At the request of the Estonian Unemployment Insurance Fund (Eesti Töötukassa), we analysed the impact of measures for partially compensating labour costs, such as wage subsidies and social tax exemptions, on the recruitment and retention of individuals with lower competitiveness in the labour market. Wage subsidies are designed to motivate employers to hire people such as long-term unemployed individuals, youth, and those facing health-related challenges. Social tax exemptions, on the other hand, aim to encourage the hiring and retention of individuals with reduced work capacity. The goal was to evaluate the effectiveness of these measures and assess potential negative side effects, such as deadweight loss and substitution effects. In 2023, over 3,000 wage subsidy agreements were signed in Estonia, and more than 4,200 applications for social tax exemptions were approved, covering approximately 7,800 employees in total.
To identify factors influencing the effectiveness of these measures in Estonia, we combined in-depth interviews and discussion seminars with employers who used wage subsidies and social tax exemptions for employees with reduced work capacity, along with an analysis of international scientific literature. The study also examined employers’ evaluations of the current conditions and design of these measures, gathering suggestions to enhance employers’ motivation to hire and retain individuals with lower competitiveness in the labour market.
A recurring theme was the investigation of potential negative side effects associated with the use of these measures, particularly deadweight loss and substitution effects. To assess the risk of these effects, we relied on literature analysis and employers’ evaluations of whether and under what circumstances these measures influenced their decision to hire individuals with lower competitiveness in the labour market, such as young people with little work experience, long-term unemployed individuals, or those with reduced work capacity.
Key Findings
1. Importance of Cost Savings
For employers, the primary motivation for using these measures is the potential cost savings on labour expenses. This motivation is particularly significant for smaller companies where employee-related costs constitute a larger proportion of total expenses, and new hires are less frequent, making each hiring decision appear riskier. Employers who train workers themselves due to a lack of skilled labour or who are more open to hiring individuals with lower competitiveness also valued these measures more. Some employers additionally cited the desire to be a socially responsible company as a motivating factor.
2. Deadweight Loss Risk
Interviews revealed a risk of deadweight loss associated with wage subsidies in Estonia. For instance, employers sometimes learn about the possibility of wage subsidies only after deciding to hire an individual, which can lead them to delay formalizing employment to apply for the subsidy.
3. Effectiveness of Social Tax Exemptions
The impact of social tax exemptions on recruitment decisions was found to be smaller compared to wage subsidies. Often, employers become aware of the possibility of applying for the exemption only during or after signing the employment contract. However, social tax exemptions were seen as supporting employers’ decisions to retain employees, particularly when reduced work capacity noticeably affected the employee’s ability to perform the job (e.g., working fewer hours, taking frequent sick leave, or being somewhat less productive).
4. Barriers and Skepticism
Larger employers and those actively recruiting often found the cost savings from these measures insufficient to influence their HR decisions. Employers’ attitudes toward specific target groups also affected the importance of these measures. For example, some employers viewed long-term unemployed individuals with more caution compared to other target groups. They often sought to understand why a person had been out of the labour market for an extended period, and some preferred offering short-term contracts that are not eligible for wage subsidies.
5. Recommendations to Enhance Effectiveness
To reduce deadweight loss and increase the likelihood of positive impacts on employers’ decisions to hire individuals with lower competitiveness, the measures could be tailored more specifically for smaller employers, those providing on-the-job training, or those making necessary adjustments for employees with reduced work capacity. Early awareness of the measures, for example, through candidate CVs, interviews, or proactive recommendations from Töötukassa, could help influence employers’ decisions during the recruitment process.
6. Proposals to Improve Accessibility and Transparency
Suggestions that do not increase the risks of deadweight loss or substitution effects include enhancing the transparency and availability of information. For instance, standardizing the processing time for wage subsidy applications across regions could reduce bureaucratic barriers. Simplifying procedures and improving communication about the possibilities of wage subsidies or social tax exemptions—such as through automated notifications about expiring benefits or encouraging candidates to indicate eligibility in their CVs—could increase employers’ interest and confidence in using these measures.
Employers emphasized the importance of being able to quickly start employment relationships with chosen candidates, underscoring the value of streamlined processes. Providing electronic information sheets about benefits for qualifying candidates, which job seekers could share with employers if they wish, could reduce uncertainties and help employers make more informed hiring decisions without unnecessary delays.
