Linking unemployment benefits to previous earnings would give rise to weaker financial work incentives unless capped or time-limited, research has found.
The Economic and Social Research Institute (ESRI) said there is a “coherent economic case” for such a move, as set out in the programme for Government.
But it warned that the reform would give rise to a non-trivial cost and weaker financial work incentives unless capped or time-limited.
The findings were published as part of the ESRI’s annual Budget Perspectives conference, taking place on Friday.
Ireland is one of the few countries in the European Union without a strong relationship between the unemployment benefit payment and the claimant’s previous level of earnings.
The research concludes that while such a linkage can provide a short-term cushion for 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.
The ESRI said 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, equivalent to 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, it said.
Maintaining 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.
The ESRI said that, under this reform scenario, higher income individuals would benefit the most, seeing the greatest increase in replacement rates.
The report also highlighted 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 by incentivising the employee to stay at home in cases of infectious diseases.
Theano Kakoulidou, one of the authors of the ESRI 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.”
Another of the report authors, Michael Doolan, 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.”
