Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions - Modernising Social Protection for More and Better Jobs a comprehensive approach contributing to making work pay
Date: 2003-12-30
Institutions: European Commission
Subjects: European social policy, health insurance, labour market, pension scheme, social security, social-security benefit, subsistence level income, unemployment insurance

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 30.12.2003
COM(2003) 842 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Modernising Social Protection for More and Better Jobs
a comprehensive approach contributing to making work pay

EN

  EN

TABLE OF CONTENTS

1.

2.

3.

Introduction .................................................................................................................. 3

Need to modernise social protection policies............................................................... 6

Better social protection policies and labour market transitions ................................... 7

3.1.

From benefits to jobs: helping men and women to earn their own living.................... 7

3.1.1. Obstacles to the labour market integration of people living on labour market benefits
...................................................................................................................................... 8

3.1.2.

Policy reform trends and employment-friendly measures ......................................... 10

3.2.

Reconciling work and family life and supporting working parents ........................... 11

3.2.1. Obstacles to the labour market integration of working parents ................................. 11

3.2.2.

Policy reform trends and employment-friendly measures ......................................... 13

3.3.

3.4.

From job to job: facilitating occupational and geographic mobility.......................... 14

From incapacity to work: offering a new start for people with health problems ....... 15

3.4.1. Obstacles to the labour market integration of people with health problems.............. 15

3.4.2.

Policy reforms trends and employment-friendly measures........................................ 16

3.5.

Prolonging working lives ........................................................................................... 18

3.5.1. Obstacles to longer working lives in current social protection systems .................... 18

3.5.2.

Policy reforms trends and employment-friendly measures........................................ 19

4.

5.

The situation in acceding countries............................................................................ 20

Policy lessons to be drawn ......................................................................................... 21

2

 
1.

INTRODUCTION

In March 2003, the European Council invited the Commission "to report in time for the 2004
Spring European Council on the improvement in the overall framework for social protection
policies  through  a  greater  emphasis  on  the  effectiveness  of  incentives  (e.g.  benefit  systems,
reconciliation  of  family  and  work  life,  measures  for  older  people)  and  the  identification  of
best practice".

The main purpose of this Communication is to address the key challenge of promoting more
effective  work  incentives  in  social  protection  systems  while  allowing  them  to  pursue  their
central  goal  of  providing  a  high  level  of  social  protection  for  all  and,  at  the  same  time,
avoiding  excessive  budgetary  costs.  This  is  a  matter  that  has  raised  considerable  political
interest  in  all  Member  States,  as  most  are  making  efforts  in  order  to  increase  the  levels  of
participation  in  employment.  This  is  crucial  in  order  to  lift  the  long  term  threat  that
demographic  ageing  is  posing  to  the  financial  and  social  sustainability  of  social  protection
systems.  Increasing  participation  in  employment,  particularly  among  most  disadvantaged
people, is also seen as the main safeguard against drifting into poverty and social exclusion.

At EU level, the efforts made by Member States to review social protection systems in order
to  make  them  more  employment  friendly  are  supported  and  driven  through  strengthened
coordination of economic, employment and social policies. Ambitious targets have been set at
EU level for 2010: to increase the overall employment rate to 70%, the employment rate of
women  to  60%  and  the  employment  rate  for  people  in  the  age  range  55-64  to  50%.  These
targets  are  supported  by  various  guidelines  and  recommendations  included  in  the  Broad
Economic  Policy  Guidelines  and  the  Employment  Guidelines,  as  well  as  in  the  common
objectives of the Open Method of Coordination in the areas of pensions and social inclusion.
As part of the policy agenda for the modernisation of European social model, social protection
systems need to be  adapted in the framework of an  active welfare state  to  ensure  that work
pays  while  securing  their  social  policy  goals  such  as  fighting  poverty  and  social  exclusion.
However, these objectives are not in contradiction with each other: the best safeguard against
social  exclusion  is  a  job  as  it  was  stated  in  the  Lisbon  conclusions.  There  is  therefore  a
transversal  concern  cutting  across  several  areas  of  policy  coordination  and  a  need  to  move
towards  a  more  integrated  approach,  combining  a  focus  on  the  role  and  functions  of  social
protection  systems,  with  the  need  to  maintain  appropriate  incentives  for  people  to  get  and
maintain jobs, and adding a concern for the impact of equally relevant policies in the areas of
labour market, health care and family support.

The  decision  to  accept  a  job  is  influenced  by  financial  as  well  as  a  wide  spectrum  of  non-
financial  aspects.  "To  make  work  pay"  has  been  used  as  a  label  for  policies  that  aim  at
reforming tax and benefit systems with a view to providing appropriate financial incentives to
take  up  jobs,  to  remain  in  work,  to  increase  work  effort  and  to  invest  in  education  and
training.  Such  strategies  are  covered  by  Employment  Guideline  8  and  the  Broad  Economic
Policy  Guideline  41.  Both  the  Joint  Employment  Report  and  the  BEPGs’  Implementation
Report analyse in detail efforts made by Member States in addressing this issue.

The BEPGS and the EGs as well  as  their  Implementation  reports  will continue to cover the
objective of ‘making work pay’ from the perspective of economic and employment policies.
In  particular,  the  Communication  on  Streamlining  open  co-ordination  in  the  field  of  social

1

See COM (2003)176 final and COM(2003)170 final.

3

 
                                                
protection2  states  that  “both  the  economic  and  employment  policy  co-ordination  processes
address  appropriate  incentives  to  take  up  work,  remain  in  work,  increase  work  effort  and
invest  in  education  and  training.  This  implies  in  particular  that  they  deal  with  the  incentive
effects of the interaction of tax and benefit systems, as well as of labour market policies”.

While the financial incentives embedded in benefit and tax systems are the core of policies to
make work pay, also the non-financial incentives such as care services for children, disabled
people and the frail elderly, job search assistance, training, health care, etc. have an important
role  to  play..  Therefore,  there  is  a  need  for  a  comprehensive  approach  dealing  with  a  wide
range  of  incentives,  both  financial  and  non-financial,  that  can  support  workability  and
employability and ensure that work pays.

The present communication identifies the main challenges and policy responses that Member
States have implemented with the aim of making social protection systems more employment
friendly. It has benefited from the replies submitted by the delegations to the Social Protection
Committee in September 2003 to a questionnaire addressed by DG EMPL. The questionnaire
focus on income support measures – including their tax treatment – for people of working age
– including incentives for retaining older workers longer in  employment – and on measures
targeted at facilitating the reconciliation of family and work  life. The  communication  draws
upon  a  recent  report  on  social  protection  and  employment  prepared  by  DG  EMPL  for
discussion at the Social Protection Committee3. It also took into account the report by a Group
of  Experts  working  under  the  auspices  of  the  Employment  Committee4,  focusing  on  the
interaction between tax and benefits, which is a major issue in the debate on make work pay.

BOX- Report to the Employment Committee on “Making Work Pay”-Group of experts
on Making Work Pay

The  report  identifies  the  main  factors  underlying  the  (lack  of)  financial  incentives  to  seek,
take  up  and  remain  in  work.  It  states  that  financial  incentives  determine  to  a  large  extent
whether transitions on the labour market take place or not and that they therefore constitute
an important allocation mechanism. In addition, the non-financial factors and the design of
social security systems are important to make work attractive.

The report also analyses possible instruments for enhancing financial benefits from accepting
work. Examples from Member States are used to illustrate policy options. The report focuses
the  attention  on  the  fundamental  trade-offs  between  the  ability  of  low  income  support
programmes  to  be  effective  in  relieving  poverty  and  to  have  well-targeted  benefits  while
maintaining  desirable  work  incentives  and  avoiding  unsustainable  budgetary  costs.  It  is
stressed that in  designing policies to increase incentives  for  MWP,  three  aspects  should  be
taken into account

1.
Increasing  labour  supply:  Unemployment  traps,  inactivity  traps  and  low-wage
(poverty) traps have an adverse influence on total labour supply and should be diminished in
order  to  increase  labour  participation  and  employment  growth  and  reduce  benefit
dependency. ./..

2.

Poverty  alleviation:  Social  security  systems  and  income  dependent  schemes  play  an

2

3

4

COM (2003) 261.
A  revised  version  of  the  Commission  document  "Key  Issues  on  Social  Protection  and  Employment"
was discussed by the SPC on 13 June 2003.
The report by the EMCO Group of experts on "Making Work Pay" was discussed by the EMCO on 9
October 2003.

