately 142 thousand persons not receiving any work-related income had to live on wages earned by other family members, savings, social benefits or other social transfers. The small share of persons receiving unemployment benefits is mostly determined by strict eligibility criteria for unemployment social insurance benefit and relatively short benefit’s payment period 5.
With a rather ineffective unemployment insurance system in the country 6, an increase in the number of the unemployed is closely linked with increasing poverty in the country (especially as a result of increasing long-term unemployment when no income is earned for more than a year). The data of the Survey on Income and Living Conditions by Statistics Lithuania indicates that the unemployed are a particularly vulnerable group of the population in Lithuania. In 2007, the poverty risk level of the unemployed in Lithuania was one of the highest in the EU and constituted 57%. The unemployed were at risk of poverty roughly seven times more often than the employed (see diagram 1.1.3).
5 Unemployment social insurance benefit‘s payment period depends on uneployed person‘s unemployment insurance record that was obtained until person‘s registration in the teritorial labour exchange. If unemployment insurance record is lesser than 25 years, the unemployment socal insurance benefit is paid 6 months, if it ranges 25-30 years – 7 months, 30-35 years – 8 months, 35 and above – 9 months.
6 Unemployement social insurance benefit in Lithuania compensate only for 45 percent of lost income and only about 1/3 of all registered unemployed persons receive this benefit.
19 Diagram 1.1.3
Poverty risk level after social benefits by household in 2006 – 2007
in Lithuania and EU-15 (depending on the occupation of the household) (percent)
17 Overall 19 20 41 Unemployed 57 61 18 Retired 30 23 8 Employed 8 10
0 10 20 30 40 50 60 70
2006 2007 EU-15 (2007)
Sources: Statistics Lithuania. Living Conditions Survey and Income Survey of Lithuanian Population.
The inefficiency of the unemployment insurance system and insufficient coverage of benefits are also reflected by the fact that unemployment insurance benefits were allocated just 0.2% of GDP in Lithuania in 2006, whereas the EU-25 average constituted 1.5%.
Unemployment duration . Sharply rising unemployment in Lithuania also increases the number of the long-term unemployed and their share in the unemployment structure (See Table 1.1.2).
Table 1.1.2
Dynamics of the number of the long-term unemployed in 2007 – 2008 (by quarter)
(Data of the Labour Force Survey)
Q I Q II Q III Q IV Q I Q II Q III Q IV Q I
2007 2007 2007 2007 2008 2008 2008 2008 2009
Number of the long-term 26.9 23.8 18.1 20.1 15.1 12.8 21.4 30.5 38.0 unemployed (thousand)
Long-term 1.7 1.5 1.1 1.3 1.0 0.8 1.3 1.9 2.3 unemployment rate (percentage from the total labour force)
Sources: Statistics Lithuania. Labour Force Survey data.
According to the data of the Labour Force Survey, the long-term unemployment rate in Lithuania in the first quarter of 2009 went up 1.3 percentage points (from 1% to 2.3%), as compared with the first quarter of 2008, and the number of the long-term unemployed increased 152% – from 15.1 thousand to 38 thousand. An ever-creasing share of the youth under the age of 25, whose unemployment has lasted over six months, in the unemployment structure since the beginning of 2009 is another matter of great concern. In the period from January 2009
20 to May 2009, the share of that group of persons in the total number of the long-term unemployed increased by as much as 11.3 percentage points (from 14.1% to 25.4%). Summing up the above-given information about the labour market dynamics and trends emerging in this area during the economic decline, assumptions can be made that in the long run changes in the labour market may have particularly negative long-term socio-economic consequences. If the above described trends (increasing unemployment, declining employment, climbing youth unemployment, and increasing long-term unemployment in particular) continue, the situation in the labour market may become critical. In the event of failure to take any additional job preservation and employment promotion measures, in the fourth quarter of 2010 the number of the unemployed in Lithuania may exceed 300 thousand persons, of which about 100 thousand would be the long-term unemployed and 120 thousand would be entitled to unemployment benefits. In this case, there will not be sufficient funds to implement (finance) active labour market policy measures, which in turn will further reduce chances and motivation of employees to get a job, conduce to the loss of their skills, as well as push into social exclusion.
1.2 Characteristics and dynamics of the number of social assistance beneficiaries in Lithuania
One of the essential features characterising vulnerable groups of the population is social benefit received by households. Such benefits in Lithuania are paid only to the lowest income families (single residents) 7, hence, it is advisable to thoroughly examine the dynamics of the number of recipients of social benefits and their characteristics in the country.
The statistical data analysis shows that since the third quarter of 2008 the number of recipients of social benefits has been dramatically increasing in the country. In the first quarter of 2009, social benefits were drawn by about 68.6 thousand persons in Lithuania, i.e. 40% more than in the first quarter of 2008. The total number of families receiving social benefits jumped by 41% (from 19.7 thousand to 27.8 thousand) (see Diagram 1.2.1). Such a sharp growth in the number of recipients of social benefits was conditioned by falling income of the population and particularly increased number of job cuts in the recent period .
Diagram 1.2.1
Dynamics of the number of recipients of social benefits in Lithuania in 2008 – 2009 (number, by quarter)
80000 68627 60000 48997 48544 53769 40000 46198 27828 20000 19736 19646 18163 21407 0 Q I 2008 Q II 2008 Q III 2008 Q IV 2008 Q I 2009
Number of persons Number of families
Source: http://www.socialiniszemelapis.lt/index.php?22274078
7 Social benefits in Lithuania are paid to a family (single resident) if its average income during the period of three months preceding the month when the family (single resident) applied for a benefit was below the state supported income (SSI) per family (single resident) (i.e. 350 Litas), as well as if the value of the property owned by the family does not exceed the fixed ratio of property value. Cash social assistance is equal to 90% of the difference between the SSI per family or single resident and the average monthly income of the family or single resident.
21
The analysis of the distribution of recipients of social benefits by composition of family reveals that during the economic decline the number of recipients of social benefits increased among all types of households (see Diagram 1.2.2).
Diagram 1.2.2
Number of recipients of social benefits by composition of family
(the first quarter of 2008 against the first quarter of 2009)
183 Other 210 1256 2 adults without children 900 9423 1 adult without children 6861 17844 2 adults with children (3 and more) 12158 13191 2 adults with children (1 or 2) 6929 12428 1 adult with children (3 and more) 10966 25431 1 adult with children (1 or 2) 18954 Q I 2009 0 5000 10000 15000 20000 25000 30000 Q I 2008
Source: http://www.socialiniszemelapis.lt/index.php?22274078
It should be pointed out, however, that the biggest increase was recorded among families where two adults are raising 1 or 2 children aged under 18 (i.e. the so-called “statistical” Lithuanian families). In the first quarter of 2009, the number of recipients of social benefits in the said group of families nearly doubled (the increase amounted to about 90%).
Despite of a rapid increase in the number of recipients of social benefits in the said group of families, incomplete families where a single parent is raising 1 or 2 children, as well as large families with children aged under 18 were even more frequent recipients of social benefits in Lithuania in the recent year. The growth in the number of recipients of social benefits among these families constituted respectively 34% and 46%.
It is true to say that during the economic decline these two groups of the population remain ones of the most vulnerable in Lithuania. The vulnerability of these groups is also supported by the data of the Survey on Income and Living Conditions by Statistics Lithuania indicating that the poverty risk level in the said social groups in Lithuania in 2007 (analysing the poverty risk level by type of household) was one of the highest in the country and markedly exceeded the EU-15 average (see Diagram 1.2.3). In 2007, the poverty risk level among large families and single-parent families with children aged under 18 reached respectively 42% and 44%, whereas the average indicator in the country was roughly two times lower and accounted for 20%.
22 Diagram 1.2.3
Poverty risk level after social benefits by household in 2006 – 2007 in Lithuania and EU-15 (depending on the number of children in the household) (percent)
17 Total 19 20
2 adults with 3+ children 22 38 under 18 42 2 adults with 2 children 14 13 under 18 15
2 adults with 1 child 11 14 under 18 16 Single parents raising 34 42 children under 18 44
0 10 20 30 40 50
2006 2007 EU-15 (2007)
Sources: Department of Statistics under the Government of Lithuania. Living Conditions Survey and Income Survey of Lithuanian Population.
Summing up the information presented in this section, emphasis should be placed on the ever-increasing number of persons receiving social benefits in the face of the economic downturn (the increase constituted about 40% per year, or 19.6 thousand persons) . This is a clear indication of decreasing financial capacities of families. With further rising unemployment and decreasing household income, the number of families receiving social benefits could reach 38 thousand in 2009, and as much as 60 thousand in 2010 (especially bearing in mind that, as a result of increasing long-term unemployment, a huge share of persons no longer entitled to unemployment benefit will swell the ranks of recipients of social benefits in early 2010). The number of families receiving social benefits is likely to stabilize only in 2011.
As regards recipients of benefits, particular concern is caused by the fact that most families encountering difficulties have children, thus, scarce family finances will limit their expenditure on health care and education, as well as vocational training (this trend was already reflected by the data of the Household Budget Survey by Statistics Lithuania in 2008). This will have far-reaching negative effects in the long run as young people who have not learned any profession in good time usually lose motivation to receive vocational training and stay in unskilled jobs, which significantly reduces their chances of employment, increases the risk of social exclusion and the need for social assistance.
1.3 Indebtedness of the population and developments in Lithuania
Dynamics of loans granted to the population . According to the data of the Bank of Lithuania, at the beginning of 2009, the amount of loans granted to individuals totalled 28.6 billion Litas. Approximately 70% of the total amount constituted housing loans, and about 30% were consumer credits. From January 2008 to January 2009, the amount of loans taken out by individuals increased by 4.8 billion Litas, while the amount of loans given since April 2009 has slightly decreased (28.2 billion Litas). 23 The calculations of the Bank of Lithuania, based on the data of Statistics Lithuania, indicate that in 2007 about one third of households had taken some loan from the bank (see Table 1.3.1). In 2007, the share of households having a housing loan accounted for 10.3%, and households with consumer or other credits constituted 21.2% in Lithuania. Since the number of loans granted in 2008 continued to grow, it can be stated that the share of residents having loans in 2009 has further increased.
Table 1.3.1
Indebted households in Lithuania (percent)
2004 2005 2006 2007
Share of households with housing loans, % 2.3 6.0 8.7 10.3
Share of households with consumer or other credits, % 20.0 18.1 22.3 21.2
Sources: Calculations of the Bank of Lithuania, based on the data of the Statistics Lithuania.
Risk assessment of household indebtedness . The capability of households to fulfil their liabilities is denoted by two key risks: decreasing income caused by unemployment or a drop in real income, and rising interest rates. The latter trends indicate that these two risks are rather high in Lithuania and are likely to continue for another several years. Increasing unemployment and falling income entail a rise in interest rates on loans in the national currency 8. 6 month VILIBOR rate applied to loans in Litas has more than doubled (from roughly 4% to 9%) since February-March 2007 (when the number of granted housing loans reached its peak in Lithuania). Such a rise in interest rates and housing loan repayments poses a serious risk to the population having loans in Litas. A dramatic increase in interest rates on loans is likely to cause growing loan repayment problems not only for persons who have lost their jobs but also for households whose income has not decreased or decreased slightly during the recent period. Such a situation is caused by the fact that an increasing number of insolvent loans leads to the risk being transferred on households able to repay loans.
According to the data of the Bank of Lithuania, in the period from July 2008 to July 2009, the amount of housing loans overdue more than 60 days in Lithuania nearly tripled from 114 million to 324 million Litas (see Diagram 1.3.2). Diagram 1.3.2 Dynamics of overdue housing loans and consumer credits in Lithuania (thousand Litas)
Thousand 350000 324037 Litas 282583 300000 250000 200000 146318 130633 139035 150000 114048 117009 86927 100000 49921 60799 50000 0 1 July 2008 1 October 2008 1 January 2009 1 April 2009 1 July 2009 Housing loans overdue more than 60 days Consumer credits overdue more than 60 days
Sources: Data of the Bank of Lithuania, 2009
Although on 1 October 2008 the share of housing loans overdue more than 60 days in the housing loan portfolio constituted 0.58%, on 1 July 2009 the share of overdue housing loans in the housing loan portfolio accounted for roughly
8 According to the data of the Bank of Lithuania, Litas loans account for some 35% of the total loan portfolio.
24 1.58%. Due to rising unemployment and decreasing household income in the country, the number of households unable to repay their housing loans is expected to further increase. According to the data of the Survey of Households with a Housing Loan commissioned by the Bank of Lithuania, almost 14% of respondents were at least once late in making housing loan payments over the last 12 months due to decreased household income, higher household expenses or job losses. As the survey shows, difficulties in settling liabilities with the bank are more often experienced by residents of major cities, having a loan in Litas, having higher education and living in larger than average families (the average size of families delaying loan payments to the bank comprised 4.9 persons; the average household size in Lithuania is 2.5). Summing up the above-given information, it should be emphasised that in the absence of adequate actions the worsening financial situation of persons having loans will have increasingly negative effects on their quality of life and consumption structure in the long run. This lessens the possibilities of persons having loans to satisfy their personal needs, not to mention the forcible eviction of families, which would have both psychological and socio-economic implications not only for the members of the family concerned, but also for the society as a whole. According to unofficial data, at least 3 thousand families unable to repay their loan to the bank had their property seized in Lithuania in the third quarter of 2009 9. Another important negative consequence of increasing insolvency of households is the loss of the public confidence in the social and demographic policies pursued by the government in the country, which in turn boosts confrontation between public authorities and the population and causes social tension among different groups of the population.
1.4 Most vulnerable groups of the population in Lithuania
The analysis of statistical data from different institutions revealed that the economic decline had, in one way or another, affected most groups of the population in Lithuania. However, based on the analysis, several groups may be singled out as those experiencing the most adverse effects of the economic decline: persons who lost their jobs in the face of the economic downturn; single parents raising children aged under 18; large families with children aged under 18. Vulnerable groups may also include a fair amount of families having loans for house purchase (mainly in the national currency) which encounter difficulties in settling debts with the bank owing to a decrease in earned income (or job loss) and a significant increase in the interest rate on the loan. It should be noted that these social groups were also identified as most vulnerable by experts during their interviews (results of experts' interviews are covered in detail in Chapter 3 of the Report). It can be noticed already that the structure of most vulnerable groups undergoes changes in the face of economic recession, i.e. new vulnerable groups emerge which before the economic downturn could have been attributed to the middle or lower middle economic strata. While before the economic downturn socially vulnerable groups in Lithuania mainly included pensioners, the disabled, persons living on social benefits and other lower-income persons, their situation in the light of this economic crisis may be considered relatively not bad or their situation has not worsened so markedly, unlike the majority of the population who lost their jobs during the economic crisis. The incomes of the said groups have not changed substantially, whereas living expenses slightly went down in 2009 due to a fall in food and non-food prices, as well as cheaper certain services. It should be noted, however, that the said groups of the Lithuanian population are currently facing growing threat as pensions and other social benefits may be cut due to an increasing budget deficit of the State Social Insurance Fund (SODRA), which already ran at 1.2 billion Litas in May 2009. Summing up Based on the analysis of data from different national institutions in Chapter 1, it can be stated that negative consequences of the economic decline in Lithuania primarily manifest themselves in job losses among different groups of the population and particularly reduced chances of employment, which entails decreased income and lower quality of life. In the long run, it increases poverty and social exclusion of the population, as well as reduces the quality of the labour force (lost qualifications and reduced work motivation) and triggers off a decrease in the labour force due to more intensive emigration. Finally, the latter problems weaken the growth potential of the national economy.
9 http://www.lrytas.lt/-12517393841250111929-skolos-trai%C5%A1ko-jau-t%C5%ABkstan%C4%8Dius.htm
25 If the trends covered in this Chapter persist and no appropriate measures are implemented on the government level to eliminate (or mitigate) their negative consequences, the Lithuanian consolidated budget will not be able ensure adequate financing for social security measures. This will markedly lower the living standard, extend the scope of the shadow economy, reduce the skilled labour force, increase the crime rate and stimulate attitudes of the population towards emigration. All this will slow down Lithuania’s economic recovery, as the country will loose its investment appeal, which in turn will necessitate more financial allocations in the national budget to finance social security.
26 2. ANALYSIS OF POLICY MEASURES IMPLEMENTED IN THE COUNTRY DURING THE ECONOMIC DECLINE
Prior to an in-depth analysis of socio-economic policy measures implemented in Lithuania during the economic downturn, it should be noted that the majority of these measures have been launched since 1 January 2009 (after the change of the Lithuanian Government) and aimed at balancing the national budget 10 rather than targeted at protecting socially vulnerable groups.
