Olli Kangas and Laura Kalliomaa-Puha
December 2018
ESPN Thematic Report on
In-Work Poverty in Europe
Finland
2018-2019
EUROPEAN COMMISSION
Directorate-General for Employment, Social Affairs and Inclusion
Directorate C — Social Affairs
Unit C.2 — Modernisation of social protection systems
Contact: Giulia Pagliani
E-mail: Giulia.PAGLIANI@ec.europa.eu
European Commission
B-1049 Brussels
EUROPEAN COMMISSION
Directorate-General for Employment, Social Affairs and Inclusion
2019
European Social Policy Network (ESPN)
ESPN Thematic Report on
In-work poverty in Europe
Finland
2018-2019
Olli Kangas and Laura Kalliomaa-Puha
The European Social Policy Network (ESPN) was established in July 2014 on the initiative of the
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Quoting this report: Kangas, Olli and Kalliomaa-Puha, Laura (2019). ESPN Thematic Report on In-work
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In-work poverty in Europe Finland
3
Contents
SUMMARY................................................................................................................ 4
1 ANALYSIS OF THE COUNTRY’S POPULATION AT RISK OF IN-WORK POVERTY.................. 5
1.1 From a high-IWP country to the lowest-IWP country: comparative development
1970-1990.................................................................................................... 5
1.2 Not so much the depression of the 1990s, but rather the rapid economic recovery
increased the IWP risk: development 1990-2010 ................................................. 6
1.3 Back to low IWP rates: the post-2008 recession developments............................... 6
1.4 Key challenges: darker clouds in the sky?..........................................................11
2 ANALYSIS OF THE POLICIES IN PLACE ....................................................................12
2.1 Policies directly influencing IWP .......................................................................12
2.1.1 In-work benefits ..................................................................................13
2.2 Policies indirectly influencing IWP.....................................................................14
2.2.1 Income transfers have direct and indirect impacts .....................................14
2.2.2 Social services: indirect impacts .............................................................15
3 POLICY DEBATES, PROPOSALS AND REFORMS CONCERNING IN-WORK POVERTY AND
RECOMMENDATIONS............................................................................................16
4 ASSESSING DATA AND INDICATORS.......................................................................17
REFERENCES...........................................................................................................18
In-work poverty in Europe Finland
4
Summary
Since the international 2008 economic crisis, inequality and poverty in Finland have been
in decline. The same goes for in-work poverty (IWP), which in Finland is comparatively
low. The Finnish IWP rate was 3.8% in 2012, and 2.7% in 2017. The corresponding figures
for the whole EU were 8.9% and 9.6%, respectively. Interestingly enough, there seems to
be some divergence between the Finnish and the EU IWP trends. Whereas the EU IWP
rates for most population groups seem to have increased slightly, there are downward
trends in the Finnish IWP rates measured by gender, age, different household types,
intensity of work, employment status and country of origin. This said, it is important to
emphasise that the most vulnerable groups exposed to IWP are the same as in the other
EU countries: immigrants from non-EU28 or other foreign countries have a larger IWP risk
than other groups; the self-employed are more exposed than employees; and low work-
intensity households (single mothers, in particular) have higher risks. Therefore, all those
policies that directly or indirectly fortify the adult earner model – the model that facilitates
both genders in all family situations to fully participate in paid work – are of great
importance in reducing IWP.
The low IWP rates in Finland are a result of several underlying factors that are interlinked.
First, employees are highly unionised and they can promote their interests via
comprehensive collective agreements. The comprehensive social security system increases
threshold wages and there are also in-work benefits that mitigate low income caused by
low work intensity/low pay. One crucial factor for the low IWP rates has been the prevailing
dual-breadwinner and full-time employment model. The full-time employment pattern also
effectively prevents IWP. Finally, the share of immigrants (usually employed in low-paid
jobs) has been low in Finland.
However, there are several challenges that may change the situation.
· New forms of contract work and increasing immigration may raise the IWP rates.
· There are strong demands to diversify wage setting and allow employers to make
employment contracts more freely, and to agree upon wages without the
interference of the trade unions.
· On the political agenda there are also voices demanding that the overall role of
trade unions must be radically reduced.
· One big theme on the political agenda is “making work pay”, i.e. eliminating work
disincentives, which include, among other policy measures, cutting down social
security and making eligibility to benefits more conditional, as well as compelling
claimants to accept any jobs, be they short term, part time or low paid. If low
incomes from employment are no longer compensated for by social transfers, the
IWP rates will inevitably increase.
· Increasing single parenthood may raise the IWP risk.
· Maintaining a low degree of IWP requires flexible and diversified income transfers
and a wide range of childcare and other family-related services to allow employment
and parenthood to be combined.
Our general recommendations are that:
· When seeking flexibility in the labour market, it is important to have a coordinated
bargaining system guaranteeing decent wage levels.
· Universal care services guarantee the continuation of the defamilised adult earner
model, which gives everyone the possibility to fully participate in paid work and
effectively prevents in-work poverty.
· Specific inclusive programmes targeted at vulnerable groups should be maintained
and improved, in order to enhance higher employment rates also in these groups.