4

 
                                                
families
Budgetary cost: Measures to improve incentives for MWP should be cost effective and

the  alleviation  of  poverty,  by  supporting 

important  role 
3.
consistent with a broader budgetary framework.

income 

low 

in 

These  aspects  form  what  is  sometimes  called  a  ‘challenging  triangle’,  because  of  the
occurrence  of  trade-offs.  Successful  policies  for  Member  States  to  make  work  pay  have  to
find a proper balance within this challenging triangle.

The  report  analyses  figures  related  to  the  three  main  indicators  of  low-wage  (poverty)  ,
unemployment and inactivity traps5.

Unemployment trap indicator (on 67 per cent of the APW (2001)

120

100

80

60

40

20

0

-20

BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK CZ HU PL SK US JP

Single Single parent One earner with children

Two earner without children

The  main  results  of  the  report  were  than  when  moving  from  an  unemployment  benefit
situation to a job, around 80 per cent of the increase of gross income is not received by the
employee in almost  all Member  States.  There  are  some  exceptions,  where  nevertheless  still
more than half of the gross gain is lost. Thus the unemployment trap is a serious problem in
most Member States, as net income changes from leaving the benefit situation are low. With
regard to the inactivity trap and the low-wage (poverty) trap the evidence is mixed. In some
countries  gross  income  gains  do  not  result  in  net  gains  at  all  and  thus  are  financially  not
attractive. In other countries more than half of a gross income increase is translated into a
net increase. Overall, the report states that financial incentives are often lacking for people
on  unemployment  benefit  (unemployment  trap),  for  people  on  social  assistance  (inactivity
trap) and for those in low paid jobs to accept a better paid job (poverty/low-wage trap).

In the policy conclusion it is clearly argued that there is no single instrument to make work
pay for everyone in every situation. Country specific circumstances largely determine the size
and  nature  of  the  problem  and  the  effectiveness  of  possible  solutions.  While  the  lack  of
financial  incentives  to  make  work  pay  generally  derives  from  the  interaction  of  schemes
primarily designed for other purposes, mainly poverty alleviation, it is  important  that  these
policies with an impact on making work pay are mainstreamed and reformed, so as to reduce
their  adverse  effect  on  labour  supply.  MWP-policies  should  be  firmly  embedded  in  labour
market policies.

5

A detailed presentation of the methodology and the results of the joint project between the Commision
services  (ECFIN,  EMPL,  TAXUD,  EUROSTAT)  and  the  OECD  for  the  calculation  of  low-wage,
unemployment and inactivity trap is in the European Commission Economic paper n. 195, “Indicators
of Unemployment and low-wage traps”).

5

 
                                                                                                                                                        
2.

NEED TO MODERNISE SOCIAL PROTECTION POLICIES

Social  protection  operates  through  a  wide  mutualisation  of  individual  risks  and  achieves  a
more  effective  level  of  protection  and  better  coverage  than  could  be  achieved  through
individual  insurance.  Social  protection  should  provide  a  reasonable  income  replacement
guaranteeing  a decent  living  standard to people  who  cannot  provide  for  themselves  through
employment. A variety of situations are covered which are characterised and checked through
implementing  provisions:  sickness,  disability,  old  age,  unemployment,  low  income.  The
primary  function  of  social  protection  institutions  consists  in  providing  security  against  risk
and  hazards  of  life.  In  fulfilling  this  function,  tax  and  benefit  programmes  may  have
potentially distorting effects on the efficient functioning of the labour market.

Such distorting effects are usually described in the literature as inactivity, unemployment and
poverty  traps6.  The  inactivity/unemployment  trap  occurs  when  benefits  are  high  compared
with expected incomes from working and/or a substantial part of the earned income is taxed
away  when  a  person  takes  up  work.  The  situation  described  as  poverty  trap  usually  arises
when low-wage workers have little immediate financial incentive to increase hours worked or,
in  a  household  context,  the  spouse,  normally  the  women,  has  little  incentives  to  enter  the
labour market. Also, the incentive to work part-time or to invest in education and training to
move up the wage ladder is blunted.

There is therefore a need for tax/benefit policies to be re-designed in such a way as to reduce
the risk of inactivity, unemployment and poverty traps. In other words, a high level of social
protection  is  desirable  as  long  as  incentives  to  work  are  maintained.  There  are  no  easy
solutions to this problem, as reforming taxes and benefits to make work pay involves trading
some  policy  goals  against  others.  In  such  trade-off  a  relevant  issue  is  the  degree  of  choice
afforded  to  individuals  by  the  different  types  of  institutions,  and  in  particular  the  choice  of
individually based social security benefits vs. family – or household-based benefits –, an issue
that is also important in relation to equality between men and women.

Modernising Member States' social protection systems by removing inherent disincentives to
work and creating the right incentives and conditions for making work more attractive, is key
to  make  them  more  employment  friendly  and  hence  to  encourage  higher  levels  of
participation  in  employment.  This  will  in  turn  contribute  to  make  social  protection  systems
more sustainable in the long run.

To  achieve  higher  employment  levels  it  is  of  paramount  importance  to  support  people  in
labour  market  transitions,  i.e.  when  they  are  changing  their  labour  market  status,  either
because they are jobless and search for jobs, or envisage changing the type, the location or the
nature  of  their  job,  or  trying  to  move  up  the  career  ladder,  or  considering  retirement.  This
Communication  is  structured  in  accordance  with  the  different  roles  that  social  protection
systems  can  play  in  promoting  successful  labour  market  transitions  in  five  different  labour
market situations:

(cid:1)  From benefits to jobs,

(cid:1)  reconciling work with family life,

(cid:1)  from job to job,

6

For measurement of these effects, see precise data in "Joint Commission-OECD project on calculating
the effective tax rates on labour".

6

 
                                                
(cid:1)  from incapacity to work, and

(cid:1)  prolonging working life.

3.

BETTER SOCIAL PROTECTION POLICIES AND LABOUR MARKET TRANSITIONS

Following the approach described above, this chapter examines the interaction between social
protection  schemes  and  different  labour  market  transitions.  The  aim  is  to  identify  strategies
encouraging  labour  market  participation  through  better  activation  of  social  protection.  For
each  particular  labour market  transition,  the  obstacles  to  labour  market  integration  faced  by
people receiving benefits are identified, including the role played by the eligibility criteria, its
enforcement  and,  in  general,  the  management  of  the  benefit  schemes.  The  analysis  then
moves to recent policy reforms adopted or envisaged with the aim of tackling such obstacles
and making work pay. The analysis is supported by examples of good practice, making use of
available information.

When  discussing  these  different  labour  market  transitions,  the  following  types  of  benefit
schemes  are  considered:  (i)  unemployment  insurance  and  unemployment  assistance;  (ii)
minimum income guarantee and other forms of social assistance (including housing benefits);
(iii)  employment-conditional  benefits  and  other  similar  provisions;  (iv)  support  for  families
and  parents  (family  benefits,  maternity,  paternity  and  parental  leave  schemes,  child-care
benefits  and  provision,  elderly  care  and  care  for  disabled  people);  (v)  early  retirement;  and
(vi) support for sickness, invalidity and work-related injuries.

In approaching the range of policies that aim to make work more attractive, it is necessary to
emphasise  that  financial  reward  is  not  the  only  and  most  important  aspect  determining  job
quality  and  work  attractiveness.  From  the  perspective  of  the  worker  a  job  that  pays  is  one
which  provides  the  worker  with  both  pecuniary  (earnings,  pension  schemes)  and  non-
pecuniary returns more or less subjectively defined as a result of a host of characteristics such
as  job  status,  employer  behaviour,  opportunities  for  education  and  on-the-job  training,
working  hours,  type  of  contractual  arrangements,  fringe  benefits  provided  by  the  employer
(pre-school childcare, training, health care, accommodation, etc.), distance travelled to work
and commuting.

3.1.

