Workers who lose their job
and receive unemployment benefits see
their spending decline by around 20% in the
first few months following job
loss. On
average, only a third
of lost earnings is made up for by
higher benefits. The spending decline is
seen across a range of goods, with more ‘discretionary'
items unsurprisingly seeing the largest hit.
However, even supermarket spending falls on average by
16% following job
loss.
These are among the findings of a new
report published today by the Institute for Fiscal
Studies. It also finds that:
-
The design of unemployment
benefits in the UK means that replacement rates (the share
of earnings that are replaced
through unemployment benefits) can vary
drastically between
individuals. For the third of our sample with the lowest
replacement rates, total income (including both earnings and
benefits) falls by around 90% and spending by
26%. For the third
of our sample with the highest replacement rates, income
falls by around 30% and spending by just 6%.
-
Unemployment is associated with
financial distress. After six months of
unemployment, the share of unemployed people making an
energy bill payment declines by
8%. We also
see a 4% increase in the
share incurring overdraft charges (16.0%
to 16.6%) and an 8% increase in the
share having a current account in negative balance
(22.1% to 23.8%). These changes could all have
longer-term financial consequences.
At the same time, there are
substantial declines in credit card charges and payday loan
usage, potentially due to job
loss reducing access to credit or
willingness to use it.
-
Again these averages mask substantial
variation according to the amount of protection afforded by
the benefit system. Among the third of
workers with the least protection –
whose total income falls by the most at
job loss – there
is a 17% decline in the share of people
making an energy bill payment each month and a 20%
decline in the share making a rental
payment. Among the third of workers that the
benefit system protects the most, the share of people
making energy bill payments declines by
just 3% and rental payments do not decline at
all.
Isaac Delestre, a senior
research economist at IFS and co-author of the report,
said:
‘The immediate financial shock of job
loss is substantial for many households, with declines in
spending and numerous warning signs of financial
distress. These patterns are strongly correlated with how
much of a worker's lost income is replaced by benefits. The
government's proposed unemployment insurance benefit could serve
to provide more protection for some of those who currently have
the least support. As ever, however, there are
trade-offs and more generous unemployment benefits
would also blunt incentives to return to work more
quickly.'
ENDS
Notes to Editor
Unemployment, benefits and household spending: new evidence
from UK bank account data is an IFS report by Isaac
Delestre and Tom Waters