In-work poverty in Europe Finland
5
1 Analysis of the country’s population at risk of in-work poverty
In this first section we start with two historical analyses (sections 1.1 and 1.2) describing
the mechanisms that have led to the internationally very low in-work poverty (IWP) rates
in Finland (see Figure 1). These two introductory sections provide a comparative and
historical perspective on the changes in IWP in Finland and in some other countries. The
rationale for such a cursory historical scrutiny is the fact that the foundations of the low
IWP rates were already laid during the formative period of the Finnish welfare state and
labour market institutions, from 1960 to 1990. These sections provide preliminary
explanations for the low Finnish IWP figures: structural changes and changes in the welfare
state programmes explain fluctuations in IWP and the population composition of IWP.
Whereas in these two sections we rely on previous Finnish studies, in the later sections, in
order to ensure comparability (in terms of concept and data sources), analyses are
primarily based on the statistical annex provided by the ESPN Network Core Team (see
Annex A in Peña-Casas, Ghailani, Spasova and Vanhercke 2019).
In Finland, there is a strong belief that employment is the best way to combat poverty.
Indeed, much in this belief seems to be true. In-work poverty in Finland (2.7% in 2017) is
a much smaller problem than in many other EU countries (the EU average is 9.6%). In this
Thematic Report we use the IWP definition agreed on by the EU in which: “a person is at
risk of in-work poverty if he/she is in employment and lives in a household that is at risk
of poverty. A person is in employment when he/she worked for more than half of the
income reference year. Employed individuals can be salaried employees or self-employed.
The income reference year is the calendar year prior to the survey. A household is at risk
of poverty (or ‘income poor’) if its equivalised disposable income is below 60% of the
national equivalised disposable household median income. The population covered are 18-
64 years old.” (Eurostat, 2005).
1.1 From a high-IWP country to the lowest-IWP country: comparative
development 1970-1990
In the early 1970s, the Finnish IWP rates were higher than in Sweden, Germany or the UK,
but lower than in the US or Canada (Table 1). However, 20 years later the Finnish IWP was
the lowest of all the countries compared in Table 1. There are structural, institutional and
policy-related factors explaining the positive Finnish development. First, in the early 1970s
the share of the agricultural population was still relatively high in Finland. Since the self-
employed (to say nothing of “unpaid family workers” in agriculture) tend to have higher
income poverty rates than employees, the structure of the Finnish labour force kept the
IWP rates high (Kangas and Ritakallio, 1998). Second, the development of the major
Finnish welfare state institutions, be they income transfer schemes or social services, took
place between the 1960s and the 1980s. Third, the 1960s and 1970s were decades when
unionisation rapidly increased among employees (there were 430,000 union members in
1960 but as many as 1,642,000 in 1980 (Alestalo and Uusitalo, 1986:182)), and
consequently centralised wage agreements came to cover some 90% of all employees. The
joint effect of these structural, institutional and social policy-related developments pushed
the IWP rates down. In fact, the very same factors explain why the rates are still the lowest
in the EU.
Table 1. In-work poverty (%) in Finland and some other OECD countries 1970-2000.
YEAR FINLAND SWEDEN GERMANY UK CANADA USA
1970 9.9 8.9 4.8 9.0 10.8 13.0
1980 6.1 5.8 7.2 5.1 15.9 13.2
1990 1.9 4.4 4.8 6.3 14.1 8.8
Source: Airio (2008:71).
In-work poverty in Europe Finland
6
According to Airio1 (2008:75), not only did the IWP rate go down (from 9.9% in 1970 to
1.9% in 1990), but also the composition of the IWP population changed. Whereas in 1970
the most vulnerable group was dual-earner families with children (comprising 60% of all
IWP family groups), in 1990 the group most exposed to IWP was single adults (58%).
1.2 Not so much the depression of the 1990s, but rather the rapid
economic recovery increased the IWP risk: development 1990-
2010
In the early 1990s, Finland experienced the deepest economic recession in its independent
history. Interestingly enough, the IWP rates went down from 1990 to 1995, just as
unemployment skyrocketed from 3.5% to 16.0% (Palviainen, 2014:16; Kangas,
2019:156). The explanation is that, in the wake of rising unemployment, the median
income decreased and, consequently, the poverty threshold tied to the median went down
and more people, who prior to the depression had incomes below the poverty threshold,
qualified in the deepest recession as “non-poor”. At the same time, in order to combat
accelerating public debt, the government carried out cuts in social security spending. The
general idea was not to change the basic structure of the Finnish welfare state, but just to
make it leaner. However, the welfare state also became meaner towards the lower-income
groups (Kangas, 2019). This said, the “leaner and meaner” Finnish transfer system reduced
IWP rates by 66% (Penttilä, 2005).
