Ireland is an outlier among EU countries as it does not have a strong link between previous earnings and the level of payment provided to those who have recently lost their job or are on leave from work for the short- to medium-term for reasons of illness or maternity. This paper provides a historical background for earnings-related benefits in Ireland, outlines the rationale behind linking benefits with previous earnings and examines the potential impact of (re)instating them.

1. www.esri.ie
Earnings-related benefits in
Ireland: rationale, costs and work
incentives
Budget Perspectives 2023
Date
10th June 2022
Authors
Theano Kakoulidou
Michael Doolan
Barra Roantree

2. 2
Flat-rate benefits an exception in EU & UK
0 5 10 15 20 25 30
Flat-rate
Earning-related rate
Number of EU countries by type of benefit rates
Unemployment Benefit Maternity Benefit Illness Benefit
Source: Missoc Comparative Tables
Notes: Author’s calculations

3. 4
Why earnings-related benefits?
• Provide higher cushioning during absences
• Higher payments for pandemic benefits
• Pandemic Unemployment Payment (PUP)
• Enhanced Illness Benefit
But
• Worsen financial incentives to work
• Advantage insiders versus outsiders
• Increased spending

4. 5
Earnings-related benefit for absences from work
Illness benefit
• Relevant public spending in IE only half of EU
• Low benefit rates linked with relapses and work
accidents
• Public health externalities
Maternity Benefit
• Income replacement during maternity
IE: 35% - EU: 82%
• Promotes gender equality

5. 6
Earnings-related benefit for unemployment
• Share of income in unemployment (EU): 60% -
70%
• Greater cushioning during unemployment spell
• Avoid labour market mismatch
But also
• Higher earners likely to have savings
• Weaker financial incentives to work
• Increased cost

6. 7
What we do…
• Take all employed individuals
• Run simulation
• All employed become unemployed and eligible
for JB
• Do this for baseline and 10 reform scenarios
• Will only discuss two reforms today
• Compare baseline results to reform scenarios

7. 8
Scenarios
Name Reform
‘PUP’ 60% of previous earnings – maximum caps based on PUP rates
‘Mean
earnings’
60% of previous earnings – maximum cap set at 60% of mean weekly
earnings (cap of €460/week)

8. 9
Replacement rates
• Analyse replacement rates to investigate effect
of reforms
𝑅𝑅𝑅𝑅 =
𝑛𝑛𝑛𝑛𝑛𝑛 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑜𝑜𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤
𝑛𝑛𝑛𝑛𝑛𝑛 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤
• Higher RR means:
• Greater cushioning effect of reform
• Lower incentive to work

9. 10
Greater protection provided by reforms…

10. 11
‘PUP’ cushioning more equitable than ‘Mean earnings’…
67 67 71 71 70 70 67 67 63 63
+12
+12 +13
+12
+10
+15
+16 +19 +23
+24
0
10
20
30
40
50
60
70
80
90
100
Median RRs
Baseline 'PUP' 'Mean earnings'

11. 12
‘Mean earnings’ has more perverse work incentive effects..
45 45
52 52 50 50 44 44
32 32
+39 +28 +26
+26
+28
+44
+44 +46
+48
+52
0
10
20
30
40
50
60
70
80
90
100
Share with RR > 70%
Baseline 'PUP' 'Mean earnings'

12. 13
Summary
Name Reform
Median RR
(%)
Share with
RR > 70%
(%)
Additional
Spending
(€)
Baseline Baseline 67 43 -
‘PUP’
RR: 60%
Cap: PUP
78 71 278m
‘Mean
earnings’
RR: 60%
Cap: 60% mean earnings
88 91 588m

13. 14
In conclusion…
• Coherent economic case for earnings-related JB
• Short-term cushion
• Automatic stabilisers
• However, must weight up against:
• Fiscal cost
• Perverse work incentives effects
• Inequitable distribution of gains
• Lower maximum caps ensure more equitable distribution
of cushioning effect
• Time limiting of payments reduces issue of weakened
incentive to work
• Case for Maternity Benefit & Illness Benefit
• Could potentially finance through PRSI increase

14. 15