1. Unemployment benefits in the UK:
what would happen if we switch to
a private insurance system?
Irene Dell’Orto
Wednesday 15th June 2016

2. Agenda
Structure of the presentation
Definition of unemployment used in the UK and some key data
Why does the
government provide
insurance against
unemployment?
Unemployment
in the UK
What would be the
implications of replacing
the NI system with a
private insurance?
Unemployment
benefits in UK
What is the economic rationale behind the government
intervention?
What are the negative unintended side effects?
Brief overview of the benefits available in the UK:
- Jobseeker Allowance (JSA)
- Income support
- Employment and Support Allowance (ESA)
- Housing benefit
What would happen if we switch to a mandatory private
insurance system for workers?
Why does the government provide insurance against unemployment (i.e. unemployment
benefits funded from National Insurance contributions) and what would be the
implications of replacing this system with a requirement for working individuals to
take out private insurance against the risk of unemployment?

3. Unemployment rates in the UK
Data highlights
The level and rate of UK unemployment measured by the Labour Force Survey
(LFS) using a definition of unemployment specified by the International Labour
Organisation. Unemployed people as those without a job who have been actively
seeking work in the past 4 weeks and are available to start work in the next 2
weeks. It also includes those who are out of work but have found a job and are
waiting to start it in the next 2 weeks.
Source: Office for National Statistics
Figure. UK unemployment rate, population aged 16 and over (1971 – 2016)
10%
7.5%
5%
2.5%
0%
1980 19901971 2000
5.1%
1.7 mil
Chart: UK unemployment rate, 2016 Jan-Mar
LFS: SA: Annual = 4 quarter average
12.5%
2010 2016

4. The benefits system in the UK 1/2
Jobseeker’s Allowance
Jobseeker's Allowance (JSA) is the main form of unemployment benefit paid by
the Government to people who are unemployed and actively seeking work. It is part
of the social security benefits system and is intended to cover living expenses for a
limited period of time while the claimant is out of work.
If you’re eligible, there’s a maximum amount you can get - but how much you’re
entitled to depends on things like your age, income and savings.
18 to 24
25 or over
up to £57.90
up to £73.10
Age JSA weekly amount
Couples (both aged over 18) up to £114.85
o Contribution-based JSA if you’ve paid enough Class 1 National Insurance
contributions in the 2 tax years before the current benefit year.
o Income-based JSA if all of the following apply:
 you work less than 16 hours per week on average
 your partner (if you have one) works less than 24 hours per week on average
 you have £16,000 or less in savings

5. The benefits system in the UK 2/2
Other benefits
Income Support
If you are unemployed because you are unable to work (for example because you are
sick, a carer or a single parent), you may qualify for Income Support. This benefit is
entirely means-tested, and is available to those aged between 16 and 59 with
savings of less than £16,000. You must also be working less than 16 hours per week.
You local Job Centre Plus will be able to advise you on how much you may be
entitled to.
Housing Benefit
Housing Benefit is available to those who need help paying their rent. Each area of
the country has a fixed maximum level of Housing Benefit to which you might be
entitled. This is reviewed monthly in line with rental price changes. Your
circumstances will dictate what proportion of this figure you are entitled to. Again,
you will not qualify if you have more than £16,000 in savings. There is a significant
amount of help available to those who are unemployed; consecutive Budgets have
seen increases in the rates of redundancy pay.
Employment and Support Allowance
Employment and Support Allowance (ESA) is a benefit for people who are unable to
work due to illness or disability. You must have a Work Capability Assessment while
your ESA claim is being assessed. This is to see to what extent your illness or
disability affects your ability to work.

6. A generous benefit system
might create a disincentive
either to look for work or
work longer hours because of
the effects of the income tax
and welfare benefits system.
Public unemployment benefits
Economic rationale and side effects
What is the economic rationale behind government intervention in the
labour market?
Unemployment insurance benefits help individuals who have lost their job to sustain
a desirable consumption level.
However, the most important disadvantage is that unemployed individuals
may be discouraged from searching for a job (or taking certain jobs) if
unemployment benefits are too generous.
Some evidence suggest that unemployment insurance prolongs jobless durations for
two reasons:
(i) Agents spend less time and effort looking for a job; and
(ii) Agents become more selective in the type of job they seek.
The poverty “trap” The entitlement effect
Since the UK has eligibility
criteria for qualifying for
benefits, anyone who does not
meet these qualification has
an incentive to work more, or
earn more, in order to meet
them

7. Private insurance system
Implications and issues
If the public-funded system is replaced by a mandatory private insurance system
paid by working individuals, this will mean that taxes will be lower.
However, private insurance or savings might not be enough to prevent a large drop
in the consumption of some individuals, creating a very unequal system. Unless
the market is regulated by the government, we might see the same failures and the
same issues (e.g. discrimination, information asymmetry and moral hazard) we
experience in other markets, such as the health insurance or the lending one.
o The entitlement effect and the poverty “trap” can create disincentives to look for a
job as in the public-funded system (moral hazard)
o Due to discrimination in the labour market, private insurance companies will deny
coverage or ask higher premiums to some individuals who are less likely to find a
job because of:
• Race, ethnicity, religion, sexual preference
• Gender and age
• Poor level of education
• Illness or disabilities
• Previous record of unemployment
o We would experience a rise of premiums before and during recession periods
o Low income individuals might struggle to pay the premiums