The recovery from the depression was rapid. The ICT-based Nokia economy created an
economic boost and, in the latter part of the 1990s, annual GDP growth was 4.9%; but the
economic tide did not benefit everyone equally, and income inequality grew rapidly. Thus,
at the same time, there was an increase in income inequality and a decrease in the
redistributive effects of the transfer and tax systems (Tuomala, 2017). Also, self-
employment increased from 182,000 in 1993 to 212,000 in 2000 (Kangas and Kalliomaa-
Puha, 2017). As a consequence of these simultaneous developments, the IWP rate
increased to 3.5% in 2000 and further to 5.5% in 2010 (Palviainen, 2014:16). To sum up:
the observations from the period 1990 to 2010 fortify the results presented in section 1.1.
The size of the vulnerable population and the effectiveness of the welfare state in reducing
poverty rates are crucial when trying to understand fluctuations in the Finnish IWP rates.
There is some criticism of the use of the relative at-risk-of-poverty measure, because it
does not take into account the increases or decreases in the poverty threshold caused by
changes in the national mean incomes. Horemans et al. (2016) found that when the
poverty threshold is kept at a pre-crisis level, an increase in in-work poverty in the EU can
be observed. Finland does not fit into this EU picture. If the poverty threshold is fixed at
the 2000 level, the IWP rate was the highest (close to 6%) in 1996, decreased to 2% in
2008, and further to 1.5% in 2010 (Palviainen, 2014:22).
1.3 Back to low IWP rates: the post-2008 recession developments
Both in 2012 and 2017, the Finnish IWP rates were the lowest in the EU (3.8% and 2.7%,
respectively). In many other countries, IWP has increased, and it ranges from the low
Finnish values to the high values found in Romania (17.9%). In order to gain some
comparative perspective on the magnitude and patterns of the national Finnish IWP rates,
in the subsequent figures we present Finnish IWP rates and the EU average. In Figure 1,
the first (upper) graph illustrates the 2012-2017 IWP development in Finland for all
1 Airio’s definition of IWP followed Eurostat’s definition: A person is in employment when he/she worked at least
17 hours a week during at least seven months of the reference year. A household is income poor if its
equivalised disposable income is below 60% of the national equivalised disposable household median income.
In-work poverty in Europe Finland
7
employed employees and the self-employed. The second graph presents the same
information, but for the EU28 average.
Figure 1. IWP poverty rates in Finland and the EU28 average for employed, employees
and the self-employed, 2012-2017
Source: Eurostat, ilc_iw01.
Since the international 2008 economic crisis, inequality and poverty in Finland have been
in decline: the Gini-index went down from 28.4 in 2008 to 27.7 in 2017 (Findikaattori,
2019a). The corresponding numbers for poverty rates were 13.9% in 2008 and 12.1% in
2017 (Findikaattori, 2019b). The same trend is visible in the IWP rates. The risk of IWP
has fallen among the self-employed, in particular (from 14.1% in 2012 to 11.5% in 2017).
On average, in the EU the IWP rate for the self-employed is much higher than in Finland
(22.2% in 2017). The same goes for employees (7.4% in 2017). However, in Finland the
relative risk of IWP is 8.8 times greater among the self-employed than among employees.
The corresponding figure is 3.0 for the EU28.
Interestingly enough, the picture is totally different if we look at the material and social
deprivation rates. In Finland, these figures are 2.3% for self-employed people and 2.4%
In-work poverty in Europe Finland
8
for employees, and in the EU 12.6% and 8.6%, respectively. The discrepancy between
income poverty and material deprivation is well documented in previous comparative and
national studies (e.g. Kangas and Ritakallio, 1998; Airio and Niemelä, 2004; Airio, 2006,
2007, 2008; Guio and Marlier, 2017; European Commission, 2018). There are many
problems with comparing income poverty and material deprivation between the self-
employed and employees. In the case of the self-employed, it is difficult to separate
personal income from enterprise income, and the self-employed can use their enterprises’
assets (company car, TV, computers, etc.) for their own personal purposes. Neither
employees nor the bogus self-employed have these coping options.
Figure 2 depicts the developmental trends in IWP by gender and age. The first panel of the
graph provides separate lines for genders. There seems to be some divergence between
the Finnish and the EU lines. Whereas the average EU IWP rates for both genders have
increased slightly, there are downward trends in Finland. The Finnish gender-related IWP
trends are in accordance with the overall decline in poverty and inequality since 2008.
Figure 2. In-work poverty (%) by gender and age in Finland and in the EU, 2012-20172.
Source: Eurostat, ilc_iw01.
2 If not otherwise indicated, all the graphs are based on the statistical annex provided by the Network Core
Team (see Annex A in Peña-Casas, Ghailani, Spasova and Vanhercke 2019).
In-work poverty in Europe Finland
9
The second panel shows the IWP trends by age. Both in the EU and in Finland, those in the
18-24 age bracket are the most exposed to IWP. To some extent, the result is
understandable: many young people have temporary or part-time jobs when they are
studying. In Finland, the incidence of IWP among young adults has substantially decreased
(from 9% in 2012 to 4% in 2017). Differences between the two other age groups (24-54
and 55-64) are negligible in Finland.
