unemployment benefits and earnings
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.
But 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.