Tax policy. Since the beginning of 2009, a number of changes to the tax system have been implemented in Lithuania. As of 1 January 2009, the rate of value added tax was increased from 18% to 21% in Lithuania. With the new standard VAT rate coming into effect, the reduced VAT rates of 5% and 9% applied to books, publications, pharmaceuticals, certain food products, as well as services such as passenger transport, accommodation, event organisation and performing activities were abolished 11 . Along with VAT changes, new provisions of the Law of the Republic of Lithuania on Excise Duty also came into effect as from 1 January 2009 increasing excise duty on ethyl alcohol, beer, intermediate products and wine; raising excise duty on motor petrol, diesel fuel 12 and other products. The above- mentioned tax changes had negative effects on the quality of life of the population (in particular, vulnerable groups of the population experiencing financial difficulties) as these changes led to an increase in prices of goods and services in Lithuania. The latter increase in prices of consumer goods and services was slightly compensated by falling prices of goods and services since July 2009 due to reduced demand for goods and services in the country 13 . Seeking to increase budget revenues and also to protect the lowest-income population, a new standard rate of personal income tax (PIT) of 15% came into effect in Lithuania from 1 January 2009, replacing the rate of 24% applied until then. The PIT rate of 15% is currently applied to all personal income, except dividends and other profit distributions (these are subject to the PIT rate of 20%). With the view of protecting the lowest-income persons, remuneration before taxes is subject to a tax-exempt amount (TEA) which is applied to each person individually, depending on his work-related income (before taxes). The higher the income, the TEA is proportionately reduced. At present, an individual whose monthly income incidental to employment relations or relations in their essence corresponding to employment relations does not exceed 800 Litas (or 9,600 Litas per year) is subject to the TEA of 470 Litas per month 14 . No TEA is applicable to work-related income exceeding 3,150 Litas per month (or 37,800 Litas per year) (before taxes). The TEA applied in 2008 did not depend on the amount of income and the basic TEA was 320 Litas.
It should be noted, however, that the new PIT rate lowered by 9 percentage points as from 2009 (15%, as compared with the rate of 24% applied in 2008) has not substantially eased the tax burden on the Lithuanian population, while the tax burden on persons of certain social groups has even increased as from the beginning of 2009 all employed persons (employees and self-employed persons) incurred the obligation to pay compulsory health insurance (CHI) contributions calculated as 6% of the total taxable income (or minimum monthly wages (MMW) in certain cases). For instance, in 2009, as a result of reduced tax burden (when gross earnings equal MMW, which is 800 Litas), net earnings of an employee having no children and not entitled to additional tax relieves increased by 2.68%, or 17.7 Litas; in the case of a family with 3 children (where both parents earn 800 Litas each) the tax burden for an employee increased by 1.26 percentage points.
10 As noted by representatives of the Government of Lithuania, the fiscal deficit is targeted at maximum 5% of GDP.
11 The reduced VAT rate of 5% applied in respect of reimbursable pharmaceuticals, books and non-periodical publications until 30 June 2009.
12 Due to significantly reduced demand for diesel fuel in Lithuania excise duty on diesel fuel was lowered again as from 1 August 2009.
13 Prices of consumer goods and services in July 2009, as compared with June, dropped by 0.8% in the country.
14 As from 1 January 2009, residents of Lithuania raising children under 18 years of age and older, if they study at full-time general education schools, are entitled to additional TEA: 100 Litas for the first child, 200 Litas for each subsequent child.
27 Labour market (employment) policy . With the view of tackling unemployment problems in Lithuania in the face of the economic decline, the Seimas of the Republic of Lithuania adopted a new version of the Law on Support for Employment on 11 June 2009 aiming at minimising the impact of the economic downturn on a rise in unemployment in the country, providing possibilities to maintain jobs and involve a larger number of persons in active labour market policy (ALMP) measures. These amendments entered into force on 1 August 2009.
The amendments have extended the range of persons entitled to a subsidy for job creation when setting up own business, including: persons who have suffered from the consequences of the economic downturn if they create a job for themselves with the funds of the Globalisation Fund; persons raising three and more children; former unemployed persons having started and expanding their own business when they are creating jobs for unemployed persons registered with the labour exchange. The Law has also introduced a new active labour market policy measure – support for territorial mobility of the unemployed. Compensation for travel expenses is foreseen when the former unemployed has to reach his workplace at a considerable distance from the place of residence. The amendments to the Law have also extended, by two more months, the payment of unemployment social insurance benefits to the unemployed in territories where the unemployment rate exceeds the national average by 1.5 times 15 . It is also provided that not only persons who have lost their job, but also employees who have been given a notice of dismissal may apply for an education grant. The current education grant amounts to 0.7 of the minimum monthly wage (MMW), or 560 Litas. Where the unemployment social insurance benefit is higher than the education grant, the unemployed may choose to receive the unemployment social insurance benefit.
As regards employment support policy measures in Lithuania, it should be noted that the Lithuanian Labour Exchange launched the Temporary Employment Promotion Project in March 2009 within the framework of which a fair number of the unemployed participate in temporary employment support measures, i.e. public works. The amount of almost 37 million Litas (15.7 million Litas from the ESF, 2.8 million Litas from the Employment Fund, and about 18 million Litas from municipal budgets) is budgeted for the implementation of this temporary employment project. Over the first three months of the implementation of this project, 5.5 thousand persons, or nearly one third of all the target participants of the project, were sent to public works. Unemployed persons participating in this project account for roughly 55% of all the unemployed who received employment support. The payment of the unemployment benefit is suspended in respect of persons carrying out public works under this project, and renewed upon the completion of public works. Public works are currently paid according to the minimum hourly pay approved by the Government, which is 4.85 Litas. The public works measure is being implemented all the year round, but unemployed persons are employed under a fixed-term employment contract for a period up to 6 months. The total amount of approximately 217 million Litas is budgeted for active labour market policy measures in Lithuania in 2009. The major share, up to 121 million Litas, will be allocated for vocational training of unemployed persons and employees who have been given a notice of dismissal.
Labour relations policy. On 25 March 2009, the Government of Lithuania approved amendments to the Labour Code allowing to set more flexible labour relations between employees and employers in collective agreements. Until 31 December 2010, it is allowed, through the collective agreement, to: • conclude fixed-term employment contracts, even if work is of permanent nature; • make a full settlement of accounts with an employee being dismissed not on the day of dismissal, though not later than within three months (in case the dismissed employee is entitled to receive a severance pay of more than five monthly wages); • dismiss employees in case they do not agree to work part time, etc. Although the liberalisation of labour relations during the economic downturn is considered positive as it enables to avoid mass redundancies in enterprises, it should be pointed out that while liberalising labour relations particular care
15 At present, persons whose unemployment insurance record is shorter than 25 years, are paid the unemployment insurance benefit for 6 months. The longest period of payment of the unemployment benefit is 9 months. It is paid to persons whose unemployment insurance record is 35 years and longer.
28 should be given to ensure security and guarantees for workers (i.e. focus on the flexicurity concept combining labour market flexibility and employment security). In this case, however, the state plays a significant part in ensuring security for workers (e.g. paying partial compensation to workers for their lost wages). Meanwhile, the liberalisation of labour relations in Lithuania is often understood by employers as a possibility to avoid obligations related to the security and earned guarantees of workers, i.e. paying no severance pay, shortening a period of notice and the like, which is hardly related to employment security or contributing to the improvement of the situation of employees in the face of the economic decline. In the meantime, the state, if allowing the liberalisation of relations between employees and employers, will hardly be able to ensure employment security for workers due to its limited finances. Thus, it can be stated that the implementation of the said measure would further increase the vulnerability of workers on the labour market in Lithuania.
Social security policy . As regards the social security policy pursued in Lithuania during the economic decline, a clear-cut distinction should be made between measures implemented in the areas of social insurance and social support.
Since late 2008, a number of measures have been implemented in the area of social insurance in Lithuania, but the adoption of these measures was mainly conditioned by problems relating to the long-term financing of the State Social Insurance Fund which became obvious at the end of 2008 rather than the goal to increase social guarantees for the population. With this in mind, certain measures implemented in the country during the economic decline had negative effects on the population as they reduced social guarantees and benefits paid in the event of income loss.
On 1 May 2009, the Law amending the Law of the Republic of Lithuania on Sickness and Maternity Social Insurance entered into force amending the procedure for the payment of sickness allowances. These amendments establish that the sickness allowance for the first two days of sickness is paid by the employer; the allowance in the amount of 40% of the remuneration is paid from the third day to the seventh day, and 80% of the said remuneration later on. It is also provided that after dismissal from work the sickness allowance is paid for a period not longer than five calendar days of sickness 16 . The said amendments to the payment procedure will have a negative influence on the income of the population in the event of sickness. According to the data of the State Social Insurance Fund Board (SSIFB), the average number of cases of sickness constituted 754.1 thousand in 2008 (772.8 thousand in 2007), and the daily average sickness allowance in Lithuania amounted to 69.6 Litas (55.4 Litas in 2007). Furthermore, on 16 June 2009, the Seimas of the Republic of Lithuania approved amendments to the Law on Unemployment Social Insurance providing that the unemployed who has been dismissed from work (service) and received a severance pay or compensation shall be granted the unemployment insurance benefit not earlier than after such number of calendar months for which the severance pay or compensation in the amount of the average monthly wage was paid after the termination of the employment contract (dismissal from the service). Moreover, in order to avoid the double payment of benefits (education grant and unemployment insurance benefit), the payment of the unemployment social insurance benefit will be suspended if the unemployed receives an education grant. The unemployed may choose an education grant to be paid in the amount of the granted unemployment social insurance benefit or in the amount set by the Law on Support for Employment. After the end of training, the payment of the granted unemployment insurance benefit will be renewed if the unemployed does not get a job. According to representatives of the Government, the said amendments to the laws have been introduced temporarily and will be effective only during the forecasted period of recession – until 31 December 2010.
On the one hand, amendments to the Law on Unemployment Social Insurance should be considered positive because they will allow to somewhat ease the pressure on SODRA's budget as running an even larger deficit 17 would weigh strongly on the payment of social benefits (pensions, maternity benefits and other social insurance benefits) to the
16 Until May 2009, the sickness allowance for the first two days of sick leave was paid by the employer, and starting from the third day a person was paid the sickness allowance in the amount of 85% of the reimbursed remuneration.
17 In January through May 2009, the revenue of the State Social Insurance Fund amounted to 4.923 billion Litas, whereas expenses reached 5.782 billion Litas.
29 population. On the other hand, the said amendments reduce the income and social guarantees of persons who have lost their job (especially if a person gets a job before starting to receive the unemployment social insurance benefit).
Furthermore, at the end of 2008, the rate of cumulative pension contributions to private pension funds was temporarily reduced from 5.5% to 3% (on 1 July 2009, this rate was reduced again, from 3% to 2%, and it is expected to be applied until 31 December 2010). According to the experts, the implementation of this measure will be contrary to the financial interests of persons who will retire in the years 2009-2011, as well as cause considerable damage to future pensioners who have signed private pension accumulation agreements.
As regards social support, it should be noted that no specific measures aimed at enhancing social support for the population who have suffered from the economic decline were implemented in Lithuania (either supporting income of the population or providing social services). This situation was mainly determined by limited state budgetary resources.
Summing up Summing up the policy measures implemented in the country during the economic decline, it can be stated that most positive developments were aimed at increasing employment of the population in the country. The measures planned or being implemented will enable a larger number of persons to participate in active labour market policy measures, as well as encourage more active participation of the unemployed. However, quite a few measures under implementation have only contributed to the vulnerability of the population in the face of the economic decline (e.g., changed procedure for the payment of sickness allowances, suspended payment of unemployment benefits, etc.). Finally, it should be noted that during the economic decline the state did not give any attention to such vulnerable groups as large families, single parents raising children or individuals having housing loans whose quality of life was seriously impaired by the economic downturn.
3. SURVEY ON OPINIONS OF THE MOST VULNERABLE GROUPS OF THE POPULATION AND EXPERTS
30 In order to identify what problems in the face of the economic recession are viewed as most urgent and how the social policy implemented in the country is assessed by experts in the social and economic fields and representatives of vulnerable groups themselves, interviews were held with vulnerable population groups and experts during the assessment exercise. To ensure the comparability of results, both the experts and the representatives of vulnerable groups were asked similar questions. All respondents had to assess the tax policy measures, the labour market and labour relations policy measures, the social protection policy measures, and possible social consequences of the economic decline, as well as put forward recommendations concerning measures aimed at mitigating the impact of the economic recession on the situation of the most vulnerable groups in Lithuania.
Assessment of the tax policy measures . As regards changes to the tax system, in the experts’ opinion, the increase in the VAT rate had the biggest negative impact on the quality of life of the most vulnerable groups of the population in Lithuania (see Diagram 3.1.1). Every third expert also pointed out the negative impact of changes in the taxation of work-related income and the increase in the excise duty. The opinions of the focus group participants as to what tax changes had the strongest negative effects coincided with the experts’ views; however, there were slight variances within the groups. Recipients of social benefits talked about the negative impact of the raised taxes in general, without specifying any taxes but rather emphasising the negative consequences of tax increases, i.e. the price rise. Individuals who lost their jobs stressed the negative effects of the increase in the VAT and excise duty. Persons having housing loans expressed negative views about the changes in the personal income tax, the increase in the VAT and the abolishment of tax relieves which led to the price rise in the country.
Diagram 3.1.1
Changes in the national tax system having the biggest negative impact on the most vulnerable groups of the population in Lithuania, in the experts’ opinion (percent)
(with a possibility of choosing more than 1 response)
100 % 81,3 75 50 31,3 31,3 18,8 25 0 Changes in the taxation Increase in the VAT rate Increase in the excise Other of remuneration of duty individuals
It seems likely that the VAT increase was mostly criticised by the experts and representatives of vulnerable groups because this tax increase affected all population groups without any exception. Moreover, it is plausible that the negative assessment was largely influenced by the abolishment of the reduced VAT rates on the basic necessities such as food products (e.g. meat, fish), pharmaceuticals and other similar goods which make up a substantial part of household budgets and cannot be replaced by other cheaper goods.
Assessment of the labour market and labour relations policy measures. During the interview, all the experts without any exception expressed positive (or more positive than negative) views about the implementation of Local Employment Initiative (LEI) projects and the organisation of public works for the unemployed (see Diagram 3.1.2). The organisation of vocational training for the unemployed was also assessed quite favourably.
Diagram 3.1.2
Views of the interviewed experts on the national policy measures implemented with the view of preserving jobs and enhancing employment (percent)
31 Liberalisation of labour relations 25,0 12,5 37,5 25,0
Postponed payment of the unemployment benefit to 25,0 31,3 18,8 25,0 persons who have lost their job
Suspended payment of the unemployment benefit to 50,0 12,5 31,3 6,3 persons receiving an education grant
Implementation of projects under local employment 68,8 31,3 initiatives
Organisation of public works for the unemployed 62,5 37,5
Organisation of vocational training for the 43,8 50,0 6,3 unemployed
0% 20% 40% 60% 80% 100%
Positive More positive than negative More negative than positive Negative
In relation to the implementation of LEI projects, the experts mostly maintained that LEIs was one of the most effective measures which is very important during the period of the economic recession because it contributes to employment and thereby mitigates regional disparities in unemployment on the national level.
The focus group participants also voiced a positive opinion about public works. The respondents viewed this measure positively as a source of income facilitating the living through the hard times.
With reference to the answers of the respondents, it can be stated that the organisation of public works for the unemployed during the period of the economic downturn could be one of the important employment promotion measures and sources of living; however, it would be advisable to expand and diversify the scope of public works and to ensure that not only persons with the lowest professional qualifications are involved in public works. The attitude towards public works as low-value (and often humiliating) activity is likely to change if public works covered such activities as “green jobs” (organic farming, forestry, etc.) which are gaining momentum worldwide. The resolution of this issue is particularly relevant, given the increasing number of qualified unemployed persons in the country.
The efforts to liberalise labour relations in the country received major criticism from the experts. In respect of the liberalization of labour relations, the experts highlighted the lack of social partnership and confidence between employers and employees which, in their opinion, poses major threat to the rights of employees and is disadvantageous for employed persons. The experts emphasised that, while liberalising labour relations, it is vitally important to ensure social security for employees, which can hardly be done due to the limited financial possibilities of the state.
The opinion of the focus group participants fully coincided with the views of the experts. The liberalisation of labour relations was viewed as particularly negative by the recipients of social benefits and the respondents who lost their jobs. The respondents based their negative position on the fact that employers tend to misuse this measure, as well as blamed employers for their selfishness, regard for their own interests, underestimation of employees, and lack of partnership.
Assessment of the policy measures implemented in the field of social insurance . As seen in Diagram 3.1.3, a slightly larger number of experts (more than a half) viewed the reduction of the rate of cumulative pension contributions from 3% to 2% as positive / more positive than negative, whereas the changed procedure for the payment of sickness allowances received most negative/more negative than positive responses.
32 When assessing the changes in the procedure for the payment of sickness allowances, the experts made mostly negative comments. A major part of the experts did not justify the adoption of this measure because it reduces guarantees for individuals covered by health insurance and causes harm to employees who have honestly paid taxes and are truly sick.
Same as the experts, the focus group participants had a purely negative opinion concerning the changes in the procedure for the payment of sickness allowances. The respondents did not offer any specific arguments against this measure or any alternative proposals; while voicing their negative position, however, the participants blamed the state for its unwillingness to help vulnerable groups and its attempt to evade responsibility.
Diagram 3.1.3
Views of the interviewed experts on the national policy measures implemented in the social insurance and other fields (percent)
100% 25,0 12,5 80% 31,3 60% 37,5 40% 31,3 20% 18,8 18,8 25,0 0% Changed procedure for the payment of Reduced rate of cumulative pension sickness allowances contributions (from 3% to 2%)
Positive More positive than negative More negative than positive Negative
Assessment of possible social consequences of the economic decline. As the survey revealed, in the opinion of most experts, unless the Government of the Republic of Lithuania takes all the necessary measures to protect the most vulnerable groups of the population, Lithuania will witness the intensification of such negative social phenomena as emigration, an increase in crime, shadow economy, poverty and social exclusion, as well as the acuteness of demographic problems, income differentiation, and the extent of social problems during the next 5-6 years (see Diagram 3.1.4). It should be noted that, as shown by statistical data, the intensification of the latter phenomena can already be observed (for more details, see Chapter 4).