As indicated in section 1.1, from 1970 to 1990 the structure of the most vulnerable IWP
groups changed from dual earners to single adults. In Table 2, we present the most recent
developments by household types. We can see that the rank-order of vulnerable groups in
the EU and Finland follow the same order: single parents, single adults, couples with
children and couples without children. The rank-order indicates that, whereas in most
European welfare states the dual-earner model is an effective guarantee against in-work
poverty, a single-earner household increases the risk of being poor. Also, in Finland single
parents had rather high IWP rates up to the year 2014 (12.8%), but by 2017 the rate was
down to 5.7%, which was lower than the IWP for any EU average group. However, the
poverty risk of a single parent is three times greater than that of a couple without children
(1.6%), and twice as high as a couple with children (3.0%).
Table 2. In-work poverty (%) by household type in Finland and the EU, 2012-2017
2012 2013 2014 2015 2016 2017
EU
average
Single person 12.6 13.1 13.5 13.2 13.9 13.4
Single person with dependent
children
19.8 20.2 20.0 19.9 21.6 21.4
Two or more adults without
dependent children
5.7 5.6 6.1 6.1 6.2 6.1
Two or more adults with dependent
children
10.1 10.0 10.5 10.6 10.4 10.6
Finland Single person 7.0 7.3 5.7 4.5 4.5 3.9
Single person with dependent
children
9.5 11.6 12.8 8.1 8.0 5.7
Two or more adults without
dependent children
2.4 2.6 2.4 2.6 2.2 1.6
Two or more adults with dependent
children
3.2 2.6 3.3 3.5 2.9 3.0
Source: Eurostat, ilc_iw.0.01.
One obvious explanation for IWP is work intensity, and at first glance the explanation for
the low Finnish IWP rates is that in Finland the share of part-time work is much lower than
in most other countries. Finland can be characterised as a country with mostly dual-earner
households and people with full-time jobs. Furthermore, the share of the self-employed
(who tend to be more exposed to IWP than employees) is relatively low in Finland (OECD
Stats, 2018). These three characteristics effectively combat poverty in general, and IWP
in particular.
When it comes to the share of part-timers, only small changes have occurred in the 2010s.
In 2010, 8.9% of males and 19.8% of females had part-time jobs. In 2017, the
corresponding shares were 10.5% and 21.9%, respectively (Findikaattori, 2018). What is
important is that the risk of IWP is nearly four times as high for part-timers as for full-
timers (respectively, 7.5% and 2.3% in 2017).
The concept of a “part-time job” can include part-time employment in many different ways,
i.e. the work intensity may vary for individuals, but also at the household level. Figure 3
In-work poverty in Europe Finland
10
depicts developmental patterns of IWP for a number of household work-intensity groups.
The first graph describes the situation without children and the second one with children.
Not surprisingly, a low level of work intensity correlates with IWP. As the left-hand panel
indicates, in Finland there are no significant differences between the medium and very high
work-intensity groups. The low-intensity group deviates, however, and has a higher
incidence of IWP, and this has increased since 2015. Including earners with children in the
analysis changes the picture. The IWP rate for low work-intensity households (often single
mothers) is rather high, which is a general European phenomenon (e.g. Horemans, 2018).
Meanwhile there is no difference between the high and the very high work-intensity groups.
However, the medium intensity group displays somewhat higher IWP risks. A worrying
trend is that those earners in low work-intensity groups, both with and without children,
have high poverty rates, and furthermore, IWP is increasing in this group.
Figure 3. In-work poverty (%) by work intensity; the first graph shows earners without
children and the second graph presents those with children in Finland and the EU, 2012-
2017
Source: Eurostat, ilc_iw01.
In-work poverty in Europe Finland
11
In many countries, immigrants are in the low work-intensity and low-paid group and are
hence the most exposed to IWP. There are many reasons for this. Often immigrants end
up in low-paid jobs in services (cleaning, house-keeping, restaurants), or they obtain their
livelihood from self-employment. In many countries the risk of IWP is greatest in those
occupations. As can be seen from Table 3, both in the EU and in Finland, immigrants from
non-EU28 or other foreign countries have higher in-work poverty risks. In the EU, the
poverty risk for immigrants coming from non-EU28 countries or from other foreign
countries is at about the same level as the self-employed, whereas in Finland the self-
employed have a higher IWP risk (11.5%) than immigrants from non-EU28 countries
(7.4%).
Table 3. In-work poverty (%) by the country of origin in Finland and the EU, 2012-2017
2012 2013 2014 2015 2016 2017
EU average EU28 countries except
reporting country
11.2 12.9 13.8 13.2 12.3 14.0
Neither non-EU28 countries nor
reporting country
18.9 19.1 20.2 21.6 21.1 23.3
Foreign country 16.0 16.6 17.7 18.2 17.5 19.8
Reporting country 8.1 8.0 8.5 8.5 8.6 8.3
Finland EU28 countries except
reporting country
4.8 8.5 7.5 7.8 7.3 2.6
Neither non-EU28 countries nor
reporting country
11.9 9.7 9.2 9.4 6.7 7.4
Foreign country 8.6 9.1 8.4 8.6 7.0 5.4
Reporting country 3.6 3.5 3.5 3.3 2.9 2.5
Source: Eurostat, ilc_iw01.
