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— Pathfinder

Who are the people outside the labour force?

Henry Saarinen

Employed, unemployed, or inactive

The working-age population is divided into employed, unemployed and the inactive population – those outside the labour force. This latter group is often overlooked when unemployment is discussed. The inactive population comprises a wide range of groups, some of whom actively wish to re-enter the labour market. These groups constitute an important potential labour reserve that can support labour market dynamics and increase labour supply. On the other hand, transitions out of and back into the labour market underline the need to understand these transitions, and to support people when they have the opportunity to re-enter the labour market.

Statistical data on the inactive population will be collected during spring 2025 on our About The Nordic Labour Market web page (in Finnish).

In Finland, the unemployment rate remained high in 2024, and the Ministry of Economic Affairs and Employment of Finland forecasts that an improvement in the labour market, and a fall in unemployment, will not happen until 2026. As the economic situation finally improves, we will almost certainly see news from different sectors regarding labour shortages. At the same time, low birth rates and an ageing population will underline the need to tap into the skills and labour of the entire working age population.

However, discussions on the inactive population are complex. For example, the debate on disability pensions alone raises a number of different aspects, such as the potential of people with specific work ability, supporting wellbeing at work, the multi-faceted discussion on social protection, the need for flexibility in working life, and different strategies for activating the labour force.

A diverse group

The inactive population is a diverse group which includes working-age pensioners, students, stay-at-home parents with young children, the long-term unemployed who are in the sphere of activation services, and those doing their military service. Statistically, some of the inactive population belong to a group whose status is unknown. Within the total inactive population, those living on capital income are a marginal group.

In this blog, I exclude students and the people doing their military service from the analysis, as they are naturally transitioning towards working life, and are likely to join the labour force in the coming years.

Stay-at-home parents of children under three

In Finland, more than 90% of home care allowance beneficiaries are women, and the duration of the care period is often longer for mothers who have lower levels of education and a weaker labour force status. The mother’s employment status before maternity leave appears to be a significant factor in the length of time spent caring for the child at home. Mothers with a valid employment contract at the start of maternity leave have a significantly shorter planned or actual period of home care than those without an employment relationship. Particular attention should be paid to the situation of parents who are outside the labour force, and their transition from home care to the labour market. Parents with a background of unemployment and low educational attainment prior to the start of the home care support period are often excluded from labour market measures during the home care support period. This can lead to a drop in skills, or to skills becoming outdated. Thus, understanding the duration of home care support and its impact is important when discussing the dynamics of the inactive population and the labour market.

People benefiting from active labour market services

Rehabilitative work is provided as a last resort activation measure for the long-term unemployed and for other people who find it difficult to gain employment. Although rehabilitative work does have positive effects such as maintaining functional capacity, boosting self-esteem, and general activation, its impact on employment has been shown to be limited. Studies show that the majority of clients in rehabilitative work activities move on to a new period of rehabilitative activity at the end of the period, while transitions to the open labour market or vocational training are very rare. We can therefore conclude that rehabilitative work activities often do not achieve actual employment objectives.

To improve the impact of activation measures, it would be important to develop clear pathways leading to the open labour market or training. This also requires a broader debate on the role of people with specific work abilities in the labour market, and how their potential could be exploited. At the same time, efforts should be made to prevent unemployment from becoming protracted at an early stage, so that other support measures can be used to break the cycle of unemployment before any last resort measures. In discussing the employment and training pathways for participants benefiting from active labour market services, the importance of cooperation between social and health services and employment areas is significant. Early and targeted interventions can enable more meaningful and sustainable transitions to work.

Full-time pensioners

People on disability pension form a significant part of the inactive population. In 2023, the most common causes of transition to total disability pension were mental and behavioural disorders (35%) and musculoskeletal disorders (26%). Every year, around 20,000 Finns retire on disability pension. Of particular concern is the 41% increase in mental health-related disability pensions for people under 35 between 2018 and 2023.

Research shows that especially people under 50 on disability pension often have a desire to return to work. This underlines the need to develop solutions that support people’s ability to stay in work and enable them to make use of their partial capacity to work. However, it is important to note that there is also a significant number of people who, due to illness or disability, do not have the capacity to return to work at all, even if they had the desire to do so.

To reduce the number of people retiring on disability and to unlock the potential of people with specific work ability, it is essential to promote reasonable adjustments and adaptations at work. This could include flexible working hours, reduced tasks, or other solutions to facilitate work. It is also important to address discrimination against those with specific work ability in the labour market, and to create incentives for both employers and employees. In this way, we can prevent early incapacity for work, and better support participation in working life. The Ami Foundation is particularly interested in funding studies and projects that promote wellbeing at work and provide more accurate information on the labour market situation of people with specific work ability.

Other unknowns

Statistics on the inactive population provide important information, but one group in particular stands out: the people whose status is unknown. These are people not in the known categories (such as pensioners, students, people in activation services, or stay-at-home parents with young children). However, this group is so large that it raises questions and highlights the need for further research. Young people not in employment, education or training, who have an unknown status, require particular attention.

It is important to understand the mechanisms behind the unknown status of the inactive population. Why do some people of working age end up in a situation where their status remains undefined? Answering these questions could provide valuable information for the development of the service system. At the same time, it would create opportunities to build new pathways to the labour market and to education and training – solutions that will have a significant impact on individuals and the society.

The impact

The economic importance of the inactive population is considerable and affects the Finnish economy in many ways. The inactive population is the main user of public services and social benefits, which increases public expenditure. The development of the size of the inactive population, as well as the development in the unemployment rate, are directly related to the economic dependency ratio.

The value of the lost contribution of people receiving disability pensions, i.e., the cost of their incapacity to work, can be costed as several billion euros per year.

The working age population outside the labour force has an important impact on the dynamics of the labour market. The vast majority of the inactive population does not benefit from employment policy measures. The services they are offered, the employment services targeted at them, and their access to training are limited compared to unemployed job seekers. There is therefore a risk that a person who continues to have some capacity to work and a desire to return to work will lose skills while they are outside the labour force.

In terms of the labour market, there are groups outside the labour force where potential labour is lost. At the time of writing this blog in the winter of 2025, labour shortages are not a very relevant topic, but as the economy improves, sooner or later this issue will surface.

At an individual level, a long period of inactivity can have negative effects. For example, going on disability pension significantly reduces income levels compared to paid work, and creates a risk of poverty. Being outside of work and education also increases the risk of social exclusion. In addition, inactivity reduces opportunities for training, which in turn may be linked to employability when a person becomes a jobseeker. For example, labour market training is primarily aimed at unemployed jobseekers or jobseekers at risk of unemployment.

Sources

We are interested in funding development projects and research that focus on The Ami Foundation’s programme priorities (https://ami.fi/en/our-work/grants/).