Earnings-related unemployment benefits weaken markedly the economic incentives for searching and accepting a job. This study estimates that the current Finnish unemployment insurance scheme lowers the number of employed by tens of thousands of persons. The scheme may also weaken the incentives of the firms to create new vacancies and thereby hinder the employment of all unemployed individuals. Moreover, a significant share of the benefits is paid to persons whose lifetime earnings are relatively high. Consequently, limiting the duration of the maximum benefit period is warranted. A cutback of the earnings-related benefits increases the lifetime income disparities somewhat, but notably less than a cutback of basic unemployment allowances.