The survey above indicates that according to EU statistics, IWP is a smaller problem in
Finland than elsewhere in the EU (see also Frazer et al., 2012; Eurofound, 2017; Lohmann
and Marx, 2018; European Commission, 2018). However, the situation may be changing
and, in some cases, there is an upward trend in the IWP rates – as shown in Figure 3 – for
low work-intensity groups. In the following section, we briefly discuss the key challenges
for the relatively good results achieved in Finland.
1.4 Key challenges: darker clouds in the sky?
The low IWP rates in Finland are the result of several interlinked factors. First, employees
are highly unionised, and they can promote their interests via comprehensive collective
agreements, often including employment-related “social packages” (agreements between
social partners on holidays, educational possibilities, family-related benefits, sick pay, etc.)
or some “solidarity” payments for low-paid occupations. Due to the fact that the coverage
of collective agreements is about 90% of employees (in the public sector the coverage is
100%), wages are regulated. Furthermore, the comprehensive social security system
inevitably increases threshold wages. Therefore, there has not been a need for a minimum
legal wage in Finland. There are also some in-work benefits that mitigate low income
caused by low work intensity. One crucial factor for the low IWP rates has been the
prevailing two-breadwinner and full-time employment model. Finally, the share of
immigrants has been low in Finland.
In-work poverty in Europe Finland
12
The interaction of these factors has contributed to the relatively good results. However,
the tide may be turning. New forms of contract work, such as part-time and fixed-term
contracts, zero-hour contracts, job hiring, various international subcontracting jobs, self-
employment, freelancing, micro-entrepreneurship and increasing immigration are raising
the number of groups exposed to IWP (Jakonen, 2017).
There are also demands to diversify the current wage-setting methods and allow employers
to make employment contracts more freely, and to agree upon wages without the
interference of the trade unions. On the political agenda, there are also voices demanding
that the overall role of trade unions be radically reduced. One big theme on the political
agenda is “making work pay”, i.e. eliminating work disincentives, which include, among
other policy measures, cutting down social security and making eligibility to benefits more
conditional, as well as compelling claimants to accept any jobs, be they short term, part
time or low paid. If low incomes from employment are no longer compensated for by social
transfers, the IWP rates will inevitably increase. Maintaining a low degree of IWP requires
flexible and diversified income transfers (Jakonen, 2017).
2 Analysis of the policies in place
In the previous sections, we briefly examined the structural and institutional developments
that have contributed to low IWP rates in Finland. The aim of the next two sections is to
take a closer look at these processes and factors. Whereas the aim of section 2.1 is to
discuss policies that have directly affected the outcome, the second section (2.2) analyses
indirect determinants.
2.1 Policies directly influencing IWP
The main explanations for the low Finnish IWP rates are linked to labour market issues,
social policies and a combination of these two. Since the IWP rates in Finland have been
low and remain so, IWP has mostly been absent as an important policy item on the political
agenda. Nor are there any policy programmes specifically targeted at IWP groups, be they
employees working under atypical employment contracts, in non-standard occupations or
the self-employed. Similarly, there are no policies aimed at tackling labour market
segmentation. Rather, the recent policy discourse and the policies adopted are more
concentrated on increasing the labour market participation rates and getting recipients of
social benefits to work and accept any job offers. The quality of the jobs or the level of pay
have not been on the governmental agenda that often. Employment is the issue.
According to Eurofound (2017:49), an adequate minimum wage is the best medicine
against IWP. However, this is not the case in the Nordic countries. The Nordic countries
have no instituted minimum wage. The main reason for this is the more or less universal
and comprehensive income transfer system, which sets a threshold wage that the employer
has to pay in order to hire an employee (see e.g. Kangas and Pulkka, 2016). Benefits are
rather generous, and therefore the threshold wage is quite high, which pushes the IWP
rate down, although the measures are not specifically targeted at IWP groups. In addition,
many low-income earners are also entitled to housing allowances and some other in-work
benefits (see section 2.2), which improve the economic situation of the lowest paid and
hence combat IWP.
In the Nordic countries, various labour market programmes and institutional practices
affect in-work poverty through their direct impact on wage setting and wage inequality
(Seikel and Spannagel, 2018). When it comes to spending on active labour market policies,
Finland fits badly into the Nordic group of countries. With its share (0.54%) of active and
passive labour market measures, Finland is closer to the OECD average (0.70%) than
Denmark (1.80%), Norway (1.00%) or Sweden (2.13%) (OECD Stats, 2018). However,
Finland spends more than the other Nordic countries on job rotation and training (second
to Denmark). The problem is that there are no reliable evaluations of how effective rotation
measures have been in reducing IWP, or as spring-boards to better-paid jobs. There are
In-work poverty in Europe Finland
13
more studies on training, but they have been interested in the employment effects, rather
than in IWP (e.g. Card et al., 2018). Thus, the possible effects on IWP are indirect.
However, there are some Finnish studies indicating that low-paid jobs probably open up
possibilities for better-paid jobs, and provide exit routes from IWP (Palviainen, 2014).
