Figures and tables in The Effect of Earnings-Related Benefits on Financial Work Incentives

Abstract

In most European Union countries, there is a link between the level of payment provided to those who have lost their job and the level of earnings in that job, at least for an initial period. While this provides valuable insurance to those who lose their job, a stronger link between unemployment benefits and previous earnings can exacerbate the moral hazard created by unemployment insurance. We examine strengthening this link for unemployment benefits in Ireland using SWITCH – a tax and welfare microsimulation model for Ireland – to simulate the financial work incentive impact of a proposed reform to current unemployment benefit policy. We find that implementing an earnings-related unemployment’s benefit leads to reduced short-term incentives to work for all those currently in employment, with the impact being greater for full-time employees.

This article contains 15 figures and 14 tables.

Figures

**Figure 1.** Cumulative distributions NRRs and PTRs, Baseline and Reform Scenario.

**Figure 2.** Net Replacement rate, Baseline and Reform Scenario.

**Figure 3.** Participation Tax Rate by quintile, Baseline and Reform Scenario.

**Figure B1.** Reform 1 baseline versus 60% of previous earnings with maximum caps based on PUP rates

**Figure B2.** Net Replacemet Rates, Reform 1 baseline versus 60% of previous earnings with maximum caps based on PUP rates

**Figure B3.** Participation Tax Rates, Reform 1 baseline versus 60% of previous earnings with maximum caps based on PUP rates

**Figure B4.** Reform 2: baseline versus 60% of previous earnings with maximum cap set at 60% of mean wage

**Figure B5.** Net Replacement Rates, Reform 2: baseline versus 60% of previous earnings with maximum cap set at 60% of mean wage.

**Figure B6.** Participation Tax Rates, Reform 2: baseline versus 60% of previous earnings with maximum cap set at 60% of mean wage.

**Figure B7.** Reform 3: baseline versus 70% of previous earnings with maximum caps based on PUP rates.

**Figure B8.** Net Replacement Rates, Reform 3: baseline versus 70% of previous earnings with maximum caps based on PUP rates.

**Figure B9.** Participation Tax Rates, Reform 3: baseline versus 70% of previous earnings with maximum caps based on PUP rates.

**Figure B10.** Reform 4: baseline versus 60% of previous earnings with maximum cap set at 43% of mean earnings (to give cost of c. €400m).

**Figure B11.** Net replacement rates, Reform 4: baseline versus 60% of previous earnings with maximum cap set at 43% of mean earnings (to give cost of c. €400m).

**Figure B12.** Participation tax rates, Reform 4: baseline versus 60% of previous earnings with maximum cap set at 43% of mean earnings (to give cost of c. €400m).

Tables

Table 1. Income inequality, poverty and additional spending required.

	Baseline	Reform Scenario	Difference
Gini	0.2782	0.2773	-0.001 pp
Poverty – Whole population	13.63%	13.57%	-0.06 pp
Poverty – Working age adult population	13.31%	13.24%	-0.07 pp
Elderly poverty*	12.20%	12.18%	-0.02 pp
Children poverty	15.77%	15.68%	-0.09 pp
Fiscal cost	€348 million	€626 million	€278 milion

Note: Authors calculations using the SWITCH v4.6 tax-benefit system for 2019 linked to SILC 2019. Assessment units are defined as being at risk of poverty (poor) if their equivalised disposable income is below the poverty line. The poverty line is defined as 60% of the median equivalised disposable income of the baseline scenario. The CSO equivalence scale is used, which attributes a weight of 1 to the head of the unit, a weight of 0.66 to every person above the age of 13 and a weight of 0.33 to every child aged 0-13. Table B5 in the Appendix provides the income inequality and poverty rates for each of the 4 scenarios.

Changes in the elderly poverty rate are due to a small number of observations and thus should be read with caution.

Table 2. Work incentives.

Scenario	Reform	Median NRR (%)	Share with NRR > 70% (%)	Median PTR (%)	Share with PTR > 70% (%)
Baseline	Baseline	67	43	45	1
1	Reform scenario	78	71	64	28

Source: Authors’ estimates using the SWITCH model and data from the 2019 SILC. Results for the 4 scenarios can be found in Table B4 at the Appendix.

Table 3. Median Replacement Rate.

Income quintile	Baseline (%)	Reform (%)	pp change
Poorest	67	79	12
2	71	83	12
3	70	83	13
4	67	79	12
Richest	63	73	10

Source: Authors’ calculations using SWITCH and data from the 2019 SILC. Table B6 at the Appendix presents the Median RR for the rest of the reforms.

Table 5. Median Participation Tax Rate.

Income quintile	Baseline (%)	Reform (%)	pp change
Poorest	47	71	24
2	46	70	24
3	43	67	24
4	45	64	19
Richest	47	62	15

Source: Authors’ calculations using SWITCH and data from the 2019 SILC. Table B7 at the Appendix presents the median PTR for the rest of the reform.

