Call for a new unemployment insurance scheme for UK workers

A new unemployment insurance scheme could soon help British workers transition into a new job without the fear of it not working out and being left without an income, according to new research carried out by Resolution Foundation.

From safety net to springboard – the 44th report from The Economy 2030 Inquiry, funded by the Nuffield Foundation – has highlighted how lower rates of job-to-job moves in Britain result in missed pay and career opportunities for workers, and also wider economic stagnation.

The report further highlights how job mobility has been falling despite pay growth for those who move jobs being 4.1 percentage points higher compared to those who remain with their employer.

"Low job mobility, and the fact that those out of work often need to find a new role very swiftly, also impedes better ‘job matching’, whereby workers are able to find the right jobs for the skills they have.

"This is partly why one-in-three graduates are working in non-graduate roles, and why firms looking to expand get frustrated because they can’t find the right workers. All of this contributes to weaker productivity growth," the report authors said.

Meanwhile, contributing to weak job mobility is workers’ legitimate fear of major income losses if job moves don’t work out and they find themselves unemployed. The report found that the reality of those income losses means that unemployed workers have a strong incentive to take the first job, rather than the best one.

It was also highlighted that the UK’s flat-rate unemployment support is worth just 14% of average earnings, down from 24% in 1980. It was also noted that if a single person without children loses their job, they face the fourth biggest income loss of any advanced economy in the OECD (only ahead of just the US, Greece and Australia).

While some argue that low levels of support have helped to keep unemployment down, the authors note that other advanced economies like Denmark are able to combine dynamic labour markets with greater security via decent unemployment protection.

How would the unemployment insurance scheme work?

To address this problem, the report calls for the introduction of a new unemployment insurance scheme, whereby workers who lose their jobs receive time-limited unemployment support linked to their previous salary (at 65%, and up to a cap set at median earnings of £2,260 a month).

"This means that the current weekly entitlement would rise from £84.80 at present to a maximum of £339," the report authors said.

It was noted that such a scheme would give people the confidence to move to a better job, or to wait for one if unemployed.

The authors added that the duration of support could be flexed – for example, extending it to six months during economic downturns to act as a macroeconomic stabiliser.

They said it would benefit workers across the income distribution.

The Foundation’s analysis found that the new scheme would cost £0.4 billion in today’s labour market, given the low number of unemployed people who had previously been employed for 12 months and said costs would rise during downturns.

Louise Murphy, economist at the Resolution Foundation, said: “A new unemployment insurance scheme would help workers find better jobs by giving them the certainty of decent financial support if a job move doesn’t work out, and ensuring those losing their job can take the time to find the right next move. At a cost of £450 million, this new scheme would foster a more dynamic labour market delivering higher pay and productivity.”

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