As mentioned in sections 1.1 and 1.3, the union density in Finland is high, as is the
coverage of the wage bargaining system and collective agreements. The OECD (2018b:
83) classifies Finnish labour market bargaining as a predominantly centralised and
coordinated collective system, with a mixture of higher- and lower-level agreements and
strong coordination between sectors. Comparative results suggest that such systems are
associated with better labour market and income outcomes for exposed groups and lower
wage inequalities. The flip-side of the coin tends to be lower flexibility, higher levels of
fixed-term employment contracts and somewhat higher structural unemployment (OECD
Stats, 2018:77-78).
2.1.1 In-work benefits
There are a number of income transfer schemes that also include employed low-income
groups. Universal child allowance is paid for every child under 17 years of age. Housing
allowance is available for all low-income households. The form of housing does not affect
eligibility, i.e. the allowance is available for rented, as well as owner-occupied homes. The
amount of the housing allowance depends on the number of adults and children in the
household, the municipality of residence, and the monthly gross income. In low-income
groups, the allowance replaces 80% of housing costs, and the replacement rate declines
in step with income from employment. However, income up to €300 a month does not cut
the benefit. When the household’s gross income exceeds the maximum limit (which varies
according to the municipality category), the household is no longer entitled to the
allowance. For an adult living alone, the maximum income in the most expensive
municipality category is €1,860, and €1,470 a month in the cheapest category. For a single
parent with two children, the maximums are €3,324 and €2,619 a month, respectively
(Kela, 2018a). The housing allowance is one of the most effective transfer schemes,
directly improving the economic situation of low-income people, be they employed or not.
The problem is that the costs of the housing benefit system have rapidly increased.
Whereas in 2012 total expenditure on housing allowance was €1.3 billion, by 2016 it had
increased to €1.9 billion. In the same period, the number of households receiving the
allowance increased from 180,665 to 267,356 households (Kela, 2018b:288-289). It is
therefore no wonder that the government wants to introduce cost-containment policies.
However, the policies may lead to an increase in IWP rates.
There are also some tax credits, which benefit employed people in low-income jobs.
However, they are not significant (e.g. the maximum amount of earned income credit is
€1,540 a year). Furthermore, they are general and not tailored to combat IWP (Finnish
Tax Office, 2018).
At present, the main policy discussion revolves around work disincentives and how to
increase labour market participation rates. A specific problem in Finland is that the effective
marginal tax rates among those living on the dole, or low-income earners, are high,
creating serious work disincentives. The high effective marginal tax rates are caused by a
combination of income-tested social assistance and housing allowance and income-related
day-care fees for children. Therefore, marginal tax rates are 60-90% – or in some cases
even more (Viitamäki, 2015). According to the government, the most important task is to
reform and streamline the tax-benefit system, so that work pays enough when moving
from benefits to employment, and when moving from a part-time, low-paid job to a full-
time job. On 28 September 2017, the prime minister nominated an expert group (TOIMI)
to draw up alternatives for reforming the Finnish social security benefit system, in order to
make it more employment friendly (Prime Minister’s Office, 2018).
In-work poverty in Europe Finland
14
2.2 Policies indirectly influencing IWP
Whereas the list of policies directly targeted at combating IWP in Finland is short (section
2.1), the list of indirect measures is longer, including universal family policies, health care
and other social services available either totally cost free, or heavily subsidised. In addition
to benefits in kind, there are income transfer schemes (partially discussed in section 2.1)
and various pay subsidies for employers to employ vulnerable groups on decent wages.
As discussed in the previous sections, Finland has a high union density and a high level of
wage bargaining, covering wages and salaries so they are compressed; consequently,
there is comparatively little work income inequality. The relatively high threshold salary
and compressed wages, combined with the social benefit system, lead to low IWP rates.
The drawback in such a system is that it provides opt-out possibilities from the labour
market for those groups who might otherwise be poor (see e.g. Eurofound, 2017:11).
2.2.1 Income transfers have direct and indirect impacts
In order to facilitate the labour market participation of vulnerable groups, special income
transfer schemes are available. The most important of these are the partial sickness
allowance, partial rehabilitation allowance, partial invalidity pension, partial pension and
wage subsidies. All of these have inclusive objectives and they are designed to support
vulnerable groups in employment, as well as safeguard decent levels of income for those
who would otherwise fall into the IWP category.
The partial sickness allowance replaces the loss of earnings when the claimant must
reduce their labour supply due to sickness. The purpose of the part-time sickness allowance
is to support the claimant’s (whether sick or disabled) gradual return to full-time
employment. In order to receive partial sickness benefit (40-60%), claimants may work
part time. The partial sickness allowance is paid for up to 120 days.
The rehabilitation allowance is available either via the income-related pension scheme
or the national pension scheme (the minimum pension provided by the Social Insurance
Institution of Finland). The rehabilitation allowance under the earnings-related pension
system corresponds to the claimant’s potential disability pension plus 33 percent. The
rehabilitation allowance can also be paid partially. Kela’s rehabilitation allowance is for
employees or self-employed people with partial incapacity to work, but who have the aim
of remaining in work or of returning to work. The purpose of the rehabilitation allowance
is to provide a guarantee of economic security during the rehabilitation period. Kela’s
rehabilitation benefits are tailored to individual needs and situations after a vocational
rehabilitation assessment. The specific rehabilitation programmes include: an allowance
for education and vocational training, support for integration into work and various work
try-outs.