From benefits to jobs: helping men and women to earn their own living

Over the last decade there has been a re-examination across the Union of the role played by
social benefits in encouraging jobless people to look actively for a job. While the attention has
been  focused  on  unemployment  benefits  and  their  impact  upon  those  trying  to  re-enter  the
labour  market  after  an  unemployment  spell,  it  has  been  extended  to  other  welfare  benefits
particularly those subject to means testing. One has also re-examined the impact of benefits
on those entering the labour market for the first time. Policy reforms have been prompted by
the  high  rates  of  unemployment,  and  especially  long-term  unemployment,  and  a  concern  to
ensure  that  social  protection  systems  do  not  encourage  people  to  delay  re-entering
employment or even to choose to live on benefits rather than to be employed. It has also been
a  response  to  rising  labour  taxes  and  social  security  contributions.  However,  in  many
instances, such reforms have raised public concern with their impact on the  quality of  work
and the risk of poverty. As a result, they  were implemented only after intense public debate
and difficult negotiations with the social partners.

Several Member States have tightened up the qualifying conditions for eligibility, to increase
the  pressure  on  the  unemployed  to  accept  job  offers,  to  develop  effective  means  to  counter

7

 
fraudulent claims and abuse of the systems and to shorten the period over which the benefits
are payable. In some cases, such measures have resulted in a cutback of benefit levels. They
have  been  applied  not  only  to  unemployment  benefits  but  also  to  disability  and  early
retirement  schemes,  which  had  come  to  be  used  as  substitutes  for  unemployment
compensation in a number of Member States, in the context of the industrial restructuring of
the eighties, in recognition of the difficulty of many older unemployed people to get back to
work.

Many Member States have increased investment in active measures to help those re-entering
employment  or  acceding  to  it  for  the  first  time  by  improving  their  employability.  This  has
involved  typically  supply-side  measures  such  as  training  and  individualised  job  search
assistance, but in many cases these have been combined with measures, such as employment
subsidies and reduced social security contributions aimed at creating a labour market demand
for  people  carrying  objective  disadvantages  (young  people  with  poor  education,  disabled
people,  older  unemployed,  etc.).  The  latter  aspect  has  been  especially  highlighted  in  the
context of policy strategies aimed at developing more inclusive labour markets, where getting
a job is seen as the safest way of ensuring the social inclusion of people at the risk of poverty
and social exclusion.

The review of benefit systems has also been combined in an increasing number of countries
with attempts to make work more rewarding financially by introducing measures that increase
adequately the net income of those taking up a job, relatively to what they would receive in
benefits, by allowing them to continue to receive some income support or by reducing the tax
burden on low-paid workers. These measures have been directed in particular to encouraging
people to take low-paid or part-time jobs, which they might otherwise be reluctant to do if the
earnings they received were just marginally higher than the benefit amount.

3.1.1. Obstacles to the labour market integration of people living on labour market benefits

Unemployment benefits  perform an important  role in protecting  unemployed  people  against
temporary  loss  of  income  during  an  unemployment  spell.  In  addition,  they  contribute  to  a
more  efficient  job  matching  by  creating  conditions  for  the  unemployed  people  to  select  job
offers  criteriously  and  avoid  rushed  decisions.  They  also  perform  an 
important
macroeconomic role by helping to maintain aggregate demand during a recession or economic
slowdown.  On  the  other  hand,  unemployment  benefits  may  create  disincentives  to  work,  to
the extent that they are paid over a long period and are not adequately monitored or controlled
by means of clear requirements on active job seeking, work tests and participation  in  active
labour market policy programs.

In most Member States, the underlying approach to address the risk of such disincentives has
consisted in tightening up the conditionality of the benefit receipt upon job search and other
relevant  activities.  One  increasingly  popular  measure  has  been  to  get  the  personal
involvement of the unemployed by conditioning the entitlement of the benefit to the signature
of a contract in which the person involved is committed to undertake certain activities. These
activities  may  vary  from  actively  searching  for  work,  training,  achieving  work  experience
with a voluntary organisation or on an environmental task force, or acceptance of a suitable
job offer by the Public Employment Service. However, such an approach has to be carefully
monitored in order to avoid that the reduction or suppression of benefits set off a pathway to
poverty  and  social  exclusion.  Of  particular  concern  is  the  fact  that,  despite  the  income

8

 
replacement mechanisms in place, 39% of the unemployed people in the EU lived at the risk
of poverty7 in 2000 (44% for men and 33% for women).

Social protection systems also influence the availability for work through a particular feature:
Means testing has been growing in importance in a number of Member States, in an attempt
to  limit  the  growth  of  social  protection  expenditure,  while  at  the  same  time  concentrating
resources  on  those  most  in  need.  (i.e.  those  households  with  income  below  a  certain
threshold). According to ESSPROS data, expenditure subject to means testing accounted for
around 10% of total social protection spending in the EU in 1999, but in Ireland it amounted
to almost 28% of the total and in the UK to 17%. The growth of means testing has affected a
wide range of social protection schemes and in particular housing benefits, social assistance,
unemployment benefits and disability benefits.

The problem with means testing is that it creates an artificial threshold that, once exceeded as
a result, for instance of taking up a job, may induce a sharp cut in benefits which may leave
the  household  in  question  with  marginally  higher  or  lower  net  income  than  before  the
transition  from  welfare  to  a  job  has  taken  place.  A  similar  problem  is  created  by  the
introduction of employment  conditionality  into  certain  welfare  payments,  for  instance  when
the access to higher child allowances is conditional on one of the parents being unemployed.
In recent years, some Member States have attempted to deal with the particular disincentives
created  by  means  testing  and  employment  conditionality  in  the  design  of  some  welfare
benefits. Ireland, for instance, has removed or reduced the financial disincentives to take up
employment through inter alia freezing the absolute level of child dependant additions to the
allowance  and  increasing  the  level  of  universal  child  benefit  payment,  and  introduced
transitional  arrangements  whereby  benefits  are  paid  on  a  sliding  scale  to  further  encourage
people  to  take  up  employment.  The  housing  benefits  in  France  penalise  the  exit  from  the
"Revenu  Minimum  d’Insertion"  (RMI)  as  it  involves  a  substantial  decrease  in  income,
particularly  important  for  part-time  jobs  paid  at  the  minimum  wage  level.  As  a  result,  the
1991 reform  of  the housing benefits aimed  at  suppressing  this  distortion  which  discouraged
the transition from the RIM into work.

More generally, Member States have focussed their attempts to tackle disincentives created by
social  protection  systems  through  the  use  of  tax-credits,  the  possibility  to  combine  benefits
and  work,  and  allowing  a  more  favourable  social  security  and  tax  treatment.  While  it  is
believed that these measures have had an impact in reducing the METRs (Marginal Effective
Tax Rates), there is clearly a deficit in the evaluation of such policies, both in terms of their
impact  on  employment  and  on  short  and  medium  term  budgetary  costs  and  returns.  Few
Member  States  provide  the  number  of  people  who  benefit  from  a  specific  scheme  or  the
estimated reduction in marginal rates or the budgetary effort inherent in their support schemes
aimed at making work more attractive8.

While  not  formally  part  of  social  protection  systems,  minimum  wage  policies  are
implemented by several Member States in order to face the problem of the working poor. If
set  sufficiently  above  the  level  of  unemployment  and  other  related  benefits  the  minimum
wage  may  increase  the  attractiveness  of  low-paid  jobs  and  hence  contribute  to  make  work

7

8

Risk  of  poverty  is  defined  as  living  in  a  household  with  an  equivalised  income  below  60%  of  the
national median.
This is the case for France, which to improve the financial incentives to work, reformed the housing tax
in 2000, introduced a tax-credit (Prime Pour l'Emploi) in 2001, and allowed the combination of  work
with benefit receipts for a wide range of schemes. While the budgetary impact of these three measures
was  estimated  at  €4  billion,  the  disposable  income  of  these  households  increased  by  around  3%
allowing for a reduction of more than 4 pp in the highest marginal implicit tax rate.

9

 
                                                
pay. However, with a view to avoid affecting labour demand negatively  and, thus,  reducing
job opportunities, additional measures have been undertaken in some Member States in order
to compensate employers for hiring low-productivity workers at a cost above the hypothetical
free market rate.

3.1.2.

Policy reform trends and employment-friendly measures

Guided by the activation principle embedded in the European employment strategy, Members
States  have  introduced  a  wide  range  of  measures  aimed  at  avoiding  that  unemployment
support schemes may create disincentives to work while, at the same time, encourage people
in  unemployment  to  take  a  job.  Some  of  these  measures  work  through  the  labour  demand
channel  while  others  act  directly  on  labour  supply.  The  measures  implemented  could  be
grouped  around  three  major  categories:  (i)  employment  incentives;  (ii)  combination  of
benefits and work; and (iii) more favourable social security and tax treatment.

