From the TUC

unemployment benefits and earnings

08 Jan 2013, by in Society & Welfare

The Conservative case for capping benefits is that they have been growing faster than earnings, as their poster today seeks to highlight.

I thought it might be interesting to look at how unemployment benefit has moved compared to earnings over a slightly more representative period.. So I turned to the DWP’s Annual Abstract of Statistics, which is designed (among other things) to give precise answers to such questions.

Conservative posterBut first a few words about the economics of benefits. Economists consider unemployment benefits to be automatic stabilisers. When economies slow and people lose their jobs, spending on unemployment benefits automatically go up (as more people sign on). This helps to keep economic activity up, and helps stop a vicious circle of decline starting.

This is not just a wacky Keynesian idea. Here is George Osborne, at the most recent Conservative conference.

We have never argued that you stop what economists call the automatic stabilisers operating – the lower tax receipts and extra government payments that follow if, for example, the global economy turns down.

The IMF has said the UK government is right to allow the free operation of automatic stabilisers.

“…the government allowed automatic stabilizers to operate freely and budgeted additional structural adjustment only in the outer years (2015–17). This response was right given the weak outlook and did not elicit an adverse market reaction, demonstrating the credibility of fiscal policy and institutions in the UK.”

Yet capping benefits is a cut in the automatic stabilisers that George Osborne says he does not want to stop and the IMF praise.

A suspicious mind might think that the benefit cap has more to do with politics than economics, given the support – albeit very superficial – for cuts to unemployment benefits.

So what about the relationship between benefits and earnings? It is true that almost every inflation and earnings statistics has been out of kilter in the years since the crash. Historically earnings tend to rise higher than prices, but not in the last few years – so if you just look at the last few years then ministers are right.

But over any longer time period – as we can see in the chart – it is hard to argue that benefits have outstripped wages. The blue line shows the value of single person’s unemployment benefit or latterly JSA in 2011 prices (deflated by RPI price inflation), while the red line shows it as a proportion of average wages. yes the red line has gone up in the crash years (and this graph does not include 2012 as the most recent DWP abstract only goes as far as 2011 – the 2012 percentage is 12 per cent).

But unemployment benefits are a much lower proportion of wages than they were under recent Conservative governments, where we heard far less about scroungers, if rather a lot about Mr Tebbit’s father’s bicycle.

Just for interest, here’s another graph showing what single person’s JSA would be  if paid at the proportion of earnings that it was in the year on the x-axis of the graph. This does include the 2012/13 figure of £71.

6 Responses to unemployment benefits and earnings

  1. Bill Kruse
    Jan 8th 2013, 5:55 pm

    Benefit claimants are being demonised to make it easier for the govt, any govt because Labour are equally guilty of involvement in this, to get rid of the benefits system altogether. As our politicians are no doubt very well aware, this will open up a multi-billion pound market for the insurance companies (one of which, Unum, has been acting as an advisor on welfare reform since the 90s) and equally of no doubt is our wonderful politicans would all be very keen for even the thinnest slice of that billionaire pie. One might assume also the interests of the electorate, of course, have no place in their considerations.

  2. Ian
    Jan 8th 2013, 6:39 pm

    I am puzzled by the final graph – it appears to have exactly the data points of the red line in graph 1, but a different y-axis quantity. And claims that the single JSA in 1871 was over £120!!

  3. Nigel Stanley

    Nigel Stanley
    Jan 9th 2013, 9:56 am

    Sorry Ian, it’s not perhaps as clear as it could be.

    What it shows is what JSA would be worth today if paid at the same proportion of average earnings as it was in the year on the x-axis.

    In other words if JSA was today paid at the same proportion of earnings as unemployment benefit was in 1971, a claimant would get about £123. If paid at the same proportion of earnings as in 1996, a claimant would get around £80.

    It does follow the shape of the earlier graph as it simply multiplies the percentage shown in that by the value of JSA today £71. It’s not therefore a very profound piece of research, but I thought it might help to express this as a sum of money as well as a percentage. It looks like I was wrong!

  4. Chris Smith
    Jan 9th 2013, 10:20 am

    Thanks for the explanation of the second graph. I also was a little confused. Some good key messages though – JSA was £123 in 1971 at current prices and JSA has dropped from just over 20% to just over 10% of average earnings in 40 years.

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