Unemployment insurance should serve as a financial cushion when someone unexpectedly loses their job, rather than as a system that encourages people to remain outside the labor market at others’ expense. Yet, Lithuania spends around five times more of its GDP on unemployment-related benefits than Poland, while its unemployment rate is more than twice as high. Poland’s experience shows how much labor-market rules and incentives can matter.
Today, Lithuania’s labor market presents a striking paradox: over the past five years, the number of job vacancies has increased by 57%, reaching a record 32,000, yet the unemployment rate still exceeds 7%. In Poland, meanwhile, the unemployment rate is just 3.1% – less than half Lithuania’s rate.
Given that the two countries’ economies are growing at a simila. pace and their levels of development do not differ significantly, we might expect to see a similar situation in their labor markets. Yet such a large gap suggests that the difference stems not from the level of economic development, but from labor-market rules and the incentives they create. In Lithuania, these rules weaken incentives to work and create barriers to a swift return to employment, whereas Poland’s system is more focused on smooth and sustainable employment.
High unemployment comes at a heavy cost not only to people’s ability to live in dignity and to the economy, but also to public finances. Lithuania spends nearly 1% of its gross domestic product (GDP) on unemployment-related benefits – around five times as much as Poland. The largest share of this burden falls on lower-skilled workers, young people and the short-term unemployed.
So, what lessons does Poland offer? Poland has one of the lowest unemployment trap rates in the EU. Lithuania has the highest. This indicator shows that, during the first months of unemployment, a lower-income person in Lithuania may receive more in unemployment and other benefits than they would earn in take-home pay. In Poland, meanwhile, unemployment benefits are around half as high as in Lithuania, while maximum benefits differ by more than a factor of three (EUR 494 in Poland and EUR 1,619 in Lithuania).
Lithuania also stands out internationally because it pays unemployment benefits to people who leave their jobs voluntarily. In most OECD countries, benefits are either not paid at all in such cases or payments are deferred for several months. Poland, for example, applies a 90-day waiting period.
Our system therefore runs counter to the fundamental purpose of unemployment insurance: protecting people when they unexpectedly lose their jobs. It also creates an opportunity for people to leave work temporarily and take a holiday at taxpayers’ expense. This practice is particularly common among young people.
Official statistics on the reasons for unemployment also reveal the scale of the problem. In 2025, only 10.5% of unemployed people in Lithuania had lost their jobs because they had been dismissed, and 7.2% because of illness or disability, while as many as 42.7% were out of work for personal or family reasons and 25.1% for “other reasons”.
This shows that a significant share of unemployment in Lithuania is unrelated to an unexpected loss of employment and therefore does not fit the concept of insurance. After all, no one would insure a building that was going to be demolished.
More flexible regulation of employment relationships also contributes to Poland’s better labor-market outcomes. Lithuania, for example, has the lowest share of fixed-term contracts in the EU – just 1.6%, compared with an EU average of 10.9% and 12.8% in Poland. Such contracts provide flexibility for employers and employees, reduce the risk involved in hiring a new worker and serve as a stepping stone towards long-term employment for young people and the long-term unemployed.
This gap exists because, in Lithuanian companies, fixed-term contracts may not account for more than 20% of employment contracts for work of a permanent nature. This means that a company with four or fewer employees cannot sign even a single fixed-term contract, even though around 70% of companies in the country are this small.
So, what measures should be taken? The comparison between Lithuania and Poland clearly illustrates the fundamental laws of economics: people respond to incentives, while excessive restrictions suppress economic activity.
Reducing the level of unemployment benefits during the first months of unemployment would bring Lithuania’s unemployment trap rate closer to the EU average. This does not mean that the state should not help people who lose their jobs. At the same time, however, there should be no doubt that work pays. Targeted financial support should help people through difficult periods while maintaining a clear incentive to return to the labor market quickly.
Introducing a waiting period after voluntarily leaving a job, as in other countries, would help ensure that unemployment insurance is used for its intended purpose rather than for short-term holidays.
More flexible regulation of fixed-term employment contracts would reduce employers’ risk when hiring new workers and encourage the creation of more jobs. The strict 20% quota should be abolished, or an exemption should be introduced for small companies.
The new agreement of Lithuania’s governing coalition contains the fine-sounding words: “People who work must not be worse off than those who do not.” We can only hope that this principle will not remain merely a slogan.