From safety net to springboard
Losing your job in Britain is a very risky business. Low levels of out-of-work benefits are rarely an adequate safety net for those who experience job loss, and workers in the UK who move out of work are at greater risk of experiencing a large income loss than those in most other OECD countries.
Some argue that the UK’s low levels of insurance in the event of unemployment are a positive feature of our social security system, contributing to the UK’s flexible labour market. And it is indeed the case that the UK has low levels of unemployment, certainly from an international perspective. But other aspects of our labour market story are far more concerning: the UK’s labour market has become less dynamic over time, contributing to our woeful record on productivity.
There are good reasons for thinking these two characteristics – insecurity and a lack of dynamism – are related: many workers will be risk-averse given the low (or non-existent) unemployment insurance on offer if things do not work out. So, creating better unemployment insurance would both boost job market dynamism and productivity growth in the UK, while also protecting workers’ living standards if they are hit by unemployment.
We therefore propose a new and modernised system of unemployment insurance for the UK. To deal with very low replacement rates, we propose that unemployment insurance should be paid at 65 per cent of previous wages, up to a cap set at the median earnings of £2,260 per month. We propose a cautious approach of initially paying unemployment insurance for at most three months, after which eligible lower-income workers could continue to receive support through Universal Credit. Our proposed scheme is – perhaps surprisingly – fairly modest in cost, at only £0.4 billion per year in 2024-25 prices, covering 50,000 eligible workers.
- In the UK, income ‘replacement rates’ in the event of unemployment are low by international standards, falling below the OECD average. This is particularly true for single adults without children: a single person without children on the average wage has a replacement rate of just 40 per cent (including support for housing), compared to the OECD average of 59 per cent.
- Since the early 1980s, the UK’s unemployment benefits have been uprated only in line with price inflation – at best – and so have not kept up with growth in earnings. As such, our main unemployment benefit is worth just 14 per cent of average weekly earnings in 2023-24, down from 24 per cent four decades ago.
- The UK’s labour market has become less dynamic over time. For example, until the start of the Covid-19 pandemic, the rate at which workers move jobs had slowed compared to two decades ago: in 2019, the job-to-job move rate was 2.5 per cent, up from a low of 1.7 per cent in 2009, but down from a rate of 2.9 per cent in 2002. The reallocation of workers between firms has also slowed over the same time period, with the reallocation rate falling from 23 per cent in 2009 to 19 per cent in 2019.
- Creating better unemployment insurance would both boost job market dynamism and productivity growth in the UK, while also protecting workers’ living standards if they are hit by unemployment. Evidence shows that more-generous unemployment benefits support workers to find better-paid and longer-lasting jobs. By reducing the fear of not being able to meet financial obligations in the event of unemployment, it seems workers feel more confident in taking risky job moves.
- We propose a new and modernised system of unemployment insurance for the UK. Contributory Jobseeker’s Allowance (JSA) should be scrapped and replaced with a system that provides real wage insurance and enables proper job search, but without putting excessive demands on the Exchequer.
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- To deal with very low replacement rates, we propose that unemployment insurance should be paid at 65 per cent of previous wages, up to a cap set at the median earnings of £2,260 per month.
- To ensure that unemployment insurance protects those in low-income households, unemployment insurance should be treated like earnings within Universal Credit, meaning that it reduces Universal Credit awards at the rate of 55p in the pound, in line with other payments designed to replace earnings, like Statutory Maternity Pay.
- We propose a cautious approach of initially paying unemployment insurance for at most three months, after which eligible lower-income workers could continue to receive support through Universal Credit.
- Unlike Contributory JSA, which has complex eligibility rules dependent on workers’ National Insurance record over the past two complete tax years, our revitalised unemployment insurance would be available to all employees who have been in employment for the past 12 months (regardless of their National Insurance contributions or whether they have switched employer). This would be possible to calculate using real time information (RTI) earnings data, with the Universal Credit digital benefits system providing a blueprint.
- Our proposed scheme is – perhaps surprisingly – fairly modest in cost, at only £0.4 billion per year in 2024-25 prices, covering 50,000 eligible worker.
For all research queries about this report, please contact Louise Murphy. For press queries, please contact the Resolution Foundation press office.
Louise Murphy
Economist,
Resolution Foundation
Email Louise