Assessing the welfare effects of Jobseeker’s Allowance
Jobseeker’s Allowance (JSA) constitutes a considerable portion of government spending on welfare. It directly affects the dynamics of the UK labour market as well as the welfare of a great number of mostly vulnerable households. This project’s findings can be used to evaluate how optimal the current level of JSA is. It will also inform future policy design by providing policy makers with an indication of how the current system can be improved.
Jobseeker’s Allowance is a large part of UK welfare spending, and directly affects both the dynamics of the UK labour market and the welfare of mostly vulnerable households. JSA benefits the economy by allowing people to avoid a sharp consumption drop when they lose their jobs and providing support while they search for a new job – but it can also undermine the incentive to return to work, so it’s important to get the level at which it is paid right. Too high, and it will waste government money and disincentivise a return to work. Too low, and it puts too much pressure on the unemployed, and force them to accept unsuitable job offers – making them more likely to lose their jobs and claim benefits again. This research will help to get the level of JSA right, and help to improve the welfare system in general.
Department of Work and Pensions (DWP)
More about the research
One of the most robust empirical findings in public finance is that higher levels of unemployment benefit induce people to stay unemployed for longer. One might think, as the unemployment insurance (UI) literature assumed until recently, that UI payments prolong unemployment exclusively through a distortionary moral hazard effect. That is, the UI makes it cheaper to stay unemployed and therefore the unemployed put less effort in job search than what is socially optimal.
However recent research has shown that unemployment insurance can also have a beneficial liquidity effect, i.e. it relaxes the liquidity constraint of the unemployed. This improves welfare in two ways: First, it helps people to smooth their consumption between the two states (employment and unemployment) more effectively. Second, it eases the pressure of finding a new job and lets them search for longer and find a better job (which of course means staying unemployed for longer). In other words, under a less generous UI system, their consumption would be more volatile and they would be forced to accept inferior job offers (lower wages, skill mismatch, etc.), which could be socially inefficient.
We aim to assess the optimality of the current Jobseeker’s Allowance (JSA) scheme by estimating both of these effects. These estimates will then be used to determine how far the current JSA is from the socially optimal level, and to estimate the size of potential welfare gains from a reform that adjusts it towards the optimum.
Research team/lead researcher