Diagram 3.1.4
Views of the interviewed experts on possible social consequences of the economic decline (percent)
(with a possibility of choosing more than 1 response)
33 93,8 Emigration of the population 6,3 93,8 Crime rate 6,3 87,5 Shadow economy 6,3 6,3 87,5 Poverty and social exclusion 12,5 81,3 Income differentiation 18,8 73,3 Extent of social problems 26,7 87,5 Demographic problems 6,3 6,3 62,5 Regional differentiation 37,5 % 0 10 20 30 40 50 60 70 80 90 100 Will increase Will decrease Will remain unchanged
In the opinion of the experts, the increasing emigration of the population and the escalating problem of poverty and social exclusion will have the greatest negative impact in the long-term perspective.
The opinion of the focus group participants on the social phenomena to exert the greatest negative impact on Lithuania coincided with the views of the experts. The focus group participants mentioned the rising levels of such phenomena as emigration, poverty, unemployment, crime, demographic and social problems. The recipients of social benefits also emphasised the growing number of alcohol abuse cases and suicides.
Proposed measures aimed at mitigating the situation of vulnerable groups in Lithuania . In the opinion of the experts, the following measures need to be implemented during the period of the economic decline in Lithuania:
1. To give priority to vulnerable groups of the population (i.e. large families, single parents raising children, individuals having housing loans) by involving them in active labour market policy measures.
2. To strengthen support in the case of unemployment.
3. To provide additional social support taking into consideration the total income and property of the family.
4. To improve access to social services for the members of families within vulnerable groups.
5. To tighten control over the necessity of wage cuts in enterprises and institutions.
The focus group participants were asked about specific state measures they would need during the current period in order to mitigate the consequences of the economic crisis. The opinions of the respondents partially coincided with the proposals put forward by the experts. All the respondents proposed to support the creation of new jobs and promote economy. The recipients of social benefits also emphasised the extension of the payment of unemployment benefits and tax relieves for the unemployed. The respondents having housing loans stressed the importance of restoring tax relieves and taking measures in respect of persons having housing loans (e.g. prohibition on banks against eviction of families for a certain period of time; possibilities of changing the terms and conditions of loan agreements without additional charges).
34 Summing up
The survey carried out among experts and vulnerable groups revealed that both the experts and members of vulnerable groups have rather negative attitudes towards the measures implemented by the Government during the economic recession. This is understandable because the majority of the measures being implemented in Lithuania are aimed at reducing the state budget expenditure and increasing revenues rather than protecting the country’s population against the negative factors operating during the period of the economic downturn.
In the opinion of the experts and representatives of vulnerable groups who participated in the survey, insufficient attention to vulnerable groups and social protection of the population will intensify such social phenomena as poverty, emigration, economic inequality, shadow economy, etc. in the long-term perspective. Moreover, the discussions with the focus groups revealed a particularly negative emotional background, a sense of disappointment which over time tends to provoke social conflicts (both at the family and society level), fuel distrust in the national Government, cause an increase in the extent of health problems, a rise in the number of suicides, and other social problems.
35 4. LONG-TERM SOCIAL CONSEQUENCES OF THE ECONOMIC DECLINE
This Chapter provides forecasts of the key macroeconomic indicators and analyses possible long-term social consequences of the economic decline which will arise if the country fails to take any additional measures aimed at employment protection and employment promotion, as well as additional actions in the area of the social security of the population. With regard to long-term social consequences, this Chapter refers to the period of 2009 through 2015 when social consequences of the economic decline are expected to be most obvious.
4.1. Macroeconomic developments and their influence on social development in Lithuania in 2009-2015
Forecasts for GDP and labour market indicators . Based on the projections by the Ministry of Finance of the Republic of Lithuania, the Lithuanian economy will be in recession until 2011 and will see a slow and average growth from 2011 through 2015. GDP per capita will nearly recover to the pre-crisis, i.e. 2008, level (see Table 4.1.1). The Bank of Lithuania forecasts that the economic downturn in 2009 will bring Lithuania's real GDP back to the 2004-2005 level 18 .
Table 4.1.1
Projections for macroeconomic indicators in Lithuania in 2008-2015
(in the absence of measures aimed at supporting employment and developing social support network)
Macroeconomic indicators 2008 2009 2010 2011 2012 2013 2014 2015 GDP growth/chain-linked 3.1 -18.2 -2.6 2.3 3 3.5 4.2 4.5 volume growth (percent)* HCPI (average annual)/ 11.1 3.6 -3.0 -2.8 -0.5 Consumer price index (percent)* 0.9 1.4 1.8 Average annual unemployment rate (percent) (according to labour force surveys) 5.8 14.4 17.0 13.5 11.8 10 8.7 7.6 Average annual number of the employed (thousand) (according to labour force 1520 1311,7 1270,5 1340 1417 1438 1468 1502 surveys) Labour force (thousand) (according to labour force 1614.3 1532,1 1531,5 1550 1607 1598 1608 1636 surveys) Average annual number of the unemployed (thousand) (according to labour force 94.3 220.4 261 210 190 160 140 124 surveys) Share of the youth under the 13.4 13.2 11.9 12.4 12.1 13.1 12.9 12.9 age of 25 in the total number of the unemployed (percent) Number of unemployed young 22.1 29 31 26 23 21 18 16 persons under the age of 25 (thousand) Share of persons aged over 50 25 26 27 26 25 23 23 23 in the total number of the unemployed (percent)
18 http://www.lb.lt/news/pg.dll?f=1&did=2283&lng=LT
36 Number of unemployed persons 23.6 57.3 70.5 54.6 47.5 36.8 32.2 28.5 aged over 50 (thousand) Share of long-term unemployed 21 26 30 28 26 25 24 23 persons in the total number of the unemployed (percent) Number of long-term 19.8 57.3 78.3 58.8 49.4 40.0 33.6 28.5 unemployed persons (thousand) * Forecasts are made on the basis of the data of the Ministry of Finance of the Republic of Lithuania but adjusted by authors taking into account the latest data on the GDP drop and changes in consumer price index (CPI). Projections by the Ministry of Finance for the second quarter of 2009 can be found at: http://www.finmin.lt/web/finmin/aktualus_duomenys/makroekonomika
Source : calculations by authors, based on the data of Statistics Lithuania, the Ministry of Finance and LLE.
Although trends in employment and unemployment rates in Lithuania are determined by a number of factors (both internal, e.g. changes in household consumption and business crediting opportunities, and external, e.g. recovery of foreign economies and competitiveness of the Lithuanian production on foreign markets), it can be stated that the employment of the population will depend on the employment policy pursued by the Government and the stimulation of the economic activity of different groups of the population. The labour market developments examined by the survey propose that failure to take more active labour market policy measures and measures aimed at stimulating the economic activity of the population may increase the unemployment rate to 17.04% in 2010. This means that the number of the unemployed in the country in the said period would amount to some 260 thousand residents, and the average annual number of the employed would decline to 1270 thousand persons. Young people and people aged over 50 would be faced with particularly difficult situations as the number of the unemployed in these groups could reach respectively 31 thousand and 71 thousand in 2010, while the tension in the labour market would be felt in these groups (especially among senior population) as long as until 2014-2015. It should be pointed out that the projected youth unemployment level, though looking rather low as against an increase in the total number of the unemployed, does not reflect serious problems of youth unemployment leading to adverse long-term consequences both for individual persons and the national economy as a whole. Surveys conducted by the Institute of Labour and Social Research reveal that 25 thousand of young unemployed persons cause almost 2.2 billion of indirect (GDP not being produced, taxes not being paid, etc.) and direct (social benefits, financing of labour market policy measures, crime prevention, etc.) damage to the state per year. Furthermore, the country's labour force is expected to suffer decline due to more intensive emigration of the population from Lithuania. The dynamics of the number of the labour force over the forecast period will be determined not only by economic processes, but also by the volume of emigration and registration of economically inactive persons of working-age with the labour exchange (as required by conditions for receiving social support). Thus, fluctuations in the number of the labour force may disagree with the dynamics of the numbers of employed and unemployed persons. It is likely that in the long run (2015), after the recovery of the national economy, the number of the employed will remain lower and the number of the unemployed will be nearly one third higher than those in the pre-crisis period. A considerable increase in the number of the long-term unemployed since 2009 is also forecasted in Lithuania. In 2010, the share of long-term unemployed persons in Lithuania could account for about 30%. This means that approximately 78 thousand persons would be the long-term unemployed. A high number of long-term unemployed persons is projected to persist even after the recovery of the national economy as most unemployed persons will be less competitive on the labour market due to lost qualifications or occupational skills.
Despite these negative trends in the labour market, Lithuania's GDP is expected to grow in the period from 2011 through 2015. Such a scenario for economic and labour market development can be logically explained by the fact that during the crisis less effective and less adaptive enterprises collapse in the first instance, whereas successful enterprises climb out of the economic crisis with increased productivity and GDP growth is achieved by the number of employees lower than before the crisis.
Depending on the Government's actions, more optimistic and pessimistic scenarios are also possible. With the Government implementing bad economic decisions (making massive job cuts in the public sector, increasing the tax 37 burden on business entities and individuals), the average number of the unemployed could reach or exceed 300 thousand persons in 2010. This could be conditioned by further decline in the overall demand (consumer demand in particular), the contraction of the construction sector, the slump in the transport, food processing and trade industries. This would swell the ranks of the long-term unemployed (the share of the long-term unemployed could hit 40% in 2011–2012), require more financial resources to finance social support and significantly raise the absolute poverty threshold in the country.
On the contrary, active implementation of ALMP measures and policies aimed at retaining jobs could help enact the optimistic scenario where the number of the unemployed would be maintained within the rage between 190 and 210 thousand, and the number of the employed – at the level of 1400 thousand in 2010-2011.
Forecasts for the key indicators characterising the level of household well-being . With GDP still in decline, it is difficult to forecast changes in household income in the period from 2009 through 2015. It is only clear that, based on the forecast GDP decline, GDP may reach just 94.6% of the pre-crisis (2008) level by the year 2015. It may take a similar period of time for household income to return to the pre-crisis level. Such statements are made on the basis of the previous experience, the so-called Russian crisis in 1999. Although due to the said crisis Lithuania had a negative GDP growth only one year and it was just 1.5% (with subsequent GDP growth by respectively 4.2%, 6.7% and 6.9%), it had a huge impact on the income of the population in later years of economic growth. Disposable income increased only in 2003, as compared with the pre-crisis year of 1998. Hence, the past downturn interrupted the usual annual increase in income for four years (1999-2002) (see Table 4.1.2).
Table 4.1.2
Disposable income and expenditure per capita (Litas)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Income 368.9 422.5 428 415.4 409.5 422 457.6 495.8 579.7 680.8 859.3 986.8
Expenditure 382.6 426.8 425.4 404.4 411.4 416.1 487.2 512.3 578.1 651.5 748.8 793.9
Source : Statistics Lithuania. Data of household budget surveys for 1996-2007.
The GDP decline in 1999 had a similar impact on changes in earnings and pensions as on the disposable income of the population. The real average wage rose in 2002, whereas some modest increase in pensions was recorded only in 2003. A further drop in the income of the population after the crisis, with GDP already going up, can be explained by an attempt of business entities to boost productivity by raising production levels without increasing the number of employees. The experience of the past crisis shows that the growth of the national economy was accompanied by a further rise in unemployment in Lithuania in 2000–2001 (see Table 4.1.3). Huge unemployment puts pressure on wages, therefore, business entities do not raise them in the first post-crisis years.
Table 4.1.3
Unemployment rate in Lithuania in 1998-2008 (percent)
1998 1999 2000 2001 2002 2003 2004 2005 2005 2007 2008
13.2 13.7 16.4 16.5 13.5 12.5 11.4 8.3 5.6 4.3 5.8
Sources: Statistics Lithuania. Data of labour force surveys for 1998-2008.
38 In the light of the above-mentioned experience, it can be stated that the average disposable income of individuals in the period from 2009 through 2015 will be affected by two key factors, namely, changes in earnings and unemployment rate. The effect of each of these factors is estimated in Table 4.1.4 below (possible changes to social protection benefits not being taken into account yet).
So far, rather few forecasts, and those quite different, for decreases in earnings have been issued in Lithuania. More daring forecasts are made only about a drop in earnings in 2009 and 2010. Surveys of employers reveal that in 2009 earnings in Lithuania could decrease by up to 10-15%, on average 19 . The World Bank projects a decrease in labour costs by 7% in 2009 and 6.6% in 2010 20 . SEB Bank predicts a drop in earnings by 13% in 2009 and 5% in 2010, whereas earnings should already go up by 2.5% in 2011.
Table 4.1.4
Forecasted changes in the income of the population in Lithuania in 2009-2015
Year 2008 2009 2010 2011 2012 2013 2014 2015
Changes in earnings (percent) - -13.0* -5.0* 2.5* 3 4 5 5
Earnings (Litas) 2319 2017.6 1916.7 1964.7 2023.6 2104.5 2209.8 2319
Average disposable income (taking 986.8 858.6 815.7 836.1 861.2 895.6 940.4 986.8 into account changes in earnings) (Litas)
Average disposable income (taking 986.8 783.9 737.4 771.7 812.1 858.0 913.1 970 into account changes in earnings and unemployment) (Litas)
* Sources: Lithuanian Macroeconomic Review. SEB Bank. June 2009. No 36. p. 29. Assumptions are made that income will fall, as a result of the crisis, to a similar degree in all income groups, like it rose before the crisis.
Changes in the average disposable income may have a modest effect on the relative poverty line, provided income changes to a similar degree across all population sectors. The experience of previous periods shows that the relative poverty line measured as 60% of the median income depends little on changes in GDP and average disposable income and is more a reflection of inequality in household income distribution. In this light, this indicator is expected to increase moderately or even decrease during the economic downturn (2008-2010) in Lithuania. A more marked trend towards higher risk of relative poverty in Lithuania is anticipated much later – in five years or even more, after the recovery of the national economy when more apparent increase in economic inequality across different population groups can also be expected.
When the disposable income of individuals is falling in all or most income groups during the economic recession, absolute poverty is much more relevant. The national absolute poverty threshold is expected to increase during the economic recession as the decrease in the income of the population will increase the share of households unable to secure even basic personal needs. For the purpose of this Report, the absolute poverty line is equalled to the state supported income (i.e. 350 Litas) 21 . In 2008, some 160 thousand persons in Lithuania, which accounted for almost 5% of the total
19 The economic decline corrects forecasts for earnings in 2009. Baltic Salary Survey, 2009: http://verslas.banga.lt/lt/spaudai.iarchiv/474335739ee4f; Higher salaries may be expected in 2011. OVC Consulting survey, 2009: http://manokarjera.cv.lt/Default4.aspx?ArticleID=12d4f691-88cf-4d4c-9fdf- c8f05e9c7108&RubricID=10000000-0000-0000-0000-111111112224
20 Lithuania. Social Sectors Public Expenditure Review. World Bank. 2009. p. 20.
21 Political (legislative) methods are applied for calculating the poverty level. 39 population, lived in poverty according to this absolute poverty line. Average incomes of persons living in poverty were 120 Litas below the poverty line.
The absolute poverty line in Lithuania can be forecasted to reach 7.5% during the economic decline (in 2009), and to hit as much as 13.2% in 2010 (i.e. it will reach the level of the year 2006). This situation will be primarily caused by lower household income, mounting debts of the population, higher number of the long-term unemployed and their reduced chances of employment due to lost professional skills or qualifications. Same as the average disposable income, the absolute poverty line is predicted to go back to the pre-crisis level in late 2015 when 4.8% poverty level can be expected again (see Table 4.1.5).
Table 4.1.5
Forecasted changes in the absolute poverty line in Lithuania in 2008-2015
2008 2009 2010 2011 2012 2013 2014 2015
Poverty line (percent)* 4.8 7.5 13.2 11.5 9.8 8.1 6.4 4.8
Number of the poor 160,267 250,418 440,735 384,640 328,546 272,453 216,360 160,267
* The poverty line according to the state supported income (350 Litas) as applied in 2008, provided income changes to an equivalent degree across all income groups. In 2010, the average disposable income should reach the level of the year 2006, on the assumption that income will fall, as a result of the crisis, to a similar degree in all income groups, same as it rose before the crisis. An assumption is made that poverty will be gradually reduced in the period from 2010 through 2015.
Sources: calculations by authors, based on the household budget survey data.
While considering the impact of the economic decline on the standard of living in the country, it is advisable to evaluate its influence on the economic inequality of the population. One of the important indicators to assess the economic inequality of the population is the decile coefficient of differentiation measuring consumption expenditure (income) 22 . An increase of this coefficient purports an increase in economic inequality across the population; and on the contrary, its decreasing values signal a trend towards the equalisation of expenditure (income).
As shown in Table 4.1.6, the decile coefficient of differentiation measuring per capita consumption expenditure decreased from 9.3 in 2007 to 8 in 2008. This indicates a rather significant decline in economic inequality across the population during the recent years in Lithuania (the same degree of inequality in consumption expenditure in Lithuania was last recorded in 2004). The decile coefficient of differentiation increased year on year since 2003 and hit 9.3 in 2007.
