Incentive traps in the Finnish unemployment benefit system

This Master's Thesis presents a literature review of the incentive traps in the unemployment benefit systems. The paper presents the theories alongside with the Finnish unemployment benefit system. The objective is to assess how well the Finnish unemployment benefit system performs following the theories. The data and materials used in the work are mostly from the OECD and Eurostat web pages that provide a comprehensive statistical online data base. The incentive traps are identified by calculating the net replacement rates and the marginal effective tax rates The theories include benefit generosity, benefit sanction and benefit duration theories. As a fairly new component to be taken into account in evaluating the utility from transition to work, I included the value of leisure in the analysis. The main findings from the review were that the Finnish unemployment benefit system performs better than anticipated regarding incentive traps. As long as there exist governmental social security benefits which are considered as a key element of the modern welfare state, there exist incentive traps, too. We just have to use different methods than benefit reductions in order to encourage employment