The partial disability pension is for people whose working ability is reduced, but who
are able to cope with part-time work or lighter job assignments (Kela, 2018c).
A pay subsidy is an economic benefit that an employment office may grant to the
employer to cover the pay costs of unemployed jobseekers. The purpose of the pay subsidy
is to enhance the claimants’ attachments to the open labour market when they have
shortcomings in their professional skills, or if they suffer from some form of incapacity that
reduces their ability to cope at work (TE-Services, 2018).
Family-related cash benefits help to combine family responsibilities and employment.
Furthermore, they supplement the income from reduced working hours due to family
responsibilities. The Social Insurance Institution of Finland (Kela) pays a maternity
allowance for four months. In many cases, the employers pay the full salary for the
maternity leave period. After maternity leave, parental leave allowance is paid for six
months. The parental leave can be shared between the mother and father, but they cannot
receive it at the same time. Parents can simultaneously work part time and take partial
In-work poverty in Europe Finland
15
parental leave, with partial parental allowance. After parental leave, parents can take
childcare leave until the child (or youngest child) is three years of age. A child homecare
allowance is paid during that period. A part-time homecare allowance is available for those
parents who have part-time employment.
A flexible care allowance can be paid to a parent caring for a child under three years of
age, if the parent does not work more than 30 hours a week. These benefits, as well as
child allowance, are universal. Thus, these policies are not targeted specifically at groups
more exposed to IWP or anybody else (Kela, 2018d).
Carers’ leave schemes support carers in employment and combat IWP, but the
discretionary characteristics of the benefit causes problems. Childcare leave is available
for those willing to take care of a disabled or chronically ill child at home. Parents are
entitled to this until the child (or youngest child) is three years of age. The parent’s job is
also secured during this period. To combine work and care, even shorter periods of leave
are vital. When the child is under 10 years of age and falls ill, the parents can take
temporary care leave for four days in a row to stay at home and care for the child. The
eligibility for temporary care leave is based on the Employment Contracts Act. Parents
taking care of disabled children are relatively well-off in Finland until the child turns three.
Thereafter too much depends on the goodwill of the employer, since care leave for anyone
apart from the parents of children under three years of age is discretionary (for a more
detailed description, see Kangas and Kalliomaa-Puha, 2016).
As shown above, there are some income transfer schemes that are universal and available
to all (such as child allowance); there are some that are targeted at low-income groups
(such as housing allowance); and there are some targeted at vulnerable groups (such as
rehabilitation and partial sickness or pension schemes). All social transfers that are paid to
a non-employed household member also raise the household’s income and reduce in-work
poverty (counted on the basis of the household’s total income). Perhaps the most effective
in combating IWP is the rather generous housing allowance system. The problem with the
housing allowance system is that it also creates severe disincentive problems for those
living on social benefits to accept a job offer (Kangas and Pulkka, 2016). Another drawback
caused by generous transfer schemes is that young people move away from their childhood
homes rather early, forming their own single-person households that, as a rule, have
income below the poverty line. Students in temporary, part-time jobs are a big IWP
category in Finland (see Figure 2).
2.2.2 Social services: indirect impacts
Due to government care policies and other social services available to families, women face
comparatively few barriers to employment (Eurofound, 2017:11). Combining work and the
care of a child is, in most cases, facilitated by municipal day care (see Lancker and
Horemans, 2018). There are also special services for disabled or ill children – at least in
bigger cities. The fees for using public day care depend on the family’s size and income
and the hours of care needed. The day care for disabled children is free of charge. Disabled
children are provided with after-school services, as well as transportation services to
and from school. Municipal home service and home nursing care can assist families
with members who need special care. Entitlement to long-term care services in Finland
is based on residence in a municipality. Services are granted on the basis of an individual
needs assessment. There is a wide range of in-kind benefits, such as home care, sheltered
homes, more intensive institutional care, and healthcare centres; also cash benefits, such
as care allowances, tax deductions for services, and informal care support (Kalliomaa-Puha
and Kangas, 2018). Finland, as well as the other Nordic countries, is characterised by high
levels of defamilisation3, which pushes down IWP by encouraging dual-earner households.
3 Defamilisation pertains to the degree to which social care policies make it possible for people to participate in
working life outside their homes and families, i.e., family obligations do not prevent participation in activities
outside home.
In-work poverty in Europe Finland
16
Furthermore, as shown by Boertien and Permanye (2017), educational assortative mating,
and hence income-based homogamy, is lower in Finland than in most other countries,
which, in turn, equalises income distribution.