Table 4.1.6
Average consumption expenditure of the population in deciles (per capita) per month (Litas) in Lithuania in 2006-2008
Year I II III IV V VI VII VIII IX X Decile coefficient
2006 197.1 293 362.2 426.3 490.6 565.1 656.9 784.2 993.2 1746.6 8.9
22 This coefficient reflects the ratio between the point of expenditure (income) separating 10% of the population with the lowest expenditure (income) and the opposite point separating 10% of the population with the highest expenditure (income).
40 2007 219.3 331.9 409.8 484.1 565.7 653.6 755.4 903.5 1131.1 2031.1 9.3
Change (%) 11.3 13.3 13.1 13.6 15.3 15.7 15.0 15.2 13.9 16.3 0.4
Year I II III IV V VI VII VIII IX X Decile coefficient
2007 219.3 331.9 409.8 484.1 565.7 653.6 755.4 903.5 1131.1 2031.1 9.3
2008 249.2 371.2 457 538.5 623.6 712.6 821.6 969 1201.6 1994.2 8.0
Change (%) 13.6 11.8 11.5 11.2 10.2 9.0 8.8 7.2 6.2 -1.8 -1.3
Sources: Statistics Lithuania. Data of the Hosehold Budget Survey.
Notwithstanding favourable attitudes of a modern society towards a decline in economic inequality across the population, it should be pointed out that the decrease of this coefficient in 2008 was mainly determined by a slower growth in consumption expenditure within the richest sector of the population (in fact, a reduction in consumption expenditure is observed in the top tenth decile) rather than an appreciable rise in consumption expenditure within the lowest sector of the population (which, in fact, is pursued by way of reducing the inequality of the population and striving to improve the welfare in the country). This situation could have been triggered by pessimistic consumer expectations and increased saving due to rising unemployment and decreasing income in the country.
As suggested by surveys, economic growth usually goes together with the increasing economic inequality23 , which makes inverse dependence likely where economic slowdown entails a decline in economic inequality across the population. Since the period of economic slowdown is usually accompanied by rising unemployment, inverse dependence is observed between the unemployment rate and the consumption inequality of the population in the country 24 . As shown in Diagram 4.1.1 below, during the economic growth (in 2003-2008) the economic inequality of the population increased in Lithuania though the unemployment rate slowed down, and on the contrary, an increase in unemployment (as well as slower economic growth and lower consumption in the country) comes with an apparent trend towards a decline in consumption inequality across the population.
23 This situation is conditioned by the fact that the richest sector of the population usually has better access to the benefits of the economic growth than the poorest sector of the population.
24 Pearson correlation coefficient with the significance level α = 0,05 is equal to -0,75.
41 Diagram 4.1.1
Dynamics of the decile coefficient of differentiation and unemployment rate
in Lithuania in 2003-2008
15 12,4 11,4 10 8,9 9,3 7,7 8 8,48,3 8 5,6 5,8 5 4,3 0 2003 2004 2005 2006 2007 2008
Decile coefficient of differentiation Unemployment rate
Source: Statistics Lithuania. Data of the Hosehold Budget Survey and the Labour Force Surve.
In the light of the said trends, the consumption inequality of the population in the country could be expected to further decline in the short run (2009-2010), provided any income received by the poorest groups of the population (namely, pensions, disability allowances, social benefits, MMW) is not reduced (see Table 4.1.7). This trend will be mainly determined by decreasing consumption of high-income households.
Table 4.1.7
Forecasted changes in decile (consumption) coefficient of differentiation
in Lithuania in 2008-2015
2008 2009 2010 2011 2012 2013 2014 2015
Decile coefficient* 8.0 7.9 7.5 7.6 7.8 8.1 8.5 9.0
* An assumption is made that benefits will not be cut for the most deprived groups of the population (persons receiving minimum pensions, disabled persons and other similar groups).
Sources: Authors calculations.
Once the national economy recovers, an increase in the economic inequality of the population is expected in 2011 already, and it is likely to continue as long as until 2014-2015. This can be explained by the fact that the richest sectors of the population who have temporarily reduced their consumption expenditure will recover faster than people with average and lower income who have been more affected by the economic downturn (in particular, vulnerable population groups – unemployed persons, single parents raising children and other similar groups). As already mentioned above, the income of the rich usually grows faster than the income of the poor during the economic growth.
Consequences of the economic decline for the most vulnerable population groups in Lithuania.
It can be stated already that the economic decline will have far-reaching negative effects on the most vulnerable groups of the population in Lithuania, unless the Government takes additional measures aimed at employment promotion and social protection of the population. The number of persons who lost their jobs during the economic decline could amount to nearly 170 thousand in 2009, and add another 120 thousand in 2010. This number includes only those persons who lose their jobs in the given years (excluding the currently unemployed) (see Table 4.1.8).
42 Table 4.1.8
Forecasted share of the most vulnerable population groups in Lithuania in 2008-2015
(unless the Government takes additional measures)
2008 2009 2010 2011 2012 2013 2014 2015
Number of persons who lost their 95.0* 170.0 120.0 60.0 50.0 30.0 - - jobs during the economic decline (thousand) 25
Share of unemployed persons raising 7 7.5 7.5 7.8 8 7.5 7.3 7.3 three and more children aged under 18 in the total number of the unemployed (percent)
Number of unemployed persons 6.6 16.5 19.6 16.4 15.2 12.0 10.2 9.1 raising three and more children aged under 18 (thousand)
Share of single parents raising 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 children aged under 18 in the total number of the unemployed (percent)
Number of unemployed single 2.7 6.4 7.6 6.1 5.5 4.6 4.1 3.6 parents raising children aged under 18 (thousand)
Share of housing loans overdue more 0.04 0.09 0.13 0.15 0.12 0.1 0.09 0.05 than 60 days (in the total number of households, percent)**
* September-December 2008 (LLE data). ** Calculations based on the data of the Bank of Lithuania.
Sources: Authors calculations based on Statistics Lithuania, Ministy of Finance of the Republic of Lithuania and Lithuanian Labour Exchange data.
A considerable increase in the number of unemployed persons raising three and more children aged under 18 (it could reach 19.6 thousand persons in 2010) and the number of single parents raising children aged under 18 (it could go up to 7.6 thousand in 2010) is predicted during the economic decline. Though the number of the unemployed in the given social groups should start going down in 2011, the level of the year 2008 is unlikely to be reached even in 2015.
Furthermore, in the absence of adequate actions, the share of housing loans overdue (more than 60 days) in Lithuania is likely to increase (against the total number of households having housing loans). The share of such households could expand until 2011 and account for some 0.15% of the total number of households having housing loans. The latter indicator is anticipated to decrease in 2012, and the share of housing loans overdue could reach the level of the year 2008 by 2015.
25 The number of persons who lost their jobs in a year and the forecasted average annual number of the unemployed differ because a certain share of persons losing their jobs do not register with the labour exchange (e.g. in case of emigration) or find a new economic activity.
43
4.2. Long-term negative social consequences of the economic decline
4.2.1. Increase in long-term unemployment and associated problems in the country As already mentioned, the number of the long-term unemployed will grow significantly in Lithuania during (and after) the period of the economic downturn. Therefore, it is expedient to emphasise negative long-term consequences of long-term unemployment in the country. These consequences may be analysed in the narrow and broad sense. In the narrow sense, unemployment (and long-term unemployment in particular) reduces the income of individuals and poses a threat of a person’s isolation from the society and the loss of social relations. Unemployment creates psychological problems, causes the loss of personal qualifications, and restricts an individual’s social relations and possibilities of self- expression. These problems have a negative effect on an individual’s relationships both in the family and other social networks and reduce the motivation of the unemployed for economic and social activity. In the broad sense, unemployment is the reason behind the ineffective use of labour force and other industrial resources, which reduces possibilities for the country’s economic development.
In the long run, unemployment has a huge negative impact on the employee’s professional qualifications. The longer the duration of unemployment, the greater the damage to the person’s professional qualifications. If lower professional qualifications are maintained longer and can be restored faster (within a shorter period of time), higher professional qualifications are much more difficult to restore. The loss of qualifications has a negative impact on motivation for employment and professional career, which can be evaluated as a certain loss of human capital. The loss of professional qualifications reduces the person’s self-confidence in the labour market, requires additional investment in order to regain (restore) the qualifications, and reduces the employee’s work efficiency and initiative.
4.2.2. Reduction in investment in human capital
The country’s living standard and the national economic growth in the long-term period highly depends on possibilities for technological development. Meanwhile, technological progress is primarily associated with the quantity of economic knowledge and staff qualifications, capacities and skills.
During the period of the economic decline, household consumption expenditure decreases along with a decline in the income of the population. As income has decreased, a major portion of consumption expenditure is set for food; thus, first of all, this has a negative impact on investment in goods and services that are not the basic necessities, including investment in human capital (education, health care, culture and recreation, improvement of living conditions, etc.). According to the data of the Household Budget Survey, the average expenditure (in cash and kind) allocated for education per capita per month decreased by more than one fifth (22.8%) – from 5.7 Litas to 4.4 Litas (see Table 4.2.1) in Lithuania in 2008. Expenditure on education per capita per month fell by as much as 38% (from 8.1 Litas to 5.0 Litas) in the major cities of the country, and by 14.7% (from 6.8 Litas to 5.8 Litas) in other towns. In 2008, education expenditure increased only in rural households (from 2.1 Litas to 2.7 Litas).
Households living in the major cities and other towns of the country also cut their consumption expenditure on recreation and culture (by 15% on average). Furthermore, households living in other towns and rural areas reduced, though slightly, their health expenditure (by 2.5% on average). It is worthwhile pointing out that the year 2008 saw a decline in investment in human capital despite the rise in earnings, as compared to 2007 26 . This situation was most
26 In 2008, the index of real earnings stood at 111.2, and the index of average gross monthly earnings was 120.6 in the country.
44 probably induced by less optimistic expectations of the population and the increasing risk of income loss due to rising unemployment and the worsening economic situation in the country.
Table 4.2.1
Average consumption expenditure (in cash and kind) per capita per month in Lithuania in 2007 and 2008 (Litas)
Urban and rural areas 2007 2008 Change (%)
Food and non-alcoholic beverages 248.1 276.2 11.3
Alcoholic beverages 18.7 20.9 11.8
Clothing and footwear 69.0 67.5 -2.2
Housing, water, electricity, gas and other fuels 89.5 100.2 12.0
Furnishings, household equipment 43.3 39.9 -7.9
Health 36.1 39.1 8.3
Recreation and culture 41.1 37.8 -8.0
Education 5.7 4.4 -22.8
Miscellaneous goods and services 35.1 39.5 12.5
Sources: Statistics Lithuania. Data of the Household Budget Survey.
It is likely that during the period of the economic crisis household expenditure on education, health care and other similar items will further decrease along with a decline in the income of the population. Reduced possibilities for acquiring education and professional qualifications imply negative consequences in the long-term perspective. Low or none occupational qualifications significantly reduce the competitiveness of individuals in the labour market, determine low wages and promote income inequality and poverty in the country. Thus, all this creates conditions for a vicious circle of poverty where poverty is transferred from generation to generation.
4.2.3. Increase in the emigration of the population and associated problems in the country
Despite the fact that the wave of emigration decreased (from 15.5 thousand to 12.6 thousand) in 2006 for the first time after Lithuania’s accession to the EU and 7.7 thousand persons (or 14% more than in 2005) immigrated to Lithuania, the pace of emigration has accelerated again during the period of the economic crisis. This situation was mainly induced by falling or lost income of the population, rising interest rates on consumer credits or housing loans (taken in the national currency), as well as the social and economic policy implemented in the country with a little focus on social problems of the population due to limited state budgetary resources. In 2008, the number of emigrants from Lithuania grew by 22.8%, as compared with 2007 (from 13.8 thousand to 17.0 thousand); meanwhile, the increase in the number of immigrants to Lithuania stood at merely 8% (increased from 8.6 thousand to 9.3 thousand).
45 Diagram 4.2.1
Extent of international migration in Lithuania in 2003-2008
20000 17015 16000 15165 15571 13853 12602 12000 11032 9297 8000 7745 8609 7253 7086 6789 5110 5553 4000 4694 4728
0 2001 2002 2003 2004 2005 2006 2007 2008
Emigrants Immigrants
Sources: Statistics Lithuania. Data of the International Migration Survey.
The extent of emigration did not decrease in 2009 either. In the period from January to September 2009, the balance of migration in Lithuania was negative and equalled some 11 thousand persons (16.2 thousand emigrated, and 5.2 thousand immigrated), whereas the latter indicator was equal to 7.7 thousand in 2008 (5.2 thousand in 2007). Bearing in mind that the Lithuanian economy is forecasted to recover only in 2011-2012, the extent of emigration of the country’s population is likely to grow further in late 2009 and in 2010, along with the recovery of foreign economies. By then the extent of emigration may be projected to grow up to 20-25 thousand per year. Thus, as a result of growing migration, Lithuania may lose another 100 thousand persons during the next five years. It is particularly alarming because Lithuanian citizens find it increasingly easy to adapt to the socio-cultural environment of foreign countries (particularly English- speaking countries) and they tend to stay there permanently.
More intensive emigration of the population entails a wide range of long-term negative social consequences having a negative impact not only on individual households but also on the country as a whole and its economic potential. They are analysed below.
Population decline. Although the family-friendly policy pursued in Lithuania over the past several years 27 had a positive impact on the increase in the country’s birth-rate (the number of births in Lithuania grew by 14.6% during the period 2003-2008); however, this did not solve the problem of population decline and population ageing in the country. During the period from 2003 to 2008 the total population declined by 96.2 thousand (from 3.46 million to 3.36 million.). This situation was mainly determined by the fact that the growing birth-rate was offset by a large flow of emigration from Lithuania, which has further increased since the beginning of 2008.
As regards changes in the population figures, it should be mentioned that alongside migration processes other factors such as an increased mortality rate, higher number of suicides, life expectancy, etc. have a great impact on the population decline. With decreasing social guarantees and a rather slow improvement in the standard of living, the latter indicators can worsen significantly in Lithuania over the coming 5-10 years. As seen in Table 4.2.2, the number of suicides and attempted suicides was down in Lithuania in 2007, but it went up again in 2008 – this increase was rather significant
27 Since 1 January 2008, the amount of the maternity allowance in Lithuania equals 100% of the beneficiary's reimbursed remuneration for the first year and 85% for the second year. The reimbursed remuneration is calculated on the basis of the insured person’s insured income over the past 9 calendar months (since 1 July 2009 – over the past 12 calendar months) before the month of the beginning of the maternity leave.
46 and accounted for 8.4%. In 2008, 3.3 suicides and attempted suicides were recorded per 10,000 population (this figure was 3.0 in 2007), and the total number of suicides and attempted suicides equalled 1,111 in Lithuania. The negative impact of the economic downturn on living conditions, growing liabilities of individuals to banks (particularly difficulties in repaying housing loans), and rising unemployment can further reinforce these trends, and the latter indicator may increase up to 1,500 people in 2011-2012.
Table 4.2.2
Dynamics of the number of suicides and attempted suicides in Lithuania in 2003-2008
2003 2004 2005 2006 2007 2008
Suicides and attempted suicides 1,455 1,381 1,319 1,049 1,025 1,111
Population (thousand) 3,462. 3,445. 3,425. 3,403. 3,384. 3,366. 5 9 3 3 9 4
Suicides and attempted suicides per 10,000 4.2 4.0 3.9 3.1 3.0 3.3 population
Sources: Statistics Lithuania. Data on mortality and causes of death.
The abovementioned indicator is likely to further increase in Lithuania during the next 5-6 years (and particularly in 2009-2011) due to the worsening financial situation of households and a growing sense of disappointment among the population (such trends were revealed at the interviews of the most vulnerable groups). Moreover, attention should be drawn to the fact that, unlike many other social consequences, the growing number of suicides causes irreversible social outcomes that are painful not only for individuals and families but also for the entire society and the state (both in social and economic terms).
Loss of skilled labour force. As the extent of emigration increases, a higher number of specialists with higher educational attainments, not just individuals with lower education and low professional qualifications leave the country. Since 2005, the extent of emigration of people having higher and high education and possessing high professional qualifications has been increasing year on year. In 2007, persons with higher and high education accounted for one fourth (25.8%) of all the people who emigrated from Lithuania. As the number of the qualified unemployed increases during the period of the economic decline, their share in the total number of emigrants can go up to 35-40% in 2011-2012. Such trends will be reinforced by rising unemployment and an increasing number of individuals who experience difficulties in repaying housing loans and consumer credits. It will be increasingly more difficult to compensate for the lost skilled labour force with newly trained qualified specialists because the current high prices of higher education are likely to limit the possibilities of acquiring higher education for a significant number of young people. The aforementioned trend will also be strengthened by the fact that a part of young people able to pay for their studies will go to study at foreign universities and subsequently get jobs abroad. In such a case, it will be very difficult to make these people to return to Lithuania even after the improvement in the country’s economic situation. Escalation in the demographic ageing problem in the country. Given that emigration from the country usually involves people of working age, the demographic ageing problem is likely to become more acute in Lithuania during the period from 2009 through 2015. According to statistical data, every sixth man and every fourth woman in Lithuania was aged 60 and above in 2008. Based on the data of Statistics Lithuania, the demographic ageing coefficient 28 increased from
28 This coefficient indicates the number of elderly people (aged 60 and over) per 100 children aged under 15.
47 118 to 134 in Lithuania during the period 2005-2008. This indicator increased significantly in 2008, as compared with 2007, despite the country’s substantially improved birth-rate indicators in 2008. This only confirms the fact that the recent demographic problems in Lithuania have been influenced by a large extent of emigration of the working-age population rather than low birth rates.