(1) 

(2) 

(3) 

Concerning  employment  incentives  (labour  supply  channel),  measures  implemented
by  Member  States  have  focussed  on:  (i)  limiting  the  amount  (Spain)  or  the  length
(Germany)  of  the  unemployment  benefit  that  can  be  perceived;  (ii)  unifying  the
unemployment insurance with the social assistance benefits; (iii) giving incentives for
young people (Finland) or for new hires covering youths and adults over 25 who had
not  been  employed  on  a  permanent  basis  (Italy);  (iv)  making  conditional  activation
complements  (subsistence  allowance)  to  job  search  and  participation  in  active
measures  after  a  certain  period  of  unemployment  (Finland);  and  (v)  using  in-work
benefits, i.e., employment conditional tax-credits and benefits and other provisions of
similar  purpose.  On  in-work  benefits,  several  Member  States  used  in  the  past,  and
have recently introduced, direct financial incentives to make work pay namely under
the form of tax-credits. Looking at the number of people who came back to work after
they benefited from these tax-credits, experiences in Member States look encouraging.
However, an important disadvantage of these schemes lies on the fact that they could
draw to the bottom the wages that employers are willing to pay. Another disadvantage
is  that  in  some  cases  (the  Netherlands)  the  minimum  benefit  level  is  linked  to  the
minimum wage, therefore, the financial incentive to accept a job paying the minimum
wage tends to be low.

The  second  strand  of  policy  followed  by  Member  States  refers  to  the  possibility  to
combine the receipt of the benefit entitlement with earnings from work (labour supply
channel) by allowing the following: (i) combination of part-time or full-time job with
partial  unemployment  benefit  or  unemployment  assistance  (Spain,  Ireland,  Portugal)
or  with  a  wide  range  of  other  social  benefit  schemes  such  as  normal  and  specific
unemployment  benefits,  RMI,  lone-parent  allowance,  ASS  and  disabled  adult
allowance  (France);  and  (ii)  incentives  to  start-up  business  or  to  encourage  self-
employment by allowing to receive the unemployment benefit in a lump sum payment
(Spain).

The third strand of policy concerns the provision of a more favourable tax and social
security treatment for both employees (labour supply channel) and employers (labour
demand channel). As this Communication does not discuss policy measures affecting
labour  demand,  the  following  measures  only  reflect  those  implemented  by  Member
States aimed at influencing labour supply: (i) more favourable tax treatment for older
workers deciding to prolong their working life (Spain); (ii) reform of the housing taxes
not to penalise the entry in the labour market, namely of low income households, and
total  exemption  for  recipients  of  the  RMI  (France);  and  (iii)  partial  reduction  or

10

 
exemption of social security contributions paid by targeted groups of employees such
as those working in painful conditions, disabled, etc. (France, Portugal).

3.2.

Reconciling work and family life and supporting working parents

Public  support  for  the  reconciliation  of  work  and  family  life  has  two  aims.  Firstly,  family
benefits  aim  to  help  families  as  they  perform  tasks  which  are  fundamental  to  the  very
organisation  and  perpetuation  of  society.  In  particular,  this  involves  supporting  families  as
they  give  birth  to,  nurture  and  educate  children  and  as  they  care  for  dependent  family
members,  most  notably  sick,  disabled  or  elderly  dependants.  In  the  context  of  demographic
ageing,  these  policies  are  becoming  more  important  as  a  means  to  reverse  the  declining
fertility rates. Member states typically provide some of these supports in the form of universal
benefits, e.g. child benefits, but with some supports made contingent on the family situation,
e.g.  lone  parent  payments,  or  paid  in  conjunction  with  other  benefits,  e.g.  supplements  for
dependent children paid with unemployment benefits.

A  second  set  of  policies  aim  to  make  it  easier  for  men  and  women  to  perform  their  family
responsibilities  while  accepting  a  job  or  remaining  active  on  the  labour  market.  Thus
subsidised or publicly provided childcare helps to keep people active in the labour market at
times  when  family  responsibilities  could  otherwise  cause  them  to  withdraw9.  Maternity,
paternity  and parental  leave  allowances support temporary  withdrawal  from  work.  They  are
associated  in  a  number  of  countries  with  provisions  to  ensure  that  attachment  to  the  labour
market is maintained. Other public  supports aim  to compensate people  during those  periods
when  they  choose  to  leave  the  formal  labour  market  to  provide  care  within  families.  This
compensation  may  take  the  form  of  cash  benefits,  e.g.  carers'  allowances,  and/or  credited
contributions  to  pension  rights  which  limits  the  disadvantage  that  the  person  concerned
suffers in terms of pension entitlement. Some systems also offer specific activation supports
to men and women returning to the labour market after a family-related absence to counter the
effect that a break from employment may have on their employability.

The  aim  of  this  second  group  of  provisions  is  to  allow  men  and  women  to  combine  their
family roles with labour market participation and to ease the transition between employment
and  full-  or  part-time  in-family  caring  and  vice  versa.  They  also  have  a  strong  objective  in
terms of the promotion of equal opportunities between women and men in the labour market.
They  are  both  a  reinforcement  of,  and  a  means  to  actively  promote,  high  levels  of
employment participation. Typically they are most developed in those countries where there
are high levels of female (and overall) participation in work.

3.2.1. Obstacles to the labour market integration of working parents

It  is  important  that  the  mechanisms  used  to  pay  family  benefits  should  not  adversely  affect
work  incentives.  Insofar  as  child  benefits  are  paid  universally,  this  will  not  be  a  problem.
However, the payment of family supplements in respect of children or dependent spouses as
part of unemployment benefits, as is the practice in most Member States, may weaken further
the financial incentive to take up work as discussed in Section 3.1.1 (note the discussion there
regarding how Ireland has recognised and sought to address this issue).

9

The primary importance of childcare as a support to the work participation of parents is borne out by
Council Recommendation 92/241/EEC of 31 March 1992 which urged Member States to "take and/or
encourage  initiatives  to  provide  childcare  while  parents  are  working,  are  following  a  course  of
education  or  training  in  order  to  obtain  employment  or  are  seeking  a  job  or  a  course  of  education  or
training in order to obtain employment."

11

 
                                                
Furthermore, mechanisms for unemployment compensation should take account of the impact
on  the  incentives  for  all  members  of  a  family.  Where  benefits  are  means-tested  and  the
family's rather than the individual's income is used as the basis of assessment to entitlement,
there  may  be  a  negative  impact  on  the  financial  incentive  both  for  the  claimant  and  the
claimant's spouse to take-up a job.

The  non-availability  of  affordable  child-care  is  seen  as  a  key  barrier  to  the  participation  of
parents, in particular women. The costs of child-care services, the availability of the different
types  of  child-care,  the  compatibility  between  hours  of  availability  and  working  hours,  the
quality and the number  of places are cited  as important issues. This is  particularly so at the
lower  end  of  the  wage  scale,  among  women  and  men  with  the  lowest  education  and  skill
levels.  There  is  evidence  that  the  supply  of  such  labour  is  sensitive  to  childcare  costs.
Accordingly, subsidies to reduce the costs of childcare services can help persons to return to
work,  including  to  part-time  work.  Although  the  direction  of  causality  is  unclear,  several
studies show that an extension of child-care support can increase in particular women's labour
force participation.

The  key  role  of  the  provision  of  child  care  in  promoting  participation  in  employment
particularly of women, was recognised by the European Council of Barcelona, by inviting all
Member States to provide child care by 2010 to at least 90% of children between three years
old and the mandatory school age and at least 33% of children under three years of age.

Lone  parents  –  whose  numbers  are  increasingly  significant  in  most  Member  States  –  are
widely seen as being particularly vulnerable to barriers to their employment participation and,
may  accordingly  face  high  levels  of  unemployment,  dependency  on  income  support  and/or
risk of poverty. The importance of the issue is also underscored by survey evidence that risk
of poverty is highest among single parent households (35% for the EU average according to
the most recent data from the European Community Household Panel survey), most of which
are  headed  by  women.  In  the  United  Kingdom,  the  exposure  to  the  poverty  risk  for  single
parent  households,  which  represent  a  relatively  high  proportion  of  all  households,  is
particularly high at 50%. The UK has also set out its concern with the long duration of benefit
dependency among lone parents.

