At the end of 2025, Lithuania’s Parliament adopted amendments to the unemployment insurance system intended to strengthen incentives for a faster return to the labor market. However, according to the Lithuanian Free Market Institute (LFMI), the fundamental problem remains unresolved: for the fourth consecutive year, Lithuania records the highest unemployment trap rate in the European Union – and remains the only EU country where this indicator exceeds 100 percent.
According to data from the Organisation for Economic Co-operation and Development (OECD), Lithuania’s unemployment trap rate reached 102.2 percent in 2024, compared to the EU average of 74.4 percent. In practical terms, this means that during the first months of unemployment, some individuals may find that income from benefits equals or even exceeds potential earnings from work.
“When the unemployment trap exceeds 100 percent, we have a clear signal: for some people, taking up work in the first months can mean financial losses. Such a system contradicts the very logic of insurance, which is meant to protect against unexpected risks. Instead, it becomes an incentive not to work,” says LFMI Senior Expert Leonardas Marcinkevičius.
Changes Introduced – But Core Issue Remains
The amendments adopted in October 2025 provide for a recalculation of unemployment benefits and introduce a more gradual (“stepped”) reduction in payments in subsequent months. The new system will take effect in July 2026.
However, LFMI’s analysis indicates that the situation for low- and middle-income earners changes little, and in some cases benefits for higher-income individuals may even increase relative to their previous earnings.
“The system becomes more gradual in later months, but habits are formed at the very beginning – during the first months, when incentives to return to work should be strongest. This is precisely where we do not see a fundamental breakthrough,” notes Leonardas Marcinkevičius.
Labor market data reinforce these concerns. Lithuania’s unemployment rate remains higher than in neighbouring countries, while job vacancy figures suggest that the issue is not purely a lack of labor demand. In the third quarter of 2025, the job vacancy rate stood 2.2 percentage points above the EU average.
“When vacancies are not declining, yet employment outcomes continue to worsen, it signals that we must look closely at the incentive structure,” says Marcinkevičius.
According to LFMI calculations, 83,600 individuals received unemployment benefits per month in July 2025. The average monthly benefit amounted to €546.6 (or €650 for those receiving a full-month payment). If the number of unemployed were reduced by half, the positive fiscal impact could reach at least €408 million annually – through both lower benefit expenditures and higher tax revenues from employment.
Restoring Insurance Principle
LFMI calls for a return to first principles: unemployment insurance should genuinely insure against involuntary job loss without undermining incentives to work. One proposed measure is to grant full unemployment benefits only to individuals who lose their jobs involuntarily – an approach already applied in 17 EU countries.
In addition, the Institute recommends gradually increasing the tax-free income threshold to ensure that net (“take-home”) earnings grow consistently and strengthen employment incentives. It also stresses the importance of controlling the indexation of social benefits so that rising payments do not weaken labor market participation or crowd out funding for national priorities, including defence.
“Unemployment insurance must remain true insurance – support in the event of job loss that is not the individual’s decision. The best social policy is one that helps people regain independent income as quickly as possible, rather than reinforcing dependence on benefits,” concludes Leonardas Marcinkevičius.
Full analysis can be found here: https://llri.lt/wp-content/uploads/2026/01/Nedarbo-spastai-2025.pdf
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