A rapid decline in population and an increasing share of persons of retirement age in the overall population structure will reduce the country’s labour force and may lead to the lack of labour force in the long-term perspective. This, in turn, will slow down the country’s possibilities for economic development, as well as impede the balancing of the SODRA's budget and exacerbate other problems. Furthermore, the working-age population will have to bear an increasing burden of supporting elderly people, and this will necessitate higher income taxation and result in lower individual income in the future.
4.2.4 Escalation in addiction and related problems in the country
The analysis of the data of the Household Budget Survey 2008 revealed that expenditure on education and health care decreased along with an increase in consumption expenditure on alcoholic beverages (by 25% in rural areas and 11.8% in the major cities). This fact is even more worrying because, for instance, expenditure on alcoholic beverages per capita per month exceeded education expenditure by almost 7 times in rural areas and 5 times in the major cities. In 2008, this gap increased from 3.3 times to 4.8 times, as compared to 2007. This shows that during the period of the economic slowdown, with economic conditions worsening in the country, the problem of excessive alcohol consumption becomes even more relevant. There is no statistics yet telling about the impact of the excise duty on alcoholic beverages increased in Lithuania in 2009 on alcohol consumption. However, there are conflicting opinions as to the benefits and damages of this duty. According to medical specialists, the number of diseases caused by alcohol intake fell by 26% in the first quarter of 2009. In their opinion, this denies the increased consumption of illegal alcohol. Meanwhile, according to the data of the police experts, the number of cases of illegal trade in alcoholic beverages registered in 2009 increased by 94% from the same period of the previous year 29 . Therefore, it is likely that due to rising unemployment and worsening economic conditions the problem of alcohol abuse will affect more and more families.
4.2.5 Increase in the crime rate in the country Surveys show that unemployment and related poverty are among the main factors leading to criminal activity. Decreasing income of the population and an increasing level of poverty in the country contribute to the likelihood of a higher number of crimes. In 2001, the Institute of Labour and Social Research conducted a sociological survey of persons released from imprisonment institutions 30 ; its results spotlighted this dependency and correlation resilience. As much as 52% of respondents did not have any job before imprisonment. Out of those employed, 16% had temporary or seasonal jobs. Along with an increase in the country’s unemployment rate, the signs of growth in the crime rate can also be observed in Lithuania. The crime rate was decreasing in Lithuania year on year since 2005, but it went up again in 2008. According to the data of the Lithuanian Prosecutor General’s Office, the crime rate in Lithuania increased by almost 6% – from 73.7 thousand in 2007 to 78.1 thousand in 2008 (see Table 4.2.3). The number of criminal offences was mainly boosted by the increased number of thefts (13%), destruction or damage of property (20%) and crimes against the financial system (21%). Moreover, the number of cases of property damage caused by deceit (104%), crimes against security of electronic data and information systems (82%), and credit frauds (69%) also rose. According to the experts, there is a particularly high rise in property-related crimes, particularly minor thefts.
29 http://www.zebra.lt/lt/aktualijos/lietuvoje/Grieztesni-prekybos-alkoholiu-istatymai-isblaive-Lietuva-2009-05- 28.html
30 Analysis of the results of the sociological survey on social and professional needs of sentenced persons. Study Report. MSSL-ILSR, Vilnius, 2001.
48 Table 4.2.3
Number of criminal offences registered in Lithuania in 2005-2015*
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Criminal 89,815 82,155 73,741 78,060 83,915 91,467 96,040 98,920 94,965 92,116 89,200 offences
Criminal 2,631 2,421 2,185 2,324 offences per 2,505 2,743 2,893 2,990 2,871 2,784 2,696 100,000 population
* The Table presents the actual data of Statistics Lithuania for 2005-2008 and forecasts for the period 2009-2015 in Lithuania. The indicator of registered criminal offences per 100,000 population during the period 2009-2015 is calculated using the population decline forecast.
The analysis of the 2009 data also reveals an increase in the number of crimes. During January-April 2009, the overall crime rate went up by 3.2% in Lithuania. Although the overall crime rate in Lithuania seems to have increased only slightly, a more in-depth analysis of the data reveals that the growth in the number of crimes related to financial embezzlement and other similar crimes is rather significant. During the said period, the number of cases of the production of counterfeit currency and securities grew by 158.6% (from 237 to 613), the number of frauds increased by 59.1% (from 915 to 1456), and the number of crimes relating to possession of narcotic substances rose by 6.2% (from 486 until 516). Meanwhile, such relatively low overall growth in the crime rate was determined by the decrease in the number of traffic violations (a 30.5% decline), crimes against a child and a family (a 40.5% decrease), and car thefts (a 36.5% drop). In the light of the abovementioned trends and the impact of the Russian crisis recorded in 1999-2000 on the dynamics of the crime rate in Lithuania, it can be presumed that the crime rate will increase in the face of the economic downturn, making a negative impact on the social and economic development of individuals and the country. It can be forecasted that the trends in crime growth can continue for a longer period than the economic downturn as, based on the Lithuanian and foreign experience, the economic downturn entails a high rise in crimes of economic nature and their restraints require more time and more significant improvement in the living standard. The forecast given in Table 4.2.3 provides for crime growth in the country until 2012; however, the dynamics of this indicator also depends on crime administration and the legal environment in the country.
4.2.6. Growth of the shadow economy and corruption in the country During the economic hard times, an increasing number of business entities face financial difficulties, and some entities switch to the shadow economy, seeing it as one business rescues. According to the data of Statistics Lithuania, the shadow economy accounted for 15% in Lithuania in 2004-2008. As the Lithuanian and foreign experience shows, the scope of the shadow economy tends to increase in the face of the economic downturn. This is particularly relevant in the area of labour relations where the shadow economy manifests itself as employment without formalising labour relations and failure to pay relevant taxes (income, social insurance). It can be forecasted that the extent of the shadow economy could go up to 20-22% by 2015, as a result of the decreasing profitability of business entities, increasing taxes and labour costs, and deteriorating macroeconomic environment. It is particularly important to mention that shadow economic activities develop very fast (usually 12 to 18 months) but their restraint (elimination) requires a much longer period (3 to 5 years on average). A growing number of complaints, requests and enquiries of citizens about infringements of their rights that are registered by the State Labour Inspectorate confirm that an increasing number of business entities move into the shadows during the period of the economic decline. For instance, about 5-7 thousand of the abovementioned complaints were received in 2006, whereas this number increased to over 11 thousand in 2008. This number continues to grow in 2009 – the number of complaints and requests received during the first two months of 2009 increased by one third from the same
49 period of the previous year. Furthermore, it is likely that a significant number of people do not apply to the State Labour Inspectorate regarding various infringements (e.g. unofficial envelope wages) for fear of losing their job; therefore, it can be stated that the latter indicator may actually be significantly higher. The shadow economy does not only exert a huge adverse impact on the country’s economy but also entails a wide range of negative social consequences, namely, increasing social and economic differentiation, rising levels of corruption in the country, reduction of social guarantees for individuals, and low efficiency of the social policy measures applied in the country. The shadow economy reduces the efficiency of resource allocation across sectors, unbalances the tax system, lowers the level of common infrastructure and main public services, as well as slows down the pace of the country’s economic growth. Summing up The analysis carried out in this Chapter reveals that in case the national Government fails to take measures aimed at supporting employment and improving the social support network, the situation in the labour market and household income will continue to deteriorate in Lithuania for the next 2-3 years. And even though the economic growth is forecasted in Lithuania from 2012, it will have only a minor positive impact on the quality of life of households. The deteriorating macroeconomic situation and the rising level of poverty in the country (more than one tenth of all households will live below the absolute poverty line in 2010) will intensify other negative social phenomena such as emigration, an increase in crime, growing numbers of addictions and suicides, etc. in the country. Moreover, decreasing income of the population will reduce investment in human capital (education and vocational training, health care), which, in the long run, will reduce the competitiveness of individuals on the labour market, condition low wages and lessen the possibilities of avoiding poverty in the future.
50
5. COST ANALYSIS OF MEASURES MITIGATING THE NEGATIVE SOCIAL CONSEQUENCES OF THE ECONOMIC RECESSION
The analysis showed that the State could mitigate the long-term negative social consequences by dealing with two key problems, viz. unemployment and decline in household income (at least for lowest income groups facing the threat of poverty or already impoverished). Considering the above, this Chapter analysis three key groups of social policy measures focusing on:
• securing jobs;
• integration into the labour market;
• improving the existing network of minimum income.
Within the scope of the listed priorities, the cost analysis of the proposed measures and measures already applied by the Government as well as the cost analysis of not taking of measures, i.e. how much the adequate failure to respond to challenges of the crisis will cost or would cost to the society, is given below. EU vocabulary terms as the cost of absence of the adequate social security or the cost of passiveness.
5.1. Securing jobs
The loss of job and job-related income is the most substantial social consequence of the economic recession. Therefore, the first measure that might mitigate negative social consequences is securing jobs. The State has different options in order to secure jobs in two economic sectors:
1. In the public sector the State, being the employer, may preserve the number of employees from being reduced.
2. In the private sector (considering the fact that it is private enterprises that make the decision regarding the number of employees and that the State has a limited possibility to influence such decision) the State may contribute with economic incentives for recruitment decisions made by private enterprises.
The analysis of securing jobs in the said two sectors is provided below.
5.1.1. Public sector
Not only private enterprises but also the State, being the employer, is affected by the economic crisis in the recruitment area. With the decreasing tax income and in the presence of borrowing restrictions the State is forced to spend less for the financing of its institutions; as the major share of such financing is used for employee salaries, the economy of spending cannot leave recruitment solutions unaffected. However, two alternatives are available, viz. to reduce the number of employees and leave the salaries unchanged, or to reduce salaries and leave the number of employees unchanged. The latter solution is less painful as far as social consequences are concerned. Reducing salaries in the public sector was exactly what the Lithuanian Government undertook.
51 The social benefit of reducing salaries for employees of the public sector is preserved jobs in this sector. This is direct benefit to the families of those who are not fired, and indirect to the entire society, as it allows escaping the loss related to the growth of unemployment (unemployment benefits, social benefits for families of persons who lost their job, expenses incurred by labour exchanges providing services to the unemployed, also expenses incurred by other institutions providing services related to the integration into the labour market). Meanwhile, social costs of the salary reduction is the decrease in income of employees subject to the reduction of salaries and the resulting decrease in consumption and the decline in the standard of living. The benefit and costs of the salary reduction in the public sector should be separately calculated for two groups of employees, viz. for politicians, judges, public officials and civil servants (this group is hereinafter referred to as civil servants) and for employees of budgetary institutions.
Reduction of salaries for public officials and civil servants. Salaries for civil servants are calculated with due consideration to the basic salary of a civil servant, which, pursuant to the law, was LTL 490 before 30 December 2008, later it was reduced to LTL 475, and from 1 August 2009 it amounts to LTL 450 31 . At the end of 2008, the average salary of a civil servant was LTL 3,364. At that time, the total number of civil servants was 65,100 (30,100 were engaged in public administration and 35,000 were statutory civil servants). Thus, if salaries are not reduced and the number of civil servants remains stable, the monthly salaries fund should be LTL 219.1 million, and the annual salaries fund – LTL 2,629.7 million. If we also include social insurance contributions paid by institutions (31% of the calculated salaries), the total annual expenditure for the recruitment of civil servants shall be LTL 3,445 million.
After the State reduces the basic salary of a civil servant from LTL 490 to LTL 452, i.e. by 8.2%, the state budget economy of LTL 282.5 million can be expected. At the same time they are costs of families of civil servants sustained as a result of the anti-crisis measure of the Government. However, as the average salary of a civil servant is above the average national salary level, such reduction of salaries does not pose a threat of the increase in poverty. On the contrary, it is the measure that contributes to the restriction of the expansion of poverty, as employees are not fired.
If, for the purpose of the same economy of Government spending, employees had been fired instead of reducing salaries, some 8.2% or approximately 5,300 civil servants would have lost their jobs. This number would be received if the proportionately equal number of civil servants of every level and every qualification was fired. During the reduction of staff more qualified employees usually remain, while less qualified and less paid employees are usually fired; therefore, the said economy of spending would be achieved at the expense of a higher number of fired employees. As a result of the economy of Government spending, the firing of specialists and senior specialists the average salary of which is 36% lower than the average salary of a civil servant would cause approximately 7,200 unemployed persons more (cf. Table 5.1.1).
Table 5.1.1
Benefits and costs of the reduction of salaries in the public sector in order to escape the growth of
unemployment in 2010
Salary reduction Total results of
the public sector Civil servants * Employees of budgetary
institutions **
Economy of Government spending (million LTL) 282.5 1,205.6 1,488.1
Household costs (loss of income) (million LTL) 282.5 1,205.6 1,488.1
31 Official Gazette , No. 91-3916, 2009
52 The prevented growth in the number of the unemployed (the 7,200 28,000 35,200 number of persons)
Economy of unemployment benefits (million LTL) *** 12.7 48.3 61.0
The prevented growth in the number of impoverished as a 4,320 16,800 21,120 result of the loss of job (the number of persons)
The prevented growth in the number of impoverished 5,184 20,160 25,344 household members as a result of the loss of job by the head of the household (the number of persons)
The total prevented growth in the number of the 9,504 36,960 46,464 impoverished (the number of persons)
* The reduction of salaries for civil servants by reducing the basic salary from LTL 490 to LTL 450 and by reducing the basic salary coefficients (the total of approximately 10%). ** The reduction of the basic salary for the employees of budgetary institutions from LTL 128 to LTL 122 and the reduction of bonuses to heads (the total reduction of financing of 8%). *** The annual amount is calculated based on the established duration of payment of unemployment benefits, which is six months.
Sources: Calculated by authors based on the draft National Agreement “For avoiding huge indebtedness of the State and for building a safe future
for Lithuania” – Office of the Lithuanian Government. 21 July 2009
The said number of the unemployed would only decrease gradually with the decreasing total number of the unemployed during the after-crisis period, and this would have long-term consequences until 2015. One would think that as a result of excellent education the fired civil servants would have a competitive advantage in the labour market and would find new jobs faster. However, even if that was the case, the negative consequences of their firing would be similar for the society, as these persons would outrival other unemployed, and if the job demand remains the same the said impact on the growth of unemployment would persist.
Reduction of salaries for employees of budgetary institutions. Salaries for employees of the public sector engaged in institutions financed from state, municipal and social funds and rendering educational, social care, healthcare, etc., services to the society (i.e. in budgetary institutions) are established based on the basic monthly salary (BMS). As of 1 32 January 2008, the BMS was LTL 128 , while as of 1 October 2009 this amount was reduced to LTL 122.
The decrease of the basic salary of employees of budgetary institutions from LTL 128 to LTL 122 and the decrease of bonuses for heads would cause the reduction of household income of employees of budgetary institutions. However, efforts to achieve the same economy of Government spending by reducing the number of employees while preserving the salary level would be a far worse alternative. Approximately 350,000 employees are engaged in the said sector. The average monthly salary is approximately LTL 2,330 (in 2008).
The reduction of salaries for employees of budgetary institutions as an alternative to the firing of employees has more favourable social consequences than the reduction of salaries for civil servants as a result of difference of these two sectors in size. Approximately four times more employees are employed in the budgetary sector. Thus, the economy of public spending in this sector would result in a higher growth in the number of the unemployed, i.e. as high as 28,000 (cf. Table 5.1.1). The expected reduction of salaries would result in the decrease in household income of 350,000 budgetary employees. The total costs of these residents in 2010: LTL 1,205.6 million.
32 Official Gazette , No. 103-4216, 2007
53 The decision of the Government to reduce the salary for public sector employees as an alternative to the reduction of the number of employees has favourable consequences regarding the distribution of poverty. Unemployment is one of the key risk factors of poverty. Usually, only a small share of employed households is impoverished (8% in 2007); however, as much as 60% of the unemployed are impoverished. The total number of persons that might have been included into the number of impoverished as a result of the loss of employment in the public sector is more than 46,000 in 2010. The avoidance of the firing of employees in the public sector and the growth in the number of the unemployed also means the economy of spending for unemployment benefits. Approximately 41.8% of the unemployed receive unemployment benefits. The average unemployment benefit amounts to LTL 702.2 and is paid for half a year, so the economy of spending for half a year would be LTL 61 million (cf. Table 5.1.1).
The assessment of benefits and costs of the measures to preserve jobs in the public sector provided in Table 5.1.1 cover a short period of time, i.e. the year of 2010. In the long run the benefit and costs would change according to the changes in the labour market. With the decreasing unemployment, the measures undertaken by the Government to preserve jobs in the public sector would become less favourable, as fired employees would eventually find employment. Table 5.1.2 shows the change of the analysed results during the period up to the year 2015 (the calculation is based on the annual changes in the decrease in the unemployment).
Table 5.1.2
Benefits of the reduction of wages in the public sector in order to escape the growth of unemployment (the
entire public sector)
2010 2011 2012 2013 2014 2015
The average annual number of the 261 210 190 160 140 124 unemployed (thousand)
The percentage change of the average - 80.5 90.5 84.2 87.5 88.6 annual number of the unemployed
(previous year: 100%)
The prevented growth in the number of the 35,200 28,336 25,644 25,192 18,893 16,739 unemployed (the number of persons)
Economy of unemployment benefits 61.0 49.1 44.4 37.4 32.7 29.0
(million LTL)
The total prevented growth in the number 46,464 37,403 33,850 28,502 24,939 22,096 of the impoverished (the number of persons)
Sources: Calculated by authors.
