Resolution Foundation

From safety net to springboard

Designing an unemployment insurance scheme to protect living standards and boost economic dynamism
The State

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. 

For all research queries about this report, please contact Louise Murphy. For press queries, please contact the Resolution Foundation press office.

Louise Murphy
Resolution Foundation
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