Britain needs to help workers take more risks and find better jobs with a new unemployment insurance scheme

The big income falls that unemployment brings in Britain hold workers back from finding better jobs, deterring them from taking a new job that might not work out or holding on for the right job when unemployed. But a new unemployment insurance scheme could help to address this problem, according to major new Resolution Foundation research published today (Thursday).

From safety net to springboard – the 44^th report from The Economy 2030 Inquiry, funded by the Nuffield Foundation – examines the fact that the British labour market is not as dynamic as is often thought, with low and falling job mobility.

Lower rates of job-to-job moves, which fell by 15 per cent between 2002 and the start of the Covid-19 pandemic, results in missed pay and career opportunities for workers, and contributes to wider economic stagnation.

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, say the authors.

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 reality of those income losses means that unemployed workers have a strong incentive to take the first job, rather than the best one, say the authors.

The UK’s flat-rate unemployment support is worth just 14 per cent of average earnings, down from 24 per cent in 1980, and is very low by international standards. A single person without children losing their job faces 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.

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 per cent, 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.

Such a scheme would give people the confidence to move to a better job, or to wait for one if unemployed. The time-limited nature of the scheme – people would move onto means-tested flat-rate unemployment support after three months – would incentivise people to find jobs, prevent the risk of increasing long-term unemployment, and limit the scheme’s costs.

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

Such a scheme would benefit workers across the income distribution, most obviously average and higher earners as levels of support would be based on their previous wages, but also low earners on Universal Credit (UC).

By setting the scheme outside of UC, unemployment insurance payments would be tapered off a family’s UC award at 55 per cent, rather than the pound for pound reductions they currently experience with contributory Jobseeker’s Allowance. Overall, more than two-thirds of recipients would be from families in the lower half of the income distribution.

The authors add that complementing the scheme with stronger day one employment rights would give workers, particularly lower earners, even more confidence to move jobs.

The Foundation’s analysis finds that this new scheme would cost just £0.4 billion in today’s labour market, given the low number of unemployed people who had previously been employed for 12 months. Costs would rise during downturns – it would have cost at least £1.1 billion during the financial crisis – reflecting the need to provide more fiscal support during recessions.

Louise Murphy, Economist at the Resolution Foundation, said:

“Too many workers across Britain are having their careers held back by a fear of moving jobs, and the new job not working out. And too many of those out of work have to take the first job they’re offered, rather than holding out for one that matches their skills.

“Workers just can’t afford the major loss of family income that unemployment can bring. But staying put in the wrong job, and not having the time and confidence to find a better one, isn’t just bad for individuals. It makes our economy less productive, and Britain poorer as a result.

“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.”