5.1.2. Private sector
The State can secure jobs in the private sector by indirect measures only. The key measure could be the subsidisation of jobs when private enterprises cannot pay salaries and fire employees as a result of their difficult economic standing. It is impossible to establish how much is needed for the subsidisation of one job in order to be sufficient for the preservation, as it would depend upon the specific enterprise, its market standing and the qualification of hire labour. Costs of alleged subsidies can be calculated by assuming that a subsidy amounting to a half of the minimum salary (i.e. LTL 400) would be sufficient for one job, and the number of jobs sought to be preserve would be such as to reduce the number
54 of unemployed by 10%. If, for example, the required subsidies are be twice as high, their cost would also be twice as high as calculated, or their social results would be twice as low.
In order to secure at least 10% of the forecasted number of the unemployed for that particular year, subsidies of jobs would annually cost LTL 60 million to LTL 125 million, depending upon the total number of the unemployed. However, it should be considered that it would also be the economy of spending for unemployment benefits, which would amount to 42% of the said costs for the supporting of employment. Furthermore, a positive result, i.e. the potential reduction in the number of the impoverished by dozens of thousand persons annually, is also important (cf. Table 5.1.3).
Table 5.1.3
Costs of securing jobs in the private sector
2010 2011 2012 2013 2014 2015
The average annual number of the 261 210 190 160 140 124 unemployed (thousand)
The number of subsidised jobs / the reduced 26.1 21 19 16 14 12.4 number of the unemployed (thousand)
Cost of job subsidies (LTL 400 per month), 125 101 91 77 67 60 million LTL per year
Economy of unemployment benefits (million 52 42 38 32 28 25
LTL)
The prevented growth in the number of 15,660 12,600 11,400 9,600 8,400 7,440 impoverished household members as a result of the loss of job by the head of the household (the number of persons)
The total prevented growth in the number of 34,452 27,720 25,080 21,120 18,480 16,368 the impoverished (the number of persons)
Sources: Calculated by authors.
The general results of measures for the preservation of jobs in the public and private sectors are provided in Table 5.1.4. The above measures could reduce the number of the unemployed from 60,000 in 2010 to 30,000 at the end of 2015.
Table 5.1.4
Results of measures for the preservation of existing jobs in the public and private sectors (thousand)
2010 2011 2012 2013 2014 2015
The prevented growth in the number of the 35.2 28.3 25.6 25.2 18.9 16.7 unemployed as a result of the preservation of employment in the public sector
The prevented growth in the number of the 26.1 21 19 16 14 12.4 unemployed as a result of the subsidisation of jobs
55 in the private sector
Total jobs 61.3 49.3 44.6 31.2 32.9 29.1
Sources: Calculated by authors.
The said figures of the reduction in the number of the unemployed are rather significant when compared with the data of the previous period regarding the decrease in the number of the unemployed and emigration. In 2002-2007, when economics was recovering from the crisis in Russia, the unemployment was decreasing (20,000-50,000 per year). However, the employment was not growing until 2005. At the same time, over 20,000 residents emigrated from Lithuania annually (as many as 50,000 in 2005) (cf. Table 5.1.5).
Table 5.1.5
Employment, unemployment and emigration volumes in Lithuania in 2002-2007
2002 2003 2004 2005 2006 2007
The number of employed population, 1,405.9 1,438.0 1,436.3 1,473.9 1,499.0 1,534.2 according to the population employment survey (thousand)
The number of the unemployed, according 224.4 203.9 184.4 132.9 89.3 69.0 to the population employment survey
(thousand)
The change of the employed over the year - -7.9 -1.7 +37.6 +26.9 +35.2
(thousand)
The change of the unemployed over the - -20.5 -19.5 -51.5 -43.6 -20.3 year (thousand)
The difference between the decrease in - -28.4 -21.2 -13.9 -16.7 +14.9 then umber of the unemployed and the change of the employed (thousand)
Emigrants, 15 or older (thousand) - 20.4 29.5 41.5 23.7 23.7
Unemployment level, according to the 13.5 12.5 11.4 8.3 5.6 4.3 population employment survey
(percentage)
Sources : Data of Statistics Lithuania.
This history of labour market development (the decrease of unemployment as a result of the emigration of population) may repeat itself during the present crisis and for several years afterwards. Therefore, the above employment supporting measures would also contribute to the reduction of the long-term problem, viz. emigration.
56 5.2. Measures for the integration into the labour market
Apart from the job preservation measures analysed above, measures for the integration of the current unemployed into the labour market are also necessary. The key measures shall be those of the active labour market policies (ALMM), such as community service, employment by subsidising, vocational training. All these measures are common in Member States, they are also applied in Lithuania; however, the increased number of the unemployed demand higher ALMM costs. If the said measures are not developed, the demand for unemployment benefits and assistance to the impoverished will grow. Furthermore, long-term consequences of being unemployed are also important. Persons who have no job and no income lose their vocational and social skills, seek to be recognised as disabled, or even emigrate. As a result, there will be a shortage of labour force when the economy starts growing. Considering the above, it is worth while increasing the number of the unemployed engaged in community service and employed in subsidised jobs, and decreasing the volume of vocational training of the unemployed. The latter proposal is related to the high supply of labour force, as the employers have a sufficient choice of employees in many professional areas of the labour market. Training could be well worth only based on specific requests of employers, or only persons who have no occupation whatsoever in order to prepare them for work when the demand for labour force increases. Subsidised employment would be mostly used in the case of long-term unemployed, disabled and young people. The proposed ALMM volumes until 2015 are provided in Table 5.2.1.
Table 5.2.1
Participation in ALMM programmes (thousand of persons)
2008* 2009 2010 2011 2012 2013 2014 2015
Community service 16.4 29.7 34 29 26 20 20 20
Subsidised employment 4.9 15.3 19 16 15 12 9 7
Vocational training 11 5 6 6 5 4 4 4
Total: 32.3 50 59 51 46 36 33 31
* actual data of the Lithuanian Labour Exchange.
Sources: Calculated by authors based on the data of the Lithuanian Labour Exchange.
The cost of the implementation of ALMM depends upon the duration of their application and monthly expenditure per capita. These figures, based on the data of 2008, are provided in Table 5.2.2.
Table 5.2.2
Monthly expenditure on active labour market measures (in average per capital) and the average duration of measures
in 2008
Expenditu Duration Percentage of participating unemployed*
re (LTL) (month) 2007 2008
Vocational training of the 1,400 5 33.9 15.0
57 unemployed
Subsidised employment 505 9 16.2 6.7
Community service 1,200 2 30.5 22.3
* Data of 2007. Social Report of 2007-2008. Ministry of Social Security and Labour. 2008.
Sources: Data of the Lithuanian Labour Exchange
The evaluation of costs is based on the data of 2008 on the duration of and expenditure on each of these measures. The results are shown in Table 5.2.3. Thus, if the key measures for the integration of the unemployed into the labour market, viz. community service, subsidised employment, vocational training, cover 30,000-50,000 unemployed annually, the cost for the implementation of measures would amount to 0.12% – 0.27% of the GDP and would be small in the context of Member States; however, this would allow reducing the dequalification and desocialisation of the unemployed.
Table 5.2.3
Cost of measures for the integration into the labour market
2008* 2009 2010 2011 2012 2013 2014 2015
Vocational training of the unemployed Number of participants 11 5 6 6 5 4 4 4
(thousand) Expenditure (million LTL) 77 35 42 42 35 28 28 28 Subsidised employment Number of participants 4.9 15.3 19 16 15 12 9 7
(thousand) Expenditure (million LTL) 22.3 69.5 86.4 72.3 68.2 54.5 40.9 31.8 Community service Number of participants 16.4 29.7 34 29 26 20 20 20
(thousand) Expenditure (million LTL) 39.4 69.6 81.6 69.6 62.4 48.0 48.0 48.0 All ALMM (vocational training of the unemployed, subsidised employment, community service) Number of participants 32.3 50 59 51 46 36 33 31
(thousand) Expenditure (million LTL) 138.7 174.1 210.0 183.9 165.6 130.5 116.9 107.8 GDP in prices of that year 111,499 80,056 77,975 79,768 82,161 85,037 88,608 92,596 (million LTL) Expenditure (percentage of 0.12 0.22 0.27 0.23 0.20 0.15 0.13 0.12 the GDP) * - factual data of the Lithuanian Labour Exchange.
Sources : Calculated by authors based on the data of the Lithuanian Labour Exchange.
58
5.3. Support for the most vulnerable persons
Social benefit. Beside labour market measures analysed above, the third group of measures mitigating the negative social consequences of the economic recession (the compensation of the decrease in household income at least for lowest income groups facing the threat of poverty or already impoverished) is important.
In Lithuania, the key measure of financial support of the impoverished is the social benefit, which is granted after the evaluation of household income, property and desire to work. Other cash benefits of the social assistance are not aimed directly at the impoverished.
Prior to the economic crisis, the social benefit provided to the impoverished in Lithuania was assessed as being rather well-directed and efficient 33 ; however, even during the times of the economic upswing (when the population income risk was lower) it was assessed as insufficient 34 . It is difficult to treat the social benefit as the network of social assistance protecting the population from the drop of income below the limit acceptable to human dignity. This occurs because of the two main reasons: first, the benefit covers only a small part of the impoverished population; second, income from the social benefit hardly contributes to the approach of the average income of the impoverished population to the poverty level.
The history of the payment of social benefits shows that the number of beneficiaries and the state spending for such benefit hardly changed during the period from 1997 to 2003. This trend was not influenced even by the Russian crisis of 1999-2000, which resulted in the growth of unemployment. On the contrary, after additional requirements (property, affiliation) for the applicants for the social benefit were introduced in 2004, the number of beneficiaries and expenditure on social benefits dropped about three times by 2007. Only after the state supported income was increased from LTL 285 to LTL 350 on 1 August 2008, expenditure on social benefits grew up twice. In 2009, after income of the population decreased as a result of the crisis, the number of beneficiaries of social benefits increased (cf. Diagram 5.3.1).
Diagram 5.3.1
Expenditure on social benefits and the number of beneficiaries in Lithuania in 1996-2009
160 135,9 117,3 120 111,7 115,2 116,5 119,4 99 101,8 88,6 88,1 90 94,3 80 76,6 76,1 83,5 78,9 68,2 73,7 52,8 69,6 69,4 43,8 52,4 62,4 40 54,1 37,8 36,6 37,3 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
Beneficiaries (thousand) Expenditure (million LTL)
* First six months
Sources: Statistics Lithuania.
33 Lithuania. Social sectors Public Expenditure Review. WB. 2009. P.67.
34 Ibid , p. 68.
59
During the last several years, the number of beneficiaries of social benefits was 2-3 times lower than the number of the impoverished, when that latter was calculated according to the applicable state supported income and based on household survey data (cf. Table 5.3.1). It can be stated that the coverage of the impoverished by social benefits is still 35 lower, as some of the beneficiaries live in households that are not impoverished .
Table 5.3.1
Number and income of beneficiaries of social benefits and the impoverished
2006 2007 2008* 2008**
State supported income (poverty level) 165 205 285 350
Average income of the impoverished 105.27 139.93 180.98 229.49
Number of the impoverished (thousand) 70.2 56.8 103.5 160.3
Number of beneficiaries of social benefits 37.8 36.6 37.3 37.3
(thousand)
* Data calculated with due consideration to the state supported income applicable prior to 1 August 2008, viz. LTL 285.
** Data calculated with due consideration to the state supported income applicable as of 1 August 2008, viz. LTL 350.
Sources: Calculated by authors based on the data of the Household Budget Survey data.
According to the World Bank evaluation, only 6.7% of the impoverished receive social benefits in Lithuania, when the number of the impoverished is established according to the poverty level calculated when consumption expenditure of the population is lower than the state supported income 36 . In 2004, the procedure of granting social benefits was reformed, and the importance of social benefits was greatly diminished. After 2004, the expenditure on such benefit decreased twice. Among the 20% of the poorest households only 4.7% receive this benefit, even though its focusing increased (cf. Table 5.3.2).
Table 5.3.2
Volume, coverage and focusing of social benefits
2000 2004 2008
Expenditure on benefit (percentage of the GDP) 0.2 0.1 0.1
Coverage (20% of the poorest households) 11.0 9.5 4.7
Focusing (20% of the poorest households) 60.0 67.6 72.6
Sources : Lithuania. Social Sectors Public Expenditure Review. World Bank. 2009. p. 68.
35 The survey shows that 53.7% of the beneficiaries of social benefits live in households that are not impoverished, subject to the poverty level being 60% of median income. R. Lazutka, L. Žalimienė at al. Social Assistance in Lithuania: Situation of Beneficiaries and Results of Assistance. Vilnius. Ministry of Social Security, Institute for Social Research, UAB Lodvila . 2008. p. 236 p.
36 Lithuania. Social Sectors Public Expenditure Review. World Bank. 2009. p. 68.
60 The coverage of the impoverished by social benefits is also very low if assessed by the comparative poverty risk level. In 2005, only 2.7% of the impoverished (calculated on the basis of the comparative poverty level) received social benefits 37 .
The second mentioned flaw of the social benefit is its insufficient amount that fails to adequately increase the income of the impoverished and to reduce the poverty level. Even if the impoverished would only include those with the income less than the state supported income, following the payment of the social benefit the average income of these impoverished people would remain about one third less than the state supported income (cf. Table 5.3.1). Such situation stems from the fact that not all the impoverished receive social benefits; therefore, the average income of the impoverished remains lower.
The average income of persons and households with no employed persons (meaning that they are very much dependant on the social benefit) in Lithuania is much lower than the comparative poverty risk level. In case of a single person – income only amounts to 30% of the poverty level. It is the worst situation in the EU (cf. Table 5.3.3). Income of the households with children (a single person or a couple with two children) only amounts to 70% of the poverty level.
The above statements regarding the coverage and the amount of social benefits show that the network of minimum income guarantees does not function in Lithuania. This issue is especially acute during the crisis when more people lose their jobs and when salaries of the employed decrease. Such network has to be developed using the existing social benefit system.
The first of the above flaws of social benefits is related to strict conditions of the provision of benefits, insufficient information for the impoverished and the embarrassment of the latter to request benefits. The second flaw is related to the criterion of the emergence and amount of benefits, i.e. the state supported income. The latter amount is usually insufficient to provide adequate assistance to the impoverished.
Table 5.3.3
Percentage ratio of income of beneficiaries of social benefits and the poverty risk level in three types of unemployed
households, 2006
LT SK PT MT EE HU ES
Single person 0.3 0.5 0.5 0.5 0.5 0.5 0.6
Single parent with 2 0.7 0.6 0.7 0.4 0.6 0.9 0.6 children
Couple with 2 children 0.7 0.5 0.8 0.3 0.5 0.9 0.4
LV CZ BE PL FR SI AT
Single person 0.6 0.6 0.7 0.7 0.8 0.8 0.8
Single parent with 2 1.3 0.8 0.9 0.9 0.8 1.0 0.9 children
Couple with 2 children 1.1 0.8 0.6 0.7 0.7 0.9 0.8
DE FI SE DK UK IE NL
37 Ibid , p. 239.
61 Single person 0.9 1.0 1.1 1.1 1.2 1.2 1.3
Single parent with 2 1.2 0.9 0.9 1.0 1.2 1.0 1.1 children
Couple with 2 children 1.1 0.9 0.8 0.9 1.0 1.0 0.9
Sources : Joint EC-OECD project using OECD tax-benefit models, and Eurostat.
As it was mentioned before, on 1 August 2008 the state supported income was increased to LTL 350. During the crisis, income of the population decreased, and the further decrease is expected to last in 2010; therefore, the increase of the state supported income is not proposed. The current state supported income (LTL 350) is similar to the comparative poverty risk level of 2005 (LTL 355). As we mentioned before, as a result of the crisis, economics (based on the GDP per capita) "returned" to the year of 2004-2005, while income - to the year of 2006; thus, it could be held that the comparative poverty risk level of 2009 became similar to the state supported income as a result of the decrease of income because of the crisis. Thus, the current SSI may be applied as the key criterion in granting social benefits to the impoverished.
Unlike the amount of the state supported income that is used for the calculation of the amount of the social benefit (90% of them and family income per person on average), the coverage by social benefits should be extended, i.e. obstacles preventing the impoverished population from receiving assistance should be removed, and thus the minimum income security network must be developed. It is also suggested by the World Bank 38 .
The expansion of the coverage by social benefits without increasing the state supported income shall be possible by modifying the requirements for property and for efforts to find employment, improving the administration of benefits, providing information about benefits, and reducing the stigmatisation of the applicants. Costs expected to be incurred by the State in relation to the increase in the number of the beneficiaries of social benefits are provided in Table 5.3.4. If social benefits reach all the impoverished (classified as such according to the political poverty level of LTL 350), the State shall incur the maximum costs during the peak of the economic recession, i.e. LTL 490 million in 2010. At the end of the period they would decrease by more that twice, i.e. to LTL 208 million.
