Today, we observe a striking paradox in the Lithuanian labor market: over five years, the number of job vacancies has jumped by 57% and reached a record level of 32 thousand, yet the unemployment rate still exceeds 7%. Meanwhile, in Poland, unemployment is only 3.1% and is more than twice as low.
Considering that the economies of both countries grow at a similar pace and their development levels do not differ significantly, we should see a similar situation in the labor market. However, such a large gap shows that the difference is determined not by economic development but by labor market rules and the incentives they create. In Lithuania, these weaken the motivation to work and create obstacles to quickly returning to work, while Poland’s system is more focused on smooth and sustainable employment.
The high cost of unemployment is significant not only for a dignified human life and the economy but also for public finances. Lithuania allocates almost 1% of its gross domestic product (GDP) to unemployment-related benefits – about five times more than Poland. The largest share of this burden falls on lower-skilled workers, youth, and short-term unemployed.
First lesson: benefits must maintain the incentive to work
The essential difference between Lithuania and Poland is illustrated by the unemployment trap indicator published by the Organisation for Economic Co-operation and Development (OECD), which is the highest in Lithuania across the European Union (EU) and exceeds 100%. This shows that in the first months of unemployment, a person earning lower income can receive more from unemployment and other benefits than their net earnings. Meanwhile, Poland has one of the lowest unemployment trap indicators in the EU – unemployment benefits there are about half as low as in Lithuania, and the maximum benefit differs threefold (494 euros and 1,619 euros, respectively).
This does not mean that the state should not help people who have lost their jobs. However, the unemployment insurance system should not make a person hesitate whether work is worthwhile. The new coalition agreement includes the right words: “The position of a working person must not be worse than that of a non-working person” – it is to be hoped that this will not remain just words.
Second lesson: unemployment insurance should not finance planned withdrawal from the labor market
Lithuania also stands out internationally because unemployment benefits are paid even to those who voluntarily leave work, although in most OECD countries, in such cases, the benefit is either not paid at all or deferred for several months. For example, Poland applies a 90-day waiting period.
The Lithuanian system contradicts the fundamental purpose of unemployment insurance: unemployment benefits should protect a person who unexpectedly loses their job. However, in Lithuania, there is an opportunity to take a short break from work to go on vacation at the taxpayers’ expense – this trend is most popular among young people.
The scale of the problem is also revealed by official statistics on reasons for unemployment: in 2025, only 10.5% of unemployed Lithuanians lost their jobs due to dismissal, 7.2% due to illness or disability, while as many as 42.7% were unemployed due to personal or family reasons and 25.1% due to “other reasons.”
This shows that a significant part of unemployment in Lithuania is not related to unexpected job loss and therefore does not meet the insurance concept. After all, no one would insure a building that is intended to be voluntarily demolished.
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Third lesson: more flexible employment encourages return to the labor market
Better labor market results in Poland are also contributed to by more flexible regulation of employment relationships. This is especially noticeable when talking about fixed-term contracts. In Poland and other EU countries, such contracts provide flexibility for employers and employees, reduce the risk of hiring a new employee, and act as a stepping stone to long-term employment for youth and long-term unemployed.
However, in Lithuania, it is harder to take the first step into the labor market: the share of fixed-term contracts in the country is the lowest in the EU – only 1.6%, while the EU average is 10.9%, and in Poland – 12.8%. This gap arises because fixed-term contracts in Lithuanian companies cannot exceed 20% of permanent contracts. This means that a company with four or fewer employees cannot conclude a single fixed-term contract, although such small companies make up about 70% of the country.
Three changes that would act as a big boost to the Lithuanian labor market
First, Lithuania should reduce the level of unemployment benefits in the first months of unemployment, bringing the unemployment trap at least closer to the EU average. Targeted financial support should help a person in a difficult moment but at the same time maintain a clear incentive to quickly return to the labor market.
Second, it would be useful to introduce a waiting period for employees who leave work voluntarily. As in other countries, such a rule would ensure that unemployment insurance is used as intended, not for short-term vacations.
Third, more flexible regulation of fixed-term contracts would reduce employers’ risk when hiring new employees and encourage the creation of more jobs. The strict 20% quota should be abolished or an exception made for small companies.
The comparison between Lithuania and Poland perfectly illustrates fundamental economic laws: people respond to incentives, and excessive restrictions suppress economic activity. Therefore, it is important to evaluate laws not by how nicely they sound on paper but by the real behavior they shape.
It is no less important to learn from those who achieve better results. Can you imagine Lithuania where the unemployment rate is half as low and spending on unemployment benefits is five times lower? Poland’s example confirms that it is possible.
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