The lack of access to affordable and suitable child care is likely to pose particular problems
for this group. There is also considerable policy debate about how to balance the provision of
adequate  income  support  to  lone  parents,  while  preserving  the  incentive  for  a  return  to  the
labour market.

Maintaining work participation in the face of the possible disruptions related to family life is
also seen as  an  issue of  concern.  This  explains  why  various  short  leave  schemes  have  been
developed  as  a  complement  to  the  more  long-term  and  developed  forms  of  parental  or  care
related leave. Examples include: in the UK, working parents are entitled to take time off work
to  deal  with  emergency  involving  a  dependant  ("Time  off  for  dependants"  scheme).  In
Portugal, pensions accruals are maintained for a person that decides to take part-time job to
assist the child or adopted child and a short leave (15 days) to support a frail member of the
family. In Sweden, temporary parental benefit is payable to parents caring for a sick child.

While the opportunity to take paid maternity leave may increase women’s attachment to the
labour market, a lengthy long-term leave is likely to increase the difficulties and uncertainties
for  women  to  return  to  employment,  namely  for  those  with  insecure  employment  status  or

12

 
with low skills and  low  pay10.  The  same comments  apply  for  other  forms  of  leaves  such  as
parental leave. A comprehensive family-friendly policy helping parents to efficiently combine
family and work would help alleviate the negative effects of a single leave provision isolated
from the employment context.

3.2.2.

Policy reform trends and employment-friendly measures

There is evidence of a continued high rate of investment in childcare in Nordic countries. In
Finland, every  child under  school  age  has  the  right  to  municipal  day-care  once  the  parental
allowance  period  ends,  regardless  of  income  level  of  the  parents  or  of  whether  the  parents
work. In January 2002, Sweden introduced a ceiling on childcare fees as well as a maximum
fee  for  child  day  care  services.  This  fee  cap  will  prevent  increased  childcare  costs  when
parents increase the number of hours worked, namely for those going from unemployment to
employment.  From  2002,  there  is  a  guarantee  for  3  hours/day  child  care  for  children  of
unemployed parents and of mothers having a second/further baby, in order to give parents of
small children better opportunities to seek and take up work.

As from 2004, France will launch a number of measures to improve and simplify the system
of family allowances. A new  allowance  called  Prestation d'Accueil  du Jeune Enfant (PAJE)
will  focus  on  low  income  families  and  will  raise  the  benefit  amounts.  It  will  also  allow  a
higher compensation if the beneficiary takes a part-time job. These benefit improvements will
be matched  with  measures to increase the supply of  childcare  places.  20  000  new  childcare
places  are  planned  by  the  year  2007.  A  tax  credit  will  be  created  for  those  companies
spending in favour of the child care needs of their employees.

In April 2003, the UK introduced two means tested schemes, the "Child Tax Credit" and the
"Working Tax Credit" (WTC) to replace previous tax credits. They have the twin stated aims
of helping  to  eliminate  child  poverty  and  to  make  work  pay.  The  "Child  Tax  Credit"  is  the
main way that families get money for their children and for 16-18  year olds in education. It
replaces the old tax credits and benefits with a single system and is paid directly to the main
carer.  The  WTC  supports  working  people,  including  the  self-employed,  helping  to  top  up
earnings. It includes a child care element, which helps with the cost of registered or approved
child care, which is paid directly to the main carer. However, for couple households there is
still a claw back rate of 50 to 60% on additional earnings over and above childcare costs. The
UK’s in-work benefit scheme – which has been extended now to couple households without
children  –  is  in  fact  primarily  focused  on  reducing  the  number  of  households  that  are
dependent upon benefits. The result is that although  this scheme provides  incentives  for  the
main  breadwinner  in  couple  and  in  lone  parent  households  to  enter  employment,  it  has  a
negative  incentive  effect  on  the  employment  second  earner  in  couple  households,  and  has
been  identified  by  the  OECD11  as  having  lowered  the  employment  rate  of  married  women
with working spouses.

Member States have devoted much attention to the balance to be struck when determining the
conditions under which lone parent benefits are granted. These payments have often been paid
without a requirement that beneficiaries are available for work. Nevertheless, Member States
are seeking to strengthen the incentives and supports for participation in work. For example,
in  France,  lone-parents  are  granted  the  Allocation  de  Parent  Isolé  (API)  which  provides  a
minimum  familial  income  to  those  lone-parents  having  or  expecting  to  have  children.  The
API  allowance  is  not  conditional  on  participation  in  the  labour  market  or  on  integration

10

11

"OECD Employment Outlook. Towards more and better jobs". OECD, Paris, 2003.
"OECD Employment Outlook. Towards more and better jobs". Op. cit.

13

 
                                                
measures, but does allow for the temporary combination of earned income from work, as an
incentive  to  enter  the  labour  market.  In  the  UK,  policies  towards  recipients  of  lone  parent
payments are stated to be based on persuasion towards participation in work and on granting
of incentives, rather than on the strengthening of the formal obligation to seek work which has
been  general  throughout  their  New  Deal  reforms  of  recent  years.  The  stated  objective  in
relation  to  lone  parent  is  to  help  stop  them  from  being  economically  inactive  and  to  start
looking  for  work.  Interviews,  aimed  at  rekindling  an  interest  in  the  world  of  work,  are
mandatory.

3.3.

From job to job: facilitating occupational and geographic mobility

Occupational  and  geographic  mobility  is  crucial  for  a  high  level  of  economic  efficiency.
Mobility  helps  companies  to  adapt  to  rapidly  changing  market  environments  and  it  allows
workers  to  move  to  those  activities  where  they  can  be  more  productive  and  achieve  higher
earnings.

Occupational  mobility  can  take  many  different  forms,  ranging  from  the  move  between  two
jobs  within  the  same  organisation  to  setting  up  a  business  after  having  worked  as  an
employee. Social protection systems can create obstacles to mobility, notably in those cases
where  mobility  results  in  the  reduction  or  loss  of  certain  entitlements.  However,  social
protection  systems  can  also  support  mobility  in  many  ways,  for  instance  by  assisting
individuals  in  their  professional  shift  (including  through  sabbaticals),  contributing  to  the
temporary  cost  of  re-location  or  cushioning  to  some  extent  the  risks  involved  in  a  new
professional venture.

Historically,  social  protection  systems  were  developed  nationally  by  branches,  groups  of
companies or types of  employment.  As  a result, and while  most  important  social  protection
schemes  in  the  Member  States  presently  tend  to  cover  the  entire  country,  there  are  many
special schemes notably for civil servants, the self-employed and farmers which may make it
difficult to move between these sectors.  In particular, a move into self-employment in some
Member States goes hand in hand with less comprehensive social protection against income
loss  and/or  illness.  Mobility  requires  bridges  between  these  schemes  so  as  to  ensure  that
acquired rights to a pension or to a health or invalidity insurance are not lost and have to be
built up from scratch.

Private  and  supplementary  social  protection  arrangements  are  still  often  uncoordinated,
meaning  that  it  is  difficult  or  even  impossible  to  transfer  one's  rights  from  one  scheme  to
another. This is particularly the case for company pension schemes where a change from one
employer to another can result in a significant reduction in prospective pension entitlements.12
It is therefore important to  ensure that  those  who  change  jobs  or interrupt their  careers face
better conditions for the acquisition, preservation and transfer of occupational pension rights.

At  the  EU  level,  the  co-ordination  of  statutory  social  security  schemes  through  Regulation
1408/71, notwithstanding its complexity, has been important in ensuring that workers are able
to  exercise  their  right  to  move  freely  in  an  EU-level  labour  market,  although  only  a  small
proportion of Europe's total labour force make use of this right. No equivalent EU instrument
exists as yet for private supplementary pension or health insurance.

12

See the consultation document adopted by the Commission on 12/9/2003 "Improving the portability of
supplementary  pension  rights  second  stage  consultation  of 
the  European  social  partners"
(SEC/2003/916) for further details on obstacles to mobility arising from occupational pension schemes.

14

 
                                                
Mobility often involves shifting from part-time to full-time work or vice-versa. The share of
part-time  work  is  still  increasing  in  the  EU  and  about  one  third  of  all  new  jobs  created  are
part-time jobs. They can be particularly important as a pathway to full-time employment after
a  spell  of  unemployment  or  after  a  career  break  for  family  reasons  or  as  a  pathway  to
retirement.  Social  protection  arrangements  sometimes  hinder  such  transitions,  for  instance
where pension schemes base benefit entitlements on final earnings or social security coverage
is limited by a threshold in terms of the number of hours worked.