Table 5.3.4
Change of poverty and costs to reduce poverty
Year 2008 2009 2010 2011 2012 2013 2014 2015
Poverty level 4.8 7.5 13.2 11.5 9.8 8.1 6.4 4.8
(percentage)*
Number of the 160.3 250.4 440.7 384.6 328.5 272.5 216.4 160.3 impoverished
(thousand)
Average income of the 230 254 247 240.00 230 230 230 230 impoverished (LTL)
Annual expenditure on 208.6 260.7 489.1 456.9 425.7 353.2 280.5 208.6 benefits (100%
38 Lithuania. Social sectors Public Expenditure Review. World Bank. 2009. p. 69.
62 coverage) (million LTL)
Annual expenditure on benefits (90%) (million LTL) with different percentage of coverage of the impoverished by
benefits
75% coverage 1565 195.6 366.9 342.8 309.9 255.2 360.5 156.5
50% coverage 104.3 130.4 244.6 228.5 212.9 176.6 240.3 104.3
* The poverty level based on the state supported income applied in 2008 (LTL 350), if the decrease of income is even for all income groups. It is assumed that the decrease of income resulting from the crisis will be similar to their growth prior to the crisis for all income groups. It is assumed that in 2010-
2015 the decrease of poverty will be even.
The proposed expansion of the social benefit coverage and the resulting increase of its costs in comparison with the GDP of the respective year would not be a very difficult burden. After the crisis (in 2015) the costs would amount to the same share of the GDP as in 1996. Meanwhile, during the hardest year of the crisis (in 2010) they would amount to 0.63% of the GDP (cf. Table 5.3.5), and this would still be less than the average of Member States (cf. Table 5.3.6).
Table 5.3.5
Expenditure on social benefit (percentage of the GDP)
1996 2000 2004 2006 2008 2009* 2010* 2011* 2012* 2013* 2014* 2015*
GDP in 3,52 44,69 62,69 82,79 111,49 80,056 77,97 79,76 82,16 85,03 88,60 92,59 prices of 9 8 8 3 9 5 8 1 7 8 6 that year (million
LTL)
Expenditure 76.6 88.6 69.4 43.8 208.6* 260.7 489.1 456.9 425.7 353.2 280.5 208.6 on benefits (million (78.9) (139.2)
LTL)
Expenditure 0.24 0.20 0.11 0.05 0.19* 0.33 0.63 0.57 0.52 0.42 0.32 0.23 in percentage (0.07) (0.17) of GDP
* GDP data is actual before 2008 and estimated as of 2009. Expenditure on benefits before 2006 – actual data, in 2008 and 2009 – estimated with actual data indicated in brackets (pertaining to the first six months of 2009 recalculated for the year), and as of 2010 – estimated. Estimated data of the expenditure on benefits are calculated on the basis of the forecasted household income (cf. Table 4.2.4), assuming that all the impoverished receive
benefits, i.e. the coverage is 100%.
Table 5.3.6
Social security expenditure by function group in 2006 (percentage of the GDP)
EU-27 LT
Old age and loss of breadwinner 11.9 5.7
63 Disease 7.5 4.1
Family/children 2.1 1.1
Disability 1.9 1.4
Unemployment 1.4 0.2
Housing and social exclusion 0.9 0.2
Sources : http://ec.europa.eu/employment_social/spsi/common_indicators_en.htm
Unemployment insurance benefit. The Lithuanian social security system so far paid little attention not only to the impoverished but to the unemployed as well. This is evident by the comparison of state spending on these groups. As we mentioned before, even though the coverage of the impoverished by social benefits is increased, Lithuania would still spend less than the EU average (when calculating as a share of the GDP). Lithuania spends only 0.2% of the GDP for support measures for the unemployed, while the EU average is 1.4% (cf. Table 5.3.7). Spending on active and passive labour market measures (i.e. cash benefits) is low. Meanwhile, about 60% of the unemployed are impoverished based on the comparative poverty level (cf. Table 5.3.7).
Poverty is wide-spread among the unemployed, and this is not unexpected, as applicants for unemployment benefits are subject to extremely strict requirements, while the benefit itself is disbursed only for 6 months (except for certain categories of the unemployed). Even though the coverage of the unemployed by unemployment benefits recently increased, it is still insufficient. At the end of July of 2009 this benefit was disbursed only to approximately 35% of all unemployed.
Table 5.3.7
Poverty risk level of persons aged 18 or older by employment (percentage)
2005 2006 2007
All persons aged 18 or older 18.6 18.6 18.4
Employed 10.0 10.0 8.0
Unemployed 62.8 61.4 56.9
Old age retired persons 17.5 22.7 29.8
Other inactive persons 28.7 26.6 28.9
Sources : Statistics Lithuania. http://www.stat.gov.lt/lt/pages/view/?id=1333
The small amount of the unemployment benefit further contributes to the poverty of the unemployed. Even though the average unemployment social insurance benefit tends to grow, at the end of the first quarter of 2008 the average unemployment social insurance benefit was LTL 542, while during the first quarter of 209 - LTL 713.60.
No proposal is made to increase the employment benefit in order to reduce the poverty of the unemployed during the economic recession when the average income of the population is decreasing; however, its coverage should be expanded. Table 5.3.8 states the costs of expansion of the coverage by the unemployment benefit.
64 Table 5.3.8
Costs of expansion of the coverage by the unemployment benefit (to 75% of the unemployed)
1996 2000 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015 The average 317.4 273.7 184.4 89.3 94.3 220.4 261 210 190 160 140 124 annual number of the unemployed
(thousands) Number of the 124.5 204.9 142.5 73.2 73.4 176 209 168 152 128 112 99 registered unemployed
(thousand) Expenditure - - - - 279.1 694.3 822.2 661.5 598.5 504.0 441.0 390.6 on benefits (million LTL) (75% coverage) GDP in prices 31,52 44,69 62,69 82,79 111,49 80,05 77,97 79,76 82,16 85,03 88,60 92,59 of that year 9 8 8 3 9 6 5 8 1 7 8 6 (million LTL) Expenditure in - - - - 0.25 0.87 1.10 0.83 0.73 0.59 0.50 0.42 percentage of
GDP * Costs are calculated with due consideration to the average amount of the unemployment benefit of LTL 700 and the duration of disbursements of 6 months.
If 75% of the unemployed (calculated based on the survey data of Statistics Lithuania) become entitled to these benefits, which is almost 100% of the unemployed registered with the Lithuanian Labour Exchange, the duration of the disbursement of the benefit remains 6 months and the average amount of the benefit remains of the level of 2008, the total annual costs of the benefits shall amount to 1.1% of the GDP in 2010. Later, with the decline in unemployment, they would decrease to 0.42% of the GDP in 2015. It is the maximum potential costs. They would be reduced by the financing of ALMM measures, as the unemployed receive other benefits during the participation in these measures, and the unemployment benefit is not disbursed while such other benefits are being paid. Summary The analysis of costs of different solution options showed that for the purpose of the economy of spending in the public sector the amount of salaries should be reduced rather that the number of employees of the public sector. As a result of this measure, almost 50,000 jobs would be preserved in 2010, and this would help protect more than 30,000 residents from poverty. The State could contribute to the preservation of jobs in the private sector by subsidising them. In order to preserve at least 10% of the forecasted number of the unemployed for that particular year, subsidies of jobs would annually cost LTL 60 million to LTL 125 million (depending upon the total number of the unemployed). However, this would allow reducing the spending on unemployment benefits by 42% and reducing the number of the impoverished by dozens of thousands persons annually.
In order to integrate the unemployed into the labour market, it is well worth intensifying active labour market policy measures implemented in the country. If the said measures cover 30,000-50,000 unemployed, their costs would amount 0.12% to 0.27% of the GDP; however, they would allow significantly reducing the dequalification and desocialisation of the unemployed.
In order to protect the most vulnerable groups of the population from poverty, the assistance (social safety) network should be improved in the country. This could be implemented by expanding the national coverage of social and unemployment benefits.
65
CONCLUSIONS
1. The Assessment suggests that the economic recession in Lithuania has a significant adverse impact on the national socio-economic development. The major negative social consequences of the economic decline on the population manifest themselves in job losses and income decrease, which respectively results in rising long- term unemployment and growing social exclusion, as well as boosts emigration and shadow economy in the country. In the long run, all these circumstances increase poverty of the population and reduce the quality of the labour force (lost qualifications and reduced work motivation), as well as weaken the growth (recovery) potential of the national economy. 2. The Assessment revealed that the structure of the most vulnerable groups of the population in Lithuania was undergoing changes in the face of the economic decline, i.e. new vulnerable groups emerged which before the economic downturn were attributed to the middle or lower middle economic strata. Though the data analysis indicated that the economic decline had affected most groups of the population in Lithuania, the following social groups should be ranked among the most vulnerable groups of the population: (a) persons who lost their jobs during the economic decline; (b) single parents raising children aged under 18; (c) large families with children aged under 18. Vulnerable population groups could also include a fair amount of families having loans for house purchase (mainly in the national currency) which encounter loan repayment problems due to a decrease in work-related income (or job loss) and a significant increase in the interest rate on the loan. These population groups are likely to suffer the far-reaching adverse long-term social consequences of the economic recession.
Negative long-term social consequences of the economic decline 3. The labour market dynamics examined by the Assessment allow stating that in the event of failure to take more active measures aimed at promoting employment and developing the social support network, the situation in the labour market may become critical in the short run. In 2010, the unemployment rate in the country may shoot up to 17.4% (the number of registered unemployed persons would account for approximately 260 thousand residents), while the average annual number of the employed would decline to 1270 thousand persons. If these trends continue, Lithuania would see a dramatic increase in the number of the long-term unemployed (in 2010, their share in the unemployment structure could account for 30%, or 78 thousand persons). A high number of the long-term unemployed would persist even after the recovery of the national economy (in the period from 2012 to 2015) as most unemployed persons would be less competitive on the market due to poorer or lost qualifications after a long period of unemployment. 4. Rising unemployment in the country worsens the financial situation of households – this is indicated by the ever-increasing number of persons receiving social benefits in Lithuania. In the first quarter of 2009, the number of social beneficiaries in Lithuania increased by 40% (68.6 thousand persons in total) from the same period in 2008. The assessment of changes in earnings and unemployment in Lithuania allows predicting that household income will continue to go down in 2009-2010 but then will start slightly rising; however, the income level of the year 2008 will not be reached even in 2015. Decreasing household income will boost the absolute poverty line, which may stand at 13.2% in 2010. This means that the income of 440.7 thousand persons will be below the poverty line (350 Litas per month). The absolute poverty line is expected to go back to the level of the year 2008 (i.e. 4.8%) only in 2015. 5. The deteriorating macroeconomic situation in the country boosts the emigration of the population from Lithuania. Bearing in mind that the Lithuanian economy is forecasted to recover only in 2011-2012, the extent of emigration of the population is likely to grow further in late 2009 and in 2010, along with the recovery of 66 foreign economies. By then rates of emigration may reach 20-25 thousand per year. Thus, it may be projected that, as a result of growing emigration, Lithuania may lose another 100-150 thousand residents by 2015. In the long run, a greater extent of emigration entails such acute problems as population decline, "brain drain", demographic ageing which markedly weaken the growth potential of the national economy and slow down the improvement in the standard of living in the country. 6. Household investment in human capital (expenditure on education, health care and other similar areas) decreases along with a decline in the income of the population. According to the data of the Household Budget Survey, the average expenditure (in cash and kind) allocated for education per capita per month decreased by more than one fifth (22.8%), expenditure on recreation and culture – by nearly one tenth (8%) in Lithuania in 2008. Lower investment in human capital (education and vocational training in particular) lead to negative consequences in the long-term perspective. Low or none occupational qualification markedly reduces the competitiveness of individuals on the labour market, conditions low wages and stimulates income inequality and poverty in the country. All these conditions give rise to a vicious circle of poverty where poverty is transferred from generation to generation. 7. As a result of the increased unemployment and decreased household income, the crime rate is growing. Although in the first quarter of 2009 the total crime rate in Lithuania went up about 4%, the number of economic crimes increased significantly: the number of cases of the production of counterfeit currency and securities shot up by 158.6% (from 237 to 613), the number of frauds grew 59.1% (from 915 to 1456), etc. If these trends persist, the total number of criminal offences in Lithuania may increase by 27% in 2012 (against 2008) and constitute about 3 thousand criminal offences per 100,000 population. An increase in crime is expected to continue until 2012-2013 because, based on the Lithuanian and foreign experience, restraints on economic crimes are more time-consuming and related to a rise in the standard of living in the country. 8. Rising unemployment, decreasing household income and the negative social climate in the country have a damaging impact on the mental health of the population. The number of suicides and attempted suicides was down in Lithuania in 2007, but it went up again in 2008; this increase was rather significant and constituted 8.4%. 1,111 suicides and attempted suicides (i.e. 3.3 suicides and attempted suicides per 10,000 population) were recorded in Lithuania in 2008. Negative effects of the economic decline on living conditions and mounting debts of the population may further contribute to these trends and this indicator may grow up to 1,500 persons per year in 2011-2012. Moreover, the addiction problem is also likely to become particularly acute in Lithuania over the coming 5-7 years. This proposition is based on a considerable increase in consumption expenditure on alcoholic beverages (by 25% in rural areas and 11.8% in the major cities) along with decreasing expenditure on education and health care in 2008. 9. An increasing number of business entities are encountering financial difficulties and the scope of the shadow economy tends to grow in Lithuania in the face of the economic downturn. This is particularly relevant in the area of labour relations where shadow economy means employment without formalising labour relations and the evasion of relevant taxes (income, social insurance). The scope of the shadow economy is forecasted to increase to 20-22% by 2015 (in 2004–2008, the shadow economy accounted for about 15% in Lithuania). This situation will be triggered by the declining profitability of business entities, raised taxes and the worsening macroeconomic environment in the country.
Proposed measures to mitigate the long-term consequences of the economic recession 1. Despite the difficult situation in the country, the analysis of the policy measures being implemented in Lithuania revealed that the majority of measures undertaken since the beginning of the economic decline (i.e. from 1 January 2009) had been aimed at balancing the national budget, hence, they had a more negative than positive impact on the quality of life of the population. With the view of mitigating the major negative social consequences of the economic decline manifesting themselves in Lithuania in rising unemployment and decreasing income of the population, the key measures at the policy level should be aimed at: 67 • securing jobs (in the public and private sectors);
• integrating unemployed persons into the labour market;
• improving the existing support (social security) network in the country.
2. The analysis of costs of alternative solutions showed that for the purpose of the economy of spending in the public sector the amount of salaries should be reduced rather than the number of employees within the public sector. This measure would allow preserving almost 50 thousand jobs in 2010, and this would help protect more than 30 thousand residents from poverty. This would also allow saving 61 million Litas on unemployment benefits per year. Furthermore, the state could contribute to the preservation of job in the private sector by subsidising them. With the view of safeguarding jobs for at least 10% of the forecasted number of the unemployed during the relevant year, subsidies for jobs would annually cost 60 to 125 million Litas (depending on the total number of the unemployed). However, this would allow reducing the spending on unemployment benefits by 42% and decrease the number of persons living in poverty by several thousand persons per year. 3. The labour supply considerably exceeds the labour demand, thus, in order to integrate the unemployed into the labour market, it is advisable to intensify active labour market policy measures implemented in the country: • expanding the scope of public works (by extending their range and promoting the organisation of public works in the private sector, as well as enabling the involvement of persons with higher education in public works (e.g. organising classes at general schools, vocational schools, day care centres, etc.));
• organising vocational training under trilateral agreements (an agreement would be concluded among the unemployed, the labour exchange and the employer, i.e. the employee would be trained for a specific place of work);
• developing vocational training for members of population groups least competitive in the labour market (young people from poor families, disabled persons, etc.);
• developing subsidised employment refocusing employment priorities on support for persons having family obligations (large families with children, single parents raising children, etc.).
If these measures involved 30-50 thousand unemployed, their costs would constitute 0.12% to 0.27% of GDP; however, they would allow significantly reducing the dequalification and desocialisation of the unemployed. 4. Striving to protect the most vulnerable groups of the population from poverty, it is expedient to improve the support (social security) network in the country. This could be implemented by extending the coverage of social benefits and unemployment benefits in the country. In order to extend the coverage of social benefits, it is advisable to lower requirements on assets and employment attempts, as well as to improve the administration of benefits by providing relevant information and reducing the stigmatisation of applicants. With the view of extending the coverage of unemployment social insurance benefits, it is necessary to reduce additional requirements set for the unemployed in order to receive support in case of unemployment. If all people living in poverty were allowed to receive social support in Lithuania, this would require increasing national expenditure from 0.33% of GDP (2009) to 0.63% of GDP (2010). Later on (before 2015), these costs would almost go back to the level of the year 1996 (0.23% of GDP). The extension of the coverage of unemployment insurance benefits from 40% to 75% of the unemployed would cost 1.1% of GDP (or 822.2 million Litas) in 2010. Later on, as a result of a decline in unemployment, the costs would go down to 0.42% of GDP in 2015. These costs could be further reduced, provided the abovementioned measures for integration into the labour market are implemented.
68
RECOMMENDATIONS FOR MITIGATING LONG-TERM SOCIAL CONSEQUENCES OF THE ECONOMIC RECESSION IN LITHUANIA:
The assessment revealed that seeking to mitigate long-term negative social consequences of the economic recession in Lithuania the key measures at the policy level should be focused on:
1. Securing jobs.
2. (Re)integration of unemployed persons into the labour market.
3. Improvement of the support (security) network in the country.
These measures should be implemented as quickly as possible in order to avoid any damaging social consequences of the economic decline.
Securing jobs . While implementing this measure, it is advisable to distinguish between measures intended for the public and private sectors.
• Public sector – it is advisable to limit job cuts during the economic decline by promoting flexible forms of employment (e.g. shorter working day/week), primarily protecting the most vulnerable population groups (single parents raising children, large families, etc.).