3 Policy debates, proposals and reforms concerning in-work
poverty and recommendations
The low IWP rates in Finland are the result of a long historical process, as shown in sections
1.1 and 1.2. IWP has not been a major policy issue, and the “active inclusion” approach to
the prevention and alleviation of IWP has been a by-product. Therefore, it is very difficult
– nigh impossible – to set out one single policy programme that has led to a low level of
in-work poverty. In addition, not that much has happened in the policy programme or the
IWP rates. Strong unions and the coordinated wage bargaining system have kept wage
dispersion down. Although Finland does not have a minimum wage, the relatively generous
income transfer system sets threshold wages, keeping minimum wages at a decent level
also in the secondary labour market. The low-paid and part-time employed are supported
by housing allowances and income transfers, effectively combating IWP. In fact, IWP is not
regarded as a social problem or a challenge to be addressed in the National Reform
Programme of Finland. Nor is IWP identified in key government declarations.
However, there are some civil society organisations – most notably the European Anti-
Poverty Network Finland – that have warned of rising IWP in Finland (e.g. Jakonen, 2017).
Furthermore, representatives of trade unions are worried about the future of coordinated
wage negotiations and the opening up of Finnish labour markets to employees from non-
EEA (European Economic Area) countries. The inflow of immigrants outside the EEA area
is seen as a device to push down the lowest wages and to bolster labour market
segmentation.
The policy priority in the government’s agenda is to increase employment and reduce
unemployment. Instead of carrots, the present government has introduced a number of
sticks, trying to compel the unemployed to accept any job, be it temporary, part time or
low paid. According to the “Activation model” that came into effect on 1 January 2018, the
unemployed who do not fulfil their activation requirements (18 hours of employment in a
three-month period) have their benefits reduced. These “activation” programmes most
probably will increase the number of people in jobs with minimal working hours and with
low pay. Since these people will then be classified as employed, the level of IWP may
increase, unless social transfers are sufficient to cushion the impact of more conditional
unemployment benefits. Thus, these people will be activated to be in-work poor (Seikel
and Spannagel, 2018: 252-253).
The collective bargaining system in Finland – as in many other countries – is facing serious
challenges: union density is falling; local and enterprise-level wage negotiations are on the
rise; and there are signs that wage differences between employment sectors and segments
are increasing. Trade unions are afraid that if their role diminishes, the quality of jobs will
also diminish. The counter-argument is that if we do not make our labour market more
flexible and accept enterprise-level wage setting, productivity will be harmed, economic
growth will be sluggish, and structural unemployment will remain at a high level. There is
certainly some truth in both lines of argumentation. On the one hand, the OECD
(2018b:75) states that: “Centralised bargaining systems tend to be associated with lower
productivity growth if coverage of agreements is high.” On the other hand, the OECD also
states that labour market outcomes for vulnerable groups, in particular, are better in
centralised and coordinated systems. To avoid the Scylla of centralised negotiations and
the Charybdis of highly decentralised negotiations, a promising possibility is to use
decentralised but coordinated wage-setting processes that seem to have the positive
outcomes of decentralisation, without increasing IWP and other harmful labour market
In-work poverty in Europe Finland
17
outcomes (OECD Stats, 2018:78). This is an important recommendation also for Finland,
which is seeking a new mode for its labour market bargaining process.
Cuts introduced to social benefits and reduced access to family services may make it more
difficult to effectively integrate work and family life. Thus, the good results of the
interaction between the labour market and social policies produced in Finland may be
endangered.
In sum, our overall recommendation is that, when seeking flexibility in the labour market,
it is important to have a coordinated bargaining system. Universal care services guarantee
the continuation of the defamilised dual-earner model that effectively prevents in-work
poverty. Specific inclusive programmes targeted at vulnerable groups should be
maintained and improved, in order to enhance higher employment rates also in these
groups.
4 Assessing data and indicators
The European Union Statistics on Income and Living Conditions (EU-SILC) offer a wide
variety of possibilities, including both cross-sectional and longitudinal analyses of living
conditions in the EU (see e.g. Atkinson, Guio and Marlier, 2017). The database opens up
possibilities for comparative analyses to assess the outcomes of different national policies.
It is the main tool for European-level evidence-based policy making. Simultaneously, it is
an effective tool in national policy making to show what is good and functions well, and
where national policies need change and improvement. Therefore, the EU-SILC and the
indicators that can be derived from the data are useful for the scientific community, policy
makers and various stakeholders interested in social policy and labour market issues.
For EU-SILC purposes, Statistics Finland carries out an annual Survey on income and
living conditions, which contains information on Finnish household income and living
conditions (Statistics Finland, 2018). Annually, about 10,000 households are interviewed
for the survey by telephone. Data from various administrative registers are also linked to
the survey answers. The availability of these registers greatly improves the reliability of
the Finnish data sets. In sum, both the EU-SILC and the national statistics are of utmost
importance for analysing living conditions, poverty, employment, health, well-being,
income formation, taxes and the income distribution of the population.
That said, there are severe problems in getting data on hard-to-reach groups, which
usually are the most exposed and vulnerable groups in Finnish society. People in food
banks (e.g. Ohisalo, 2017), the homeless (Asunto ensin, 2018), undocumented immigrants
(Jauhiainen and Gadd, 2018) and people living in institutions are often, for various reasons,
excluded from registers and interviews. In order to get a fuller picture of the situation of
the most exposed groups, additional data are needed.
In-work poverty in Europe Finland
18
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