A new report has found a “consistent economic case” for linking dole with a worker’s previous wage.
But ESRI warns that changes to the amount of Jobseeker’s Allowance should be capped or time-limited due to ‘non-trivial’ cost and ‘weaker financial incentives to work’.
Its new report also finds that there are at least as strong arguments for making maternity and sickness benefits linked to earnings.
The conclusions on the reform of unemployment benefits contained in the program for the government were published today as part of ESRI’s annual conference on the budgetary outlook.
“There are consistent economic arguments for linking these benefits to past income levels, at least for an initial period,” the report says.
“In the event of unemployment, the main justification for these payments is to provide a short-term cushion to those who lose their jobs, allowing them to smooth their level of consumption more effectively during a period of short-term unemployment and to provide a greater automatic macroeconomic stabilizers.
“However, these benefits must be weighed against the non-negligible cost and lower financial incentives to work that would result from adopting a system of earnings-related unemployment benefits.”
ESRI says Ireland is one of the few EU countries that does not have a strong relationship between unemployment benefits and a claimant’s previous income level.
His research reveals that such a bond can provide a short-term cushion for those who lose their jobs, giving them time to adjust their spending.
However, he indicates that these benefits must be weighed against the non-negligible cost and lower financial incentives to work that would result from adopting such a system.
It says setting Jobseeker’s Allowance at 60% of previous earnings with a maximum payment capped at €350 a week would cost around €280 million more a year.
In this scenario, the jobseeker’s allowance would be equal to the initial pandemic unemployment allowance when set at a flat rate.
This example would have the effect of increasing by 11% the level at which labor income is replaced by non-labor income.
The report, Income-Related Benefits in Ireland: Rationale, Costs and Incentives to Work, finds that the gains from such reform would be distributed equally across all income groups.
In a separate example, he finds that maintaining the jobseeker rate at 60% of income but increasing the maximum payment to €460 per week would cost around €590 million per year.
This higher jobseeker rate is equivalent to 60% of the average weekly income.
In this case, the level at which labor income would be replaced by non-labor income would increase by 22%.
High-income earners would benefit the most, as they would see the greatest increase in their income replacement rates.
The report says international evidence suggests that linking maternity benefits to previous earnings could help reduce the gender pay gap, while similar reform of sickness benefits could generate public health benefits. .
He says it would encourage an employee to stay home in the event of infectious diseases, for example.
“The link between unemployment benefits and previous earnings could provide greater insurance for those who lose their jobs, but requires sizeable additional expenses and worsens financial incentives to work,” said report author Theano. Kakoulidou.
“Maximum payment caps are needed to ensure that the benefits of reform are distributed more equitably.”
Its co-author, Michael Doolan, said there is a strong case for linking maternity and sickness benefits to previous earnings.
He said international evidence suggests closer ties between the two would reduce the gender pay gap and provide public health benefits.