• Private sector – in order to secure employment, it is recommendable to provide conditions (as well as control mechanisms making use of possibilities envisaged in collective agreements) for a wider application of:
a) tax deferrals;
b) wage subsidies to enterprises having orders in hand.
It should be noted that the implementation of these proposed measures will highly depend on possibilities for cooperation among social partners at the enterprise level, the understanding of social responsibility by employers and the administrative capacities of the management of enterprises and subdivisions. The latter factor should play a pivotal role because the management will have to stimulate the work efficiency of employees while at the same time reducing their remuneration. This problem may be alleviated by non-economic work incentives (greater employment flexibility, more active use of resources of public consumption funds, etc.).
(Re)integration of unemployed persons into the labour market . Since the labour supply considerably exceeds the labour demand, integration measures should not only focus on permanent employment of persons, but also devote much attention to maintaining working skills and stimulating motivation for getting employment. On the other hand, it should be noted that, due to the economic decline and state budget constraints, financial allocations for active labour market policy measures may also be reduced. Thus, taking into account financial resources and changes on the labour market, priority within this measure should be given to:
• expanding public works (extending their range and promoting their organisation in the private sector, using temporarily free productive capacities to the maximum extent). When extending the scope of public works, more attention should be focused on the organisation of "green jobs" (forestry, organic farming, etc.) and jobs that could be done by persons with higher education (e.g. additional classes at general schools, vocational
69 schools, day care centres; or counselling of persons receiving social assistance and unemployed persons at labour exchange offices and municipalities, etc.). The expansion and diversification of public works would also enable a wider involvement of women and senior unemployed persons in these labour market policy measures in Lithuania. It would be particularly useful to develop cooperation between specialists with higher education and NGOs through public works. Furthermore, priority should be given to regions with the highest rate of unemployment in distributing financial allocations for public works and the scope of public works;
• developing vocational training for members of population groups least competitive in the labour market (young people from poor families, disabled persons, etc.) who for certain reasons have not acquired or cannot acquire a profession;
• organising vocational training under trilateral agreements (an agreement would be concluded among the unemployed, the labour exchange and the employer, i.e. the employee would be trained for a specific place of work);
• developing career guidance (information and counselling) services, which would be particularly given growing social tension and the falling standard of living. In times of the economic decline, it is advisable, within the framework of this measure, to strengthen social and psychological counselling dimensions, encourage unemployed persons to develop (create) new social networks, participate in the activities of NGOs and local community support groups and thereby help them ease psychological tension and disappointment;
• developing subsidised employment refocusing employment priorities on support for persons having family obligations (large families with children, single parents raising children, etc.) and persons of pre-retirement age.
Despite opinions about the inefficiency of ALMP measures, it should be noted that such view underestimates the importance and role of ALMP measures on the labour market. With high unemployment, ALMP measures help maintain economic activity and protect from dequalification rather than just ensure permanent placement of the unemployed; these measures also safeguard minimum income and, as shown by surveys, has a very positive social impact (enhances self-confidence of unemployed persons, strengthens motivation for social activity, relieves anxiety over the future, helps maintain social relations, etc.). All this contributes to the social stability and the recovery of the economy in the future.
However, control over the organisation and implementation of ALMP should be strengthened to ensure that measures better serve their primary purpose, stimulate cooperation among the population in the area of labour relations, enhance the confidence of the population in state institutions and help maintain the professional skills of the labour force. The implementation of these measures will highly depend on cooperation between local (self-governing) institutions and local employers in order to ensure that these measures cater to the needs of the local population to the maximum extent and make use of the local production infrastructure.
Improvement of the support (security) network in the country . While implementing this measure, it is advisable to:
• simplify conditions for the payment of social benefits by relaxing additional requirements. It is expedient to lower requirements on assets and employment attempts, as well as to improve the administration of benefits through wider provision of information (which in turn would reduce the stigmatisation of applicants);
• extend the coverage of unemployment social insurance benefits by reducing additional requirements set for the unemployed in order to receive support in case of unemployment (e.g. opening up possibilities to get unemployment insurance benefits for persons dismissed upon the expiry of their employment contracts; shortening the requirement for the unemployment insurance record during the last 36 months from 18 months 70 to 12 months for all persons, and to 6 months for persons aged under 24, etc.). Such measures are important taking into account the fact that in times of economic recession employees creating lower added value are dismissed in the first place, including employees with little work experience who would fall out of the support scheme in case of unemployment.
The improvement of the social network is expected to help the Government to protect the society from destructive social phenomena (crime, alcohol abuse, etc.) and social disappointment; hence, it is vital to ensure the maximum involvement of all groups in need of support in these measures. On the other hand, it would be useful to have the social security network linked with labour exchange services. Thus, some improvement of the social network could be carried out through the payment of unemployment benefits. It should be pointed out that unemployment insurance benefits in Lithuania are drawn, on average, by 40% of the unemployed, whereas the poverty risk level of households of the unemployed constitutes 60% in the country.
It should be noted that the findings and recommendations of this analysis were publicly presented and discussed at round-table meetings held in Vilnius and Kaunas with representatives of different stakeholders: ministries, municipalities, county administrations, associations of employers, trade unions, various institutions of studies and research, as well as NGOs. Representatives of different stakeholders emphasised that the most effective measure aimed at mitigating long-term social consequences of the economic recession was an investment policy ensuring the creation of high-productivity jobs and a tax policy favourable to employment. Furthermore, the need to enhance the role of NGOs received a lot of attention as, on the one hand, they can create new jobs themselves, while on the other hand, they can enhance control and transparency in the use of financial resources for public purposes. Representatives of employers, though positive about general findings and recommendations of the assessment, voiced a certain disapproval of the proposal to retain jobs in the public sector. In their opinion, the number of employees in state institutions should be reduced by about 30%, thereby at the same time enhancing the work efficiency in state institutions.
Proposals put forward by participants of the discussions and separate proposals intended to protect the most vulnerable groups of the population during the economic recession in Lithuania are presented in the table below.
71
Recommendations based on discussions with stakeholders Recommendations by the assessment experts on measures in Measure order to protect the most vulnerable groups of the population
1. Creation of jobs (emphasised by employers, In order to protect persons who lost their job during the economic Securing Jobs representatives of municipalities). recession , it is expedient:
In order to reduce long-term social consequences of the economic 1. To prepare the package of measures to increase the recession, it is well worth developing investments and employment of the population: encouraging the creation of jobs. For this purpose the following objectives must be implemented: 1.1. To create territorial banks of ideas for the development of small and medium-sized businesses;
a) To draft appropriate legislation and provide financing for the 1.2. To ensure financial conditions for the development of Business Start Programme; business incubators;
b) To more actively use the developed network of business incubators and to develop opportunities for business 1.3. To activate efforts for the search of investments; incubation; 1.4. To create conditions for the presently efficiently functioning enterprises to increase employment (by developing flexible forms c) To support and encourage various forms of business co- of employment, creation of jobs, organising auxiliary activities operation and other collaboration. related to the increase of employment of the population, etc.). It would also be expedient to more widely include employers into the solution of economic problems by providing them with more The implementation of these measures would not demand any information about possible negative social consequences of the extensive financial resources, as they comply with the currently economic recession that in the long run will reduce their business implemented activities. The implementation of Measure 1.4 would development opportunities as well (e.g. as a result of the lost require certain financial assistance (the annual expenditure could labour force or the decline in skills of the labour force, etc.). It was amount to LTL 500,000). stressed that in spite of a difficult labour market situation, very
often there is a shortage of employees wishing to make use of the subsidy for the implementation of employment subsidisation 2. To more intensely develop job preservation measures in measures. domestic enterprises and institutions:
2. Promotion of the entrepreneurship of the residents 72 (emphasised by representatives of municipalities, ministries and 2.1 To reduce taxes and contributions for employees starting the Lithuanian Labour Exchange). (e.g. from 2010) to work shorter working time;
It is expedient to encourage the residents themselves to more 2.2 To increase the non-taxable income for part-time employees actively contribute to the improvement of employment by and low-income employees; developing self-employment. For this purpose the Government 2.3 To reduce the profit tax for microenterprises with low may provide facilitation by: turnover; a) revising the tax system and creating larger incentives for starting own business (especially during the first year of 2.4 To co-ordinate corporate possibilities for preserving jobs with measures implemented by the Lithuanian Labour Exchange; business development); 2.5 To strengthen the control of the justification for the b) developing support with business promotion services or measures (e.g. by providing privileges in acquiring a business reduction of salaries in enterprises and institutions. certificate, preferential acquisition of capital goods or tools These measures will not demand any extensive financial required for the development of business) rather than resources, as they would serve to preserve employment. Thus, the monetary support. loss of part of income shall be compensated by the preserved employment and respective income from the taxation of salaries.
73 (Re)integration of 1. Increase of the role of non-governmental organisations (NGO) In order to protect large families and single parents with children , unemployed in mitigating long-term social consequences of the economic it is expedient: persons into the recession (representatives of ministries, municipalities, NGOs, 1. To improve the national system of taxation of income received labour market employers and the Lithuanian Labour Exchange). by residents with children as well as the accessibility to vocational Inclusion of NGOs into the policy of mitigating consequences of training: the economic recession would ensure the social support of beneficiaries, would create conditions for their activation and 1.1. To increase the auxiliary non-taxable income amount for inclusion into community activities or programmes implemented employees with 3 or more children, considering that the tax by territorial labour exchanges, and would increase the public burden of such persons, as compared to other hired employees, control of implemented measures. The key direction for the has decreased rather than increased since 2009. In 2009, the implementation of this measure should be as follows: auxiliary non-taxable income amount, as compared to the respective index of 2008, decreased by LTL 164 (or 19%) for a
a) Increase of the efficiency of NGO activities; family with four children, and LTL 284 (or 24%) for a family with five children. The average increase of the auxiliary non-taxable b) Extension of NGO functions and activity areas. income amount by LTL 100 would cost for the state budget approximately LTL 60 million per year. In order to increase the efficiency of NGO activities, it is expedient: 1.2. To provide opportunities for municipalities to assign certain financial resources for target vocational training of children from • To increase professional skills of employees of the NGO sector large families. The support of vocational training would require as well as opportunities for the improvement of skills of approximately LTL 3 million (if the average of 10 places for persons engaged in that sector; supported families would be financed per municipality).
• To seek single-mindedness of NGO activities in the
implementation of set goals;
• To encourage a positive attitude of the society and public
authorities towards NGOs and their activities;
• To ensure better financial opportunities for the financing of
NGO activities (for employees, maintenance of premises, etc.).
In order to expand the scope of NGO activities, it is expedient:
74 • To systematise and clearly define requirements for NGO
activities;
• To provide for higher financial guarantees for NGO activities by
extending regular/programme and transparent financing;
• To strengthen and regularly perform the control of NGO
activities.
Improvement of 1. Increase of the involvement of rural communities in solving In order to protect large families and single parents with children , the support (social poverty and social problems in the country (emphasised by it is expedient: security) network representatives of NGOs and municipalities). 1. To render additional assistance to families in order to ensure It is expedient to strengthen the capacity of various the accessibility of social services (healthcare, education, representatives (and groups thereof) of rural communities to vocational training, etc.) for family members (children). initiate rural development changes and to implement using the efforts of the community itself. It may be assisted by a more 1.1. To provide for special financial measures for poor families active participation of communities in LEADER Plus programme, to pay for studies of their children (e.g. to extend interest-free which provides the opportunity to implement projects for the credits for studies or to compensate part of expenditure upon improvement of life and employment quality in rural areas. In this the successful completion of studies by a child); programme, financing for Lithuania for the period of 2007-2013 1.2. To provide a single non-monetary assistance to families amounts to LTL 473 million. During the implementation of this 75 programme it is especially important to provide more information with children (food, accommodations, etc.) (with due for the society about implementation conditions, requirements consideration to the family situation, i.e. disposable income and benefits yielded by this programme. and assets). For the provision of a single assistance to a family (in order to additionally support it with approximately LTL 200), 2. Expanded development of social services in the country the additional amount of approximately LTL 18 million should (emphasised by representatives of municipalities, NGOs and be assigned from the state budget per year. county administrations).
In order to mitigate long-term social consequences of the economic recession it is expedient to focus more on the In order to protect households encountering difficulties to repay development of social services in the country. Social workers could housing/consumer credits , it is expedient: contribute to making the residents more active, to protect them from the expansion of the “poverty culture” and social passiveness 1. To legally regulate the procedure for the revision of terms and (this would also encourage them to contact the territorial labour conditions of the credit contract signed with the bank. exchange or ask for any other assistance, if necessary. It is expedient to legalise the opportunity for persons encountering difficulties during the economic recession to revise terms and conditions of the credit contract signed with the bank (e.g. to change the currency of the credit, to extend the deadline for the repayment of the credit, to delay the repayment of the credit for a certain period of time, etc.). Such amendments of the contract should be performed without any additional charges and liabilities towards the bank, without worsening the existing terms and conditions of the contract. In such case, distinctive criteria should be provided regarding the conditions under which the person can request the revision of terms and conditions of the contract.
2. To form a special assistance fund for persons who received credits and who temporarily encounter difficulties.
Persons who temporarily cannot pay the instalments of the credit as a result of the changed labour market situation (the decrease of income, the loss of job, etc.) or due to any other reason could request the assistance of such fund. The credit should be repaid
76 without imposing any charges or sanctions. The person would undertake to repay this amount later, over a certain period of time (e.g. 5-7 years). There must be distinctive criteria for conditions under which the person could request assistance from the fund (i.e. a maximum amount of disposable assets of the person, the amount of income per family member and other similar criteria must be established). In order to compensate the average credit amount of LTL 1,500 (3 months per year) for 10,000 borrowers, the assistance fund should amount to about LTL 45 million per year. However, it should be emphasised that these expenses are temporary.
3. To strengthen the security of persons who received housing credits.
It is expedient to establish a certain period of time (e.g. 2 years) during which no recovery could be directed to the single housing, a dwelling house, or a part thereof, required for the borrowers to live in. This provision of the law would also apply in cases when the single housing or a dwelling house is voluntarily mortgaged to the bank or a credit institution in order to obtain the credit, and the creditor demands the discharge of undisputable undertakings. It is also expedient to strengthen the awareness and the perception of the borrower regarding the potential risks and negative future perspectives. Not only the bank risk insurance shall be required but the insurance of the borrower’s risk as well, which presently fails to receive sufficient attention.
77 Recommendations of experts on the implementation of measures in Lithuania in the long run (outside the scope of the Assessment)
The measures currently implemented in the country to reduce poverty and social exclusion are rather passive and aimed at mitigating negative consequences, hence, quite ineffective in the face of the economic decline. In order to ensure a more active policy regarding poverty and social exclusion, a policy should primarily focus on developing employment and preserving jobs, as well as enhancing human resources and sense of community. It is very important to achieve that temporary problems of the economic decline have no impact on the values, attitudes and motivation of the population; therefore, it is necessary to efficiently develop social support and services, and various community initiatives in particular, so that population groups facing certain problems would not feel neglected or forgotten, which undermines the confidence of people, stifles initiatives and wish to take active steps in improving their own living conditions.
Bearing this in mind, it is advisable in the long run to:
1) set up special territorial (municipal) working groups for reducing social exclusion and poverty which would involve representatives from both the public sector and NGOs. This should ensure a complex and long-term response to the problem;
2) draw up and launch a programme to support the first employment of young people from poor families. This programme could be implemented in cooperation with vocational training institutions and territorial labour exchange offices. In the last year of studies, individual employment programmes could be developed for young people from poor families, which would facilitate their employment. Labour exchange offices should have special allocations for this programme that would be used as subsidies to employers employing such persons (e.g. the employer could be compensated for up to 60% of MMM during the first year).
3) in the light of the alarming suicidal and self-injury trends (addictions, violence, etc.), devote more attention to ensure the mental health of the public (and young people in particular). This requires allocating adequate financial resources and specific institutional commitments (from general schools to ministries), thereby setting conditions for the implementation of the National Mental Health Strategy;
4) with the view of ensuring better access to social services, their flexible and prompt provision, as well as promoting mutual assistance among the population (sense of community), to create conditions for developing private initiatives in providing social services;
5) enhance efficiency (target) in the use of financial resources allocated for social support by way of reducing cash social assistance and expanding the scope of services (e.g. introducing e-cards (for public transport, food, recreation, etc.);
6) given the increasing social tension and ageing of the population, to ensure better access to social services and human capacities in social institutions. This requires increasing the number of social workers within the community, improving their working conditions (transport services, office supplies, etc.) and extending the range of services;
7) in the long run, social problems may not be solved efficiently without involving local communities, and in particular employees and employers. Hence, it is advisable to encourage cooperation among social partners at all levels (implementing general measures at the municipal level, organising seminars, training events, etc.).
8) strengthen inter-institutional cooperation at the government level in addressing the long-term social consequences of the economic decline. It is expedient to intensify efforts to mitigate the long-term social consequences of the economic downturn at the government level ensuring the synergy of decision making in this
area. The mitigation of the social consequences of the economic decline (and the solution of poverty problems in general) should be the responsibility of all ministries, while issues concerning poverty and social exclusion should be integrated into the overall socio-economic policy pursued by the Government. It is advisable to foresee that each ministry would prepare short regular reports on the impact of their actions on poverty and social exclusion. This measure was particularly recommended by representatives of academia and employers who participated at round-table discussions.
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