Table 4. Share of individuals with Net Replacement Rate greater than 70 per cent

	All employees			Part-time employees			Full-time employees
Income quintile	Baseline (%)	Reform (%)	pp change	Baseline (%)	Reform (%)	pp change	Baseline (%)	Reform (%)	pp change
Poorest	45	84	39	62	90	28	33	80	47
2	52	80	28	87	95	8	37	75	38
3	50	76	26	86	95	9	35	71	36
4	44	70	26	71	85	14	40	69	29
Richest	32	60	28	85	92	7	29	58	29

Source: Authors’ calculations using SWITCH and data from the 2019 Survey on Income and Living Conditions (SILC). The number of individuals in each quintile, split by part-time and full-time employees, and the average wage by quintile can be found in Table B2 and Table B3 at the Appendix respectively.

Table 6. Share of individuals with Participation Tax Rate greater than 70 per cent.

	All employees			Part-time employees			Full-time employees
Income quintile	Baseline (%)	Reform (%)	pp change	Baseline (%)	Reform (%)	pp change	Baseline (%)	Reform (%)	pp change
Poorest	6	53	47	12	50	38	4	58	54
2	3	50	47	11	62	51	4	50	46
3	2	38	36	5	57	52	2	35	33
4	0.6	21	20.4	1	40	39	1	21	20
Richest	0.2	9	8.8	2	40	38	0.2	8	7.8

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Table A1. Weekly Pandemic Unemployment Payment rates.

Previous weekly income (Y)	Weekly PUP payment
Y < €150	€150
€150 ≤ Y < €220	€203
€220 ≤ Y < €300	€250
€300 ≤ Y < €400	€300
Y ≥ €400	€350

Source: Rates from October 2020, see https://www.gov.ie/en/publication/0b0fc-covid-19-pandemic-unemployment-payment-rates/#rates-from-7-september-2021.

Table B1. Unemployment Benefit Reforms.

No.	Reform
1	60% of previous earnings – maximum caps based on PUP rates
2	60% of previous earnings – maximum cap set at 60% of mean daily earnings
3	70% of previous earnings – maximum caps based on PUP rates
4	60% of previous earnings – maximum cap set at 43% of mean daily earnings

Table B2. Number of employees by household quintile and employment type.

Income quintile	All employees	Part-time employees	Full-time emploees
Poorest	180,267	80,714	99,552
2	338,642	100,951	237,691
3	459,839	123,837	336,001
4	503,762	64,397	439,365
Richest	578,028	35,171	542,857

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Table B3. Average monthly wage by quintile (€).

Income quintile	All employees	Part-time employees	Full-time emploees
Poorest	1,994	1,269	2,581
2	2,562	1,419	3,047
3	2,973	1,611	3,476
4	4,076	2,269	4,341
Richest	5,753	3,369	5,972

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Table B4. Work incentives and additional spending required.

No	Reform	Median NRR (%)	Share with NRR > 70% (%)	Median PTR (%)	Share with PTR > 70% (%)	Additional spending (€)
Baseline	Baseline	67	43	45	1	n/a
1	Reform scenario	78	71	64	28	278m
2	RR: 60% Cap: 60% mean earnings	88	91	79	74	588m
3	RR: 70% Cap: PUP	79	72	64	28	285m
4	RR: 60% Cap: 43% mean earnings	84	81	72	59	399m

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Table B5. Income inequality and poverty.

	Gini	Poverty – Whole population	Poverty – Working age adult population	Elderly poverty*	Children poverty
Baseline 2022	0.278	13.63%	13.31%	12.20%	15.77%
Reform 1	0.277	13.57%	13.24%	12.18%	15.68%
Reform 2	0.277	13.39%	13.04%	11.85%	15.35%
Reform 3	0.277	13.57%	13.24%	12.18%	15.68%
Reform 4	0.277	13.42%	13.08%	11.85%	15.41%

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Changes in the elderly poverty rates are driven by a small number of observations and thus should be read with caution.

Table B6. Median Replacement Rate, Reform 2-4.

Income quintile	Baseline (%)	Reform 2		Reform 3		Reform 4
Income quintile	Baseline (%)	NRR (%)	pp change	NRR (%)	pp change	NRR (%)	pp change
Poorest	67	82	15	80	13	81	14
2	71	88	17	84	13	86	15
3	70	89	19	84	14	86	17
4	67	90	23	79	12	84	18
Richest	63	87	24	73	10	78	16

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.

Table B7. Participation Tax Rate, Reform 2-4.

Income quintile	Baseline (%)	Reform 2		Reform 3		Reform 4
Income quintile	Baseline (%)	PTR (%)	pp change	PTR (%)	pp change	PTR (%)	pp change
Poorest	47	73	26	72	25	73	26
2	46	78	32	71	25	76	30
3	43	80	37	67	24	75	32
4	45	81	36	64	19	73	28
Richest	47	79	32	62	15	69	22

Source: Authors’ calculations using SWITCH and data from the 2019 SILC.