Education  and  training  in  a  lifelong  learning  perspective  have  an  essential  role  to  play  in
promoting occupational as well as geographic mobility. Specific measures for action at both
national  and  European  levels  were  proposed  in  the  Commission’s  action  plan  on  skills  and
mobility  (February  2002)13,  complementing  the  European  Employment  Strategy,  the
“Education  and  Training  2010”  process,  and  the  Copenhagen  process  on  enhanced
cooperation in vocational education and training14. The forthcoming Communication from the
Commission  on  European  Employment  Mobility  reports  on  progress  made  and  makes
recommendations for future action.

Finally,  transforming  undeclared  work  into  regular  work  is  also  an  important  pathway  with
implications for raising competitiveness, improving the sustainability of the social protection
system and promoting social cohesion.

3.4.

From incapacity to work: offering a new start for people with health problems

Incapacity  reduces  labour  supply  significantly,  particularly  among  workers  in  their  50s  and
60s. In some Member States up to one fifth or even one quarter of people in the age groups
55-59 and 60-64 are on invalidity benefits and outside the labour market. Many people who
claim incapacity benefits would clearly be able to pursue some gainful activity. In the UK, it
has been observed that 90% of all new claimants of incapacity benefits want and expect to go
back to work in due course.15

There  are  many  ways  in  which  health  problems  can  make  it  difficult  or  even  impossible  to
continue  exercising  one’s  current  occupation,  either  temporarily  or  permanently.  If  the
incapacity  is  temporary,  social  protection  systems  should  support  a  rapid  return  to  the
previous  occupation  by  offering  high-quality  medical  rehabilitation  services.  Permanent
incapacity to work in one’s previous occupation does not imply an incapacity to do any work
at all. Modern labour markets offer a wide range of jobs with very different demands on the
physical and mental abilities of the job holder. Thus, if a worker has to give up his previous
job for health reasons, vocational rehabilitation measures should be considered in addition to
medical  measures  so  as  to  facilitate  a  speedy  reintegration  into  the  labour  market.  Social
protection systems are a major determinant of whether people with health problems find their
way back into the labour market.

3.4.1. Obstacles to the labour market integration of people with health problems

Invalidity  benefit  schemes  are  often  based  on  a  clear-cut  categorisation  of  people  into  two
groups: the able-bodied and the incapacitated or disabled. In a number of schemes, a benefit
entitlement arises when the worker's earnings capacity is reduced, due to health problems, to

13

14

15

COM (2002) 72
See also the Communication from the Commission on the draft interim report “Education and Training
2010: the success of the Lisbon Strategy hinges on urgent reforms” COM (2003) 685 final.
It should be noted, however, that this also reflects the particular nature of the benefit which is not just
targeted at people assumed to be permanently incapacitated, as is the case in several Member States.

15

 
                                                
one  third  or  less  of  that  of  an  able-bodied  worker.  In  some  cases,  this  earnings  capacity  is
assessed  on  the  basis  of  earnings  in  one’s  previous  occupation  for  a  person  with  a  similar
qualification;  in  others  it  is  simply  the  capacity  to  earn  a  decent  living  that  determines
eligibility for invalidity benefits.

The tendency in many invalidity benefit schemes is clearly to focus on incapacity rather than
the  remaining  capacity  to  work.  Invalidity  benefits  are  typically  passive  benefits  for  those
regarded  as  unsuitable  for  employment.  Beneficiaries  may  be  discouraged  in  various  ways
from offering their remaining work capacity on the labour market. Certain activities may be
subject  to  prior  approval  by  the  benefit  institution.  If  they  are  approved,  benefits  may  be
suspended or reduced, depending on the level of earned income. Thus the financial incentives
to pursue a gainful activity tend to be weak. Moreover, beneficiaries may be reluctant to show
their willingness and ability to work if it is too difficult to return to benefits should the labour
market participation turn out to be unsustainable in the long run.

From  the  employer’s  point  of  view,  hiring  a  disabled  person  can  have  several  actual  or
perceived  drawbacks.  The  workplace  may  need  to  be  adapted,  the  disabled  worker’s
productivity and flexibility might be lower (or perceived to be lower) and there may be fears
that  a  disabled  worker  may  be  more  often  absent  for  health  reasons.  The  shift  of  the  cost
burden of illness  from  social  insurance  (sickness  cash  benefits)  to  employers  that  has  taken
place in some countries (e.g. Netherlands) may increase the reluctance of employers to recruit
disabled workers.

The importance of invalidity benefit schemes as a factor that objectively reduces participation
in employment is compounded by the use of eligibility criteria  other  than objective medical
criteria.  In  many  cases,  the  definition  of  invalidity  may  be  relative  to  one's  prior  earnings
capacity  which  depends  on  one's  occupation  and  qualifications  and  even  on  the  region  of
employment. The labour market situation and hence the chances of finding a suitable job may
also be considered in awarding invalidity benefits.

3.4.2.

Policy reforms trends and employment-friendly measures

Early  intervention  is  often  the  best  way  of  preventing  long-term  benefit  dependency.  This
implies speedy access to medical care that can prevent incapacitating health problems or that
rehabilitates those who are already experiencing serious problems. If the deterioration of the
health status cannot be prevented or reversed, thus making a change in occupation necessary,
vocational  conversion  must  be  envisaged.  Such  measures  are  foreseen  in  most  social
protection  systems,  often  in  various  branches  (pension  insurance,  unemployment  insurance,
health care, accident insurance).

In Finland, a right to early vocational rehabilitation measures for people at risk of becoming
disabled  is  being  introduced.  The  scope  of  vocational  rehabilitation  paid  for  by  the  pension
system has  expanded continuously. Results of this policy in  Finland are  encouraging.  It  has
been  shown  that  rehabilitation  measures  are  self-financing  because  they  tend  to  prolong
working lives by more than two years on average. The best rehabilitation results are achieved
when rehabilitation is launched at a sufficiently early stage and well targeted. This requires of
course a good cooperation between all the different actors involved.

In  the  Netherlands  and  Luxembourg,  there  is  an  obligation  on  employers  to  find  a  more
suitable job for a disabled person within the company (if it has more than 25 employees, in
the case of Luxembourg) or, in the case of the Netherlands, also in another company. France
seeks to promote the employment of disabled workers through a quota system which obliges
companies with more than 20 employees to employ at least 6% of disabled workers or pay a

16

 
contribution.  In  Luxembourg, re-deployed disabled  workers  enjoy  special  protection  against
dismissals  during  one  year.  Such  employment  and  redeployment  obligations  tend  to  be
matched  by  support  measures  for  the  employer  who  may  receive  subsidies  for  adapting  the
workplace or for providing training.

Some  Member  States  recognise  partial  invalidity,  thus  accommodating,  to  some  extent,  the
diversity of incapacity conditions. Sweden distinguishes four levels of reduced work capacity:
25%, 50%, 75% and 100%. Beneficiaries of partial invalidity benefits are encouraged to use
their remaining work capacity. A distinction between full and partial invalidity benefits also
exists in Germany and is being considered in Austria.

Even in the absence of partial invalidity benefits it may be possible to receive earned income
alongside an invalidity benefit. Such earnings are usually subject to an earnings ceiling which
may  depend  on  earnings  before  the  onset  of  invalidity;  thus,  in  France  the  ceiling  for  the
combined  income  is  the  level  of  earnings  before  invalidity.  An  exception  with  regard  to
ceilings is the German accident insurance scheme which pays pensions as a compensation for
a permanent medical impairment suffered as a result of a work-related accident; such pensions
are paid regardless of any other income.

In order to overcome the reluctance of invalidity benefit recipients to take up work, Sweden
and Finland allow beneficiaries to suspend their entitlement temporarily to test their ability to
work. This period can be between six months and five years in Finland; during the first two
years of employment a supplement is paid. Sweden allows a trial period of two years without
losing the benefit entitlement  and  continues  to  pay  benefits  during  the  first  three  months  of
employment.  Ireland  offers  a  ‘back-to-work’  allowance  which  allows  beneficiaries  to  retain
their  benefit  entitlement  for  three  years  (four  in  the  case  of  self-employed)  while  taking  up
full-time employment.

