Case for linking Jobseeker’s Benefit to previous earnings, but caution needed

There is a coherent economic case for linking Jobseeker's Benefit for the recently unemployed to their previous earnings, but such a reform – suggested in the current Programme for Government – would give rise to a non-trivial cost and weaker financial work incentives unless capped or time-limited. This is among the main findings of new research published today by the Economic and Social Research Institute (ESRI) as part of the ESRI's annual Budget Perspectives conference, taking place today (10/06/2022).

Ireland is one of the few countries in the European Union without a strong relationship between the unemployment benefit payment (Jobseeker’s Benefit) and the claimant’s previous level of earnings. The research concludes that while such a linkage can provide a short-term cushion to those who lose their job –allowing them time to adjust spending – such advantages need to be set against the non-trivial cost and weaker financial work-incentives that would arise from adopting such a system.

For example:

• Setting the rate of Jobseeker’s Benefit equal to 60 per cent of previous earnings, with the maximum payment per week capped at €350 per week (the rate of the Pandemic Unemployment Payment), would cost an estimated €280 million more per year. The median replacement rate – an estimate of how much in-work income is replaced by out-of-work income – would increase by 11 percentage points. The gains from such reform are distributed evenly across all income groups.
• Keeping the income replacement rate at 60 per cent but increasing the maximum payment per week to 60 per cent of the average weekly income (an effective cap of €460 per week) would cost an estimated €590 million per year. In this case, the median replacement rate would increase by 22 percentage points. Under this reform scenario higher income individuals would benefit the most, seeing the greatest increase in replacement rates.

The report also highlights that there is at least as strong a case for also making Maternity Benefit and Illness Benefit pay-related. International evidence suggests that linking Maternity Benefit to previous earnings could help reduce the gender wage gap, while a similar reform to Illness Benefit could generate public health benefits, e.g. by incentivising the employee to stay home in cases of infectious diseases.

Theano Kakoulidou, one of the authors of the report said:

“The linkage of unemployment payments to previous earnings could provide greater insurance for those who lose their job but requires non-trivial additional spending and worsens financial incentives to work. Maximum payment caps are needed so that the benefits from the reform are distributed in a more equitable manner.”

Michael Doolan, one of the authors of the report said:

“There is a strong case for linking Maternity Benefit and Illness Benefit to previous earnings, with international evidence suggesting that closer linkages between the two would reduce the gender wage gap and provide public health benefits.”