Unemployment benefit in UK

Readers question: explain benefits of increasing rate of unemployment benefit – for the unemployed , society and any cost that may result from such policy.

Current Weekly Rates of Job Seekers Allowance in UK

Contribution-based JSA

AgeJSA weekly amount
18 to 24up to £57.90
25 or overup to £73.10

 

Contribution based JSA  means you must have:

  • worked for 26 weeks in one of these years earning at least the lower earnings limit for that tax year
  • paid class 1 contributions or received National Insurance credits in both of those tax years that amount to 50 times the lower earnings limit

Income-based JSA

AgeJSA weekly amount
18 to 24£57.90
25 or over£73.10
Couples (both aged over 18)£114.85

Source: Direct Gov

Note: Unemployed may be eligible for other benefits

In any economy there will be some frictional unemployment. It takes time for people to find a job suited to their skills. If you left university with a degree in mechanical engineering, it wouldn’t make sense to get the first job that came along. A good rate of unemployment benefit would enable you to take time in finding a job suited to your skills. A low rate may force you to get a job at McDonalds which would be an inefficient use of spending 4 years at university.

Another potential benefit of raising the job seekers allowance is that it would be an example of expansionary fiscal policy. An increase in unemployment benefit would lead to an increase in spending. (It would be more effective than say tax cuts for high earners. The mpc of the unemployed will be close to 100%. High earners may save tax cuts.)

One of the big mistakes of the Great Depression in the UK was that the government cut unemployment benefits (I think in 1931). The treasury were worried about rising levels of government borrowing so unemployment benefits were cut. Of course this reduced aggregate demand further and caused a deeper recession. (As well as increasing inequality)

Another benefit of raising job seekers allowance is that it would reduce income inequality. The poorest sections of society are generally on benefits such as job seekers allowance. Therefore, raising benefits would be  effective in reducing poverty and inequality.

Disadvantage of raising unemployment benefits.

The main problem of raising unemployment benefits is that higher benefits can create disincentives to work. There is an increased incentive to remain on benefits rather than work. However, note that the weekly rate of £65 is hardly going to be much of a disincentive from getting a job which pays NMW of £5.65 an hour.

Also, it requires higher taxes or more borrowing.

Further reading

By on February 19th, 2015

5 thoughts on “Unemployment benefit in UK

  1. I don’t agree with the first two sentences: “In any economy . . . . . it takes time for people to find a job suited to their skills.” This is very much the conventional wisdom, but I disagree. According to some research done by J.P.Mattila and published in the American Economic Review, the majority of people changing jobs in the U.S. find their new job before leaving their old job. I.e. job searching at the same time as working is perfectly feasible. (Title of Mattila’s article was “Job quitting and Frictional Unemployment” (1974)).

    Indeed, the actual amount of time the unemployed spend jobs searching per week is derisory: about ten minutes a week in the U.K.: hardly a reason to take the entire week off work. In short, if the only job that those with degrees can find are MacDonalds jobs, they should have to do those jobs, while they look for something better.

    “Another potential benefit of raising the job seekers allowance is that it would be an example of expansionary fiscal policy.” I don’t think that the fact that a form of government spending is expansionary is a merit that that form of spending per se. Invading Poland would involve more government spending; personally I’m not keen on invading Poland.

  2. You are quite correct that job seekers allowance of £65 when the minimum wage is £5.65 is unlikely to be a disincentive to work but the unemployed frequently recieve numerous additional benefits as well which when totalled up mean that the replacement ratio leaves the low skilled in the benefits trap.

  3. I strongly agree with James, above. While Job Seekers Allowance alone is relatively low at £65 per week, it does act as a gateway for various other benefits, including Housing Benefit, free school meals, reduced council tax, etc. Add to this the cost of transportation to work and the tax and NI paid on the minimum wage earnings, then the incentive to work is much reduced.

  4. I share an apartment with someone who is on Job Seeker’s Allowance.

    They get £260 per month in JSA, £350 Housing Benefit and £84 Council Tax Benefit. A grand total of £8328. And this is tax-free. So they’re effectively on a £12k salary for doing absolutely nothing.

    It’s sickening when a friend works 40 hrs a week as a teaching assistant and earns the same wage. Getting so much free money means there is no incentive for the job seeker to go back to work.

  5. I am currently part-time employed and self-employed. I am on a very low income and financially would be better off on benefit.
    I am lucky in that I really enjoy the work I do in education and the arts but if I had to work in some low paid uninteresting or meanial job for the minimum wage I would find no insentive to work.
    This government want to make work more appealing to do than be on benifits. They should raise the minimum wage on basic jobs (which are, in many cases, as important as many better paid jobs) and help people into self-employment with financial support and training.
    There is no fairness in the current system our society runs on and the bridge between rich and poor is getting bigger.
    When we start seeing happiness,well-being and health as the priority rather than fiscal growth and economics built on debt conciousness, fear and lack we might start seeing a brighter, prosperous and enlightened world evolving.
    I find it utterly amazing the crazy making policies and beleifs of our current political and cultural reality and conciousness.
    There is a better way forward.

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