Many  countries are reviewing the conditions  of  eligibility  to  invalidity  benefits  by  focusing
less  on  labour  market  considerations  and  applying  stricter  medical  criteria.  As  a  result,
Luxembourg managed to reduce the number of new disability pensions by half between 1996
and  2000.  Poland  introduced  in  1997  stricter  rules  for  medical  invalidity  assessment  by
shifting these tasks from doctors' committees to the social security (ZUS) doctors and France
has  announced  that  it  will  reinforce  the  effectiveness  of  medical  controls.  However,  in  the
absence of  effective  labour  market  integration  measures  targeted  at  people  with  disabilities,
the tightening of the eligibility criteria, be they medical or economic and social, could result
in shifting the burden from invalidity schemes to other branches of social protection, namely
unemployment, sickness, early retirement and social assistance.

Finally,  it  is  still  widespread  to  grant  subsidies  to  employers,  often  in  the  form  of  reduced
social insurance contributions, in order to support hiring or maintenance at work of disabled
people.  Denmark,  for  instance,  developed  the  concept  of  'flexi  jobs'  for  people  with
permanently  reduced  work  capacity;  wage  subsidies  to  the  employer  amount  to  between  ½
and 2/3 of the salary. Financial incentives may be backed up by extensive on-the-job support
through  individual  job  coaches  who  can  be  employed  by  either  the  employer  or  the
community  (Austria,  Denmark,  Germany,  and  UK).  An  option  for  providing  employment
opportunities  for  the  most  severely  disabled  consists  in  offering  special  employment  in  a
sheltered environment,  be it in special  workshops  or  businesses  or  in  protected  segments  in
ordinary  companies.  The  Netherlands  and  Poland  have  put  particular  emphasis  on  this
approach.

17

 
3.5.

Prolonging working lives

The  Stockholm  European  Council  set  the  ambitious  goal  of  raising  the  employment  rate  of
people  aged  55-64  years  to  50%  (standing  at  40.1%  in  2002  and  as  low  as  one  quarter  for
people aged 60-64). The Barcelona European Council introduced a complementary ambitious
target  of  increasing  by  five  years  the  average  age  of  exit  from  the  labour  market  by  2010
(currently at 61 years, according to the estimations of Eurostat). Achieving these goals will be
crucial  for  ensuring  the  future  financial  sustainability  of  social  protection  and  notably  for
guaranteeing adequate level incomes for future pensioners.

Increased participation of all ages in the workforce requires promoting active ageing through
the  positive  interaction  of  economic,  social  and  employment  policies,  and  a  strong
involvement  from  the  social  partners.  Furthermore,  it  requires  stronger  investment  in  the
quality  of  work  by  promoting  measures  to  provide  an  attractive  and  adaptable  work
environment, improving access to training, and enhancement of work incentives for taking up
or  staying  longer  in  employment.  In  this  context,  existing  models  of  retirement  and
recruitment will have to change and the culture of early retirement should not be accepted as
the preferred solution to downsizing and corporate restructuring.

3.5.1. Obstacles to longer working lives in current social protection systems

Social protection schemes  certainly contribute  to the current low employment rates of  older
workers as they offer various options for an early withdrawal from the labour market. Since
the rise in unemployment in the mid-1970s, early retirement became a major tool for adjusting
the  labour  force  in  companies.  Social  protection  schemes  made  it  easier,  and  socially  more
acceptable,  to  shed  older  workers  rather  than  younger  workers.  In  view  of  demographic
ageing such a policy, that reduces the labour supply of people in the 50s and early 60s, is no
longer sustainable. The Ageing Working Group of the Economic Policy Committee estimated
that an increase in the effective retirement age of one year would reduce the expected increase
in  public  pensions  expenditure  by  0.6  to  1  percentage  points  of  GDP  (assuming  that  the
reduced incidence  in early  retirement  does  not  give  rise  to  additional  pension  entitlements).
From the point of view of adequacy, too, it will be important to make pension systems more
employment friendly: if individuals can increase their pension entitlement by working beyond
the  standard  retirement  age  (either  by  combining  earned  income  with  a  pension  or  by
deferring  the receipt  of  their pension) or opting  for  gradual  retirement then  this can  make  a
major contribution to the future adequacy of pensions.

There are numerous ways in  which  social protection  systems support the early exit of  older
workers  from  the  labour  market.  Certain  professions  benefit  from  a  lower  retirement  age
justified by the fact that work in these professions is physically demanding. An alternative to
early retirement for such groups would be to improve working conditions and to allow older
workers in such professions to move on to different activities. People with long contribution
careers may be eligible for a pension well before reaching the standard retirement age. This
can be justified on grounds of fairness towards people who had to start working early in life –
typically on low earnings –, but this should  not prevent  them from remaining  longer  on the
labour market to achieve a higher retirement income.

Pension schemes often also penalise, in  financial terms,  those who  want to  work  longer:  by
reducing  pensions  if  the  beneficiary  has  an  income  from  employment  or  by  denying  an
actuarial  increment  for  those  who  claim  their  pensions  later  (and  hence  for  a  shorter
remaining  period  of  their  lives).  A  retirement  condition  for  the  receipt  of  a  pension  and
various  means  tests  in  pension  schemes  tend  to  discourage  older  people  to  remain  on  the
labour  market.  There  are  many  restrictions  on  the  amount  of  income  that  can  be  earned  in

18

 
addition  to  a  pension.  While  the  payment  of  the  pension  is  sometimes  suspended,  in  other
cases there are deductions from the pension. Moreover, in the case of deferred retirement, the
contributions  paid  by  the  worker  and  the  shorter  remaining  life  expectancy  at  the  time  of
retirement is often not or only partially reflected in the pension level16.

Unemployment benefit schemes provide, in many Member States, another exit door from the
labour market.  Older unemployed sometimes  get  more  generous benefits  and  they  are  often
not required to be available and looking for work. In some Member States, invalidity benefits
allow  a  significant  proportion  to  retire  early,  depending  on  how  easily  such  benefits  are
granted, on whether support is given to find a more suitable job and on whether the evolution
of the health situation is regularly monitored.

3.5.2.

Policy reforms trends and employment-friendly measures

Member States recognise that the EU target of raising the employment rate of people aged 55
to  64  and  of  increasing  the  effective  average  exit  age  must  be  supported  by  profound
adaptations of their social protection systems. These reforms are now underway and they have
the potential of increasing significantly the activity rates17 of people in the 50s and 60s. While
most  Member  States  tend  to  concentrate  on  benefit  reforms  and  are  far  from  developing
comprehensive active ageing strategies an increasing number stress the need to maintain the
employability of older workers through lifelong learning, to provide better job search support,
to adapt working conditions, to change attitudes and combat age discrimination and, in some
cases,  to  lower  the  costs  of  employing  older  workers,  notably  by  reducing  social  security
contributions.

Several Member States are tightening the eligibility criteria for unemployment benefits while
offering  more  support  to  older  workers  for  finding  employment.  In  Belgium,  the  older
unemployed will be required to register as job seekers and obliged to accept work up to the
age of 58 (instead of 57 previously). The Netherlands, are abolishing altogether the age limit
above which job search is no longer required (currently 57½  years). Finland and Austria are
closing their early retirement schemes for the unemployed, and Germany reduces the period
of  unemployment  benefit  receipt  for  older  unemployed  people.  The  implication  of  such
measures is that older unemployed will no longer be regarded as definitively  excluded from
the labour market.

Early retirement is becoming more difficult even for people with long careers. In Spain, such
an  option  mainly  exists  for  people  who  had  entered  the  labour  market  before  1967.  Italy  is
gradually  increasing  the  number  of  contribution  years  required  for  a  ‘seniority  pension’.
Retirement before the standard retirement age remains possible in many Member States, but
only at the price of an actuarial reduction in pension benefits.

Gradual retirement, i.e. the  combination of a partial pension with part-time working may be
an alternative to an early complete exit from the labour market. Such option already exists or
is being introduced in several Member States. Its effect is, however, ambiguous: it may lead
to  an  increase  in  employment  participation  if  the  alternative  is  a  complete  cessation  of
activity; or it can reduce labour supply if, in the absence of the partial pension option, workers
would have continued to work full-time. Moreover, the conditions  attached  to  the  option  of
combining partial pension with part-time work will have to be made more attractive if it is to

16

17

This implies that the 'net pension wealth' of an individual is reduced by deferring retirement.
The activity rate is the proportion of people in the age group who are available and actively looking for
work.

19

 
                                                
be adopted by a  significant number  of  workers in  the countries where  this possibility  exists
(Germany, Belgium, among others).

A rise in the ‘normal’ retirement age starts to be envisaged in some Member States, often in
the context of flexible retirement schemes. In Sweden this is a reality since the 1999 reform
and the issue is openly discussed in Germany as a policy alternative. Austria and France are
raising  the  number  of  contribution  years  required  for  a  full  pension.  In  France,  this  implies
that  an  increasing  number  of  people  will  have  to  continue  working  beyond  the  standard
retirement  age  of  60  if  they  want  to  earn  a  full  pension  entitlement.  The  equalisation  of
retirement ages for men and women (e.g. Belgium, Italy, Portugal, UK) or between the private
and the public sector (Austria, UK) will also contribute to a higher effective retirement age.

There is a clear trend towards allowing older workers to stay longer on the labour market and
to combine earnings with their pension or, if they defer the receipt of their pension, to acquire
higher pension entitlements. The possibility of deferring once pension is  even considered in
countries with flat rate basic pensions (Denmark, Ireland, and UK). Other Member States are
introducing or improving the pension increments for people who remain longer on the labour
market.  However,  a  number  of  limitations  on  earnings  for  pensioners  remain  in  place  and
constitute  serious  obstacles  to  continued  labour  force  participation;  they  also  deny  older
workers important opportunities for securing an adequate income in old age.

Closer links between life-time earnings (or contribution payments) and pension benefits have
been or are being introduced in a number of Member States. This takes notably the form of
considering not only the final  years  of  a  career in  the pensions  formula, with the result that
workers who have lower earnings during the final years of their career (as a result of part-time
working or a 'second career') will not suffer undue reductions in their pension rights.

Finally,  Member  States  with  significant  occupational  pension  schemes  will  also  have  to
monitor  the  impact  of  such  often  tax-privileged  schemes  on  early  retirement.  Both  the
Netherlands and the UK are tightening the eligibility conditions for tax advantages for private
occupational  pension  schemes  offering  early  retirement  pensions.  In  the  UK,  the  accepted
minimum age is to be raised from 50 to 55 years.

4.

THE SITUATION IN ACCEDING COUNTRIES

While  the  current  problems  facing  social  protection  systems  in  Acceding  countries  greatly
differ  among  them,  the  following  features  seem  to  be  more  widely  present18:  (i)  low
participation  rates:  with  some  exceptions,  Acceding  countries  show  low  participation  rates
partly  reflecting  high  unemployment  and  high  dependency  ratios,  which  result  from  the
extensive  use  of  early  retirement  and  invalidity  pensions  used  during  the  economic
restructuring  processes  underwent  in  the  1970-80's.  Further,  some  Acceding  countries  have
more traditional social structures making the access of women to employment more restrictive
and reconciliation of work and family life more difficult; (ii) weak social protection and non-
employment  friendly  tax  systems:  despite  current  reforms,  existing  welfare  systems  are  not
very generous in financial terms, have loose eligibility conditions and provide weak access to
social  protection;  this  help  develop  a  culture  of  making  the  necessary  to  live  on  benefits
instead of directing efforts to search for a job. Finally, tax systems are sometimes ill prepared
to  develop  an  efficient  tax  collection,  while  taxation  on  labour  is  relatively  high;  and  (iii)

18

There are still too few analytical elements allowing an overview of the main obstacles to labour market
participation related to the structure and functioning of social protection systems in Acceding countries.

20

 
                                                
informal economy and migration: while immigrants, either legal or illegal, increase the capital
stock  and,  thus,  the  growth  potential  of  these  economies,  they  raise  the  problem  of  making
work  attractive  for  low-paid  workers  (legal  immigration)  and  of  transforming  undeclared
work  into  regular  employment  (illegal  immigration).  Legal  immigration  poses  serious
problems  both  in  terms  of  coverage  of  these  workers  and  for  the  long-term  financial
sustainability of the social protection systems in host countries.

Acceding countries should reinforce their social protection systems and active labour market
policies, with the aim of reducing the dependency ratio of people living on long-term benefits,
improving the employability of job seekers and increasing the participation rates, particularly
of women and older people. However, in considering policies that prolong the working lives,
account  should  be  taken  of  the  concrete  circumstances  prevailing  in  those  societies,
particularly with respect to the lower life expectancy, namely for men. Finally, on undeclared
work which sometimes is related to the illegal economy, legal sanctions should be re-enforced
and individually-tailored programs should be developed to make legal work pay for them.

5.

POLICY LESSONS TO BE DRAWN

Without prejudice of the policy recommendations to be given in the BEPGs and the
EGs,  the  following  conclusions  can  be  drawn  from  this  report  as  regards  the
contribution  that  social  protection  policies  can  provide  to  workability  and
employability:

(1)  Member States  should review and modernise their  social  protection systems
to  make  them  more  employment  friendly  by  removing  barriers  and
disincentives  to  work  and  create  the  right  conditions  to  make  work  more
attractive.  While  this  may  require  the  introduction  of  new  instruments,
significant  improvement  can  occur  just  by  reviewing  existing  policies  with
the  aim  of  eliminating  provisions  in  present  benefits  and  tax  schemes  that
have a negative impact on people's willingness or availability to take up a job
or remain in work and reduce the tax burden on low-paid workers.

(2) 

No single instrument or benefit scheme will suffice to make work attractive.
Therefore, Member States should examine the interrelationship of objectives
in  policy  areas  such  as  taxation,  social  security  systems  and  income
dependent benefit  schemes  when implementing  policies  to make  work  more
attractive. While there is a tendency to  implement making  work  pay  polices
by  applying  a  piecemeal  approach,  Member  States  should  develop  a
comprehensive  strategy  combining  social  objectives  with  the  economic,
employment  and  budgetary  objectives,  as  underlined  in  the  Employment
Guideline 8 and the Broad Economic Policy Guideline 4. Moreover, there is
need  for  closer  co-ordination  between  the  different  agencies  and  bodies
responsible for implementing interrelated reforms.

(3)  Member States should consider non-financial incentives in con-junction with
financial  incentives.  When  designing  social  protection  reforms,  Member
States should also place particular attention on aspects that have proved to be
effective incentives to work – in addition to financial incentives – such as the
following:

21

 
(a) 

(b) 

the  provision  of  adequate  (affordable  and  high  quality)  facilities  for
the  care  of  children  and  other  dependent  people,  like  older  and
disabled relatives;

the quality of work, as determined by such factors as flexible working
hours,  training  opportunities,  job  security,  adequate  social  protection
coverage.

(4) 

In  reviewing  social  protection  policies  with  the  aim  of  making  work  pay,
particular  attention  should  be  placed  on  the  interaction  between  passive
benefit  schemes  and  active  measures,  notably  in  relation  to  job  search  and
training. Stricter conditionality can help addressing the financial disincentive
to  work  inherent  in  the  tax-benefit  systems  without  necessarily  reducing  its
generosity (i.e., the duration and level of replacement income).As part of the
efforts  to  improve  incentives  to  work,  it  is  important  to  avoid  that  stricter
conditionality,  particularly  when  imposed  on  social  assistance  benefits,  may
put particularly  disadvantaged  people  at a serious risk of poverty  and  social
exclusion.

(5)  When  evaluating  the  cost-effectiveness  of  benefit  schemes,  Member  States
should carry out a more thorough and systematic analysis of the implications,
and  consider  also  the  medium-term  impacts.  In  particular,  well  designed
measures aimed at bringing people back into the labour market or prolonging
their working lives can be beneficial for both the individual and the society as
a whole.

(6) 

Removing barriers to geographical and occupational mobility is an important
objective  but  progress  has  been  slow.  Hence,  policies  to  overcome  such
barriers  need  to  be  boosted.  Member  States  need  therefore  to  focus  more
attention  on  promoting  mobility  in  the  labour  market,  for  instance,  moving
from  part-time  to  full-time  work,  moving  to  self-employment  or  moving  to
gradual  retirement  and  from  undeclared  work  into  regular  employment.
Specific  actions  may  include  financial  incentives  support  schemes  such  as
mobility  grants  and training  and  legislative  measures.  The  role  of  education
and training in a lifelong learning perspective is also crucial in this respect.

(7) 

Finally,  Member  States  should  ensure  that  supplementary  social  protection
schemes,  as  they  become  an  important  element  of  social  protection,  are
designed in such a way that they do not hinder workers in their mobility and
advancement of their careers.

22