A study of replacement ratios among a sample of unemployed workers

The Economic and Social Review, Vol. 14, No. 2, January 1983, pp. 77-91

A Study of Replacement Ratios

A m o n g a Sample of Unemployed

Workersf

D O N A L P. O ' M A H O N Y *

University College, Dublin

Abstract: This study reports the findings of an examination of the actual benefits to earnings (replace­

ment) ratio experience among a sample of unemployed workers. Previous Irish studies in this area have been at the macro-economic level and have estimated hypothetical replacement ratios for various categories of unemployed workers, based on an individual's dependency status and an assumed level of pre-unemployment earnings. This study points to a marked correlation between the actual replace­ ment ratios calculated for the sample and the hypothetical values in the earlier studies. Some of the policy implications of the findings are discussed.

here is a growing literature o n the w o r k incentive effects o f u n e m p l o y -X m e n t and similar insurance schemes. M u c h o f the empirical w o r k o n this t o p i c revolves around the impact o f the r a t i o o f u n e m p l o y m e n t benefits ( U B ) t o net income f r o m e m p l o y m e n t (usually referred t o as the replace­ ment r a t i o , R ) o n the d u r a t i o n o f u n e m p l o y m e n t . I n most studies R is n o t d i r e c t l y observed b u t rather calculated o n the basis o f i n f o r m a t i o n o f an individual's status and h y p o t h e t i c a l e n t i t l e m e n t t o benefits relative t o assumed levels o f earnings. T h e t w o published Irish studies are at the macro-economic level and utilise a time-series for R constructed as a weighted average o f the h y p o t h e t i c a l Rs for various categories o f u n e m p l o y e d workers (Walsh, 1 9 7 8 ;

* I would like to thank Mr. Seamus MacEoin and Ms Marian Hogan of the staff of the D u n Laoghaire Employment Exchange for their considerable assistance in the carrying out of the sample survey. I would also like to thank Professor Brendan Walsh of U C D for his comments and suggestions on the drafting of this paper. The comments of two anonymous referees were also helpful in redrafting the paper.

t T h e author was awarded the Lynch-Meenan medal for this study, which was carried out as part of a final year B . A . Course in Political Economy and National Economics at University College, Dublin.

Hughes, 1 9 8 1 ) . D o w l i n g ( 1 9 7 7 ) calculates effective tax rates defined as the r a t i o o f benefits plus income taxes t o gross income i n the same h y p o t h e t i c a l manner.

T h e calculations p e r f o r m e d o n I r i s h data using this m e t h o d o l o g y reveal high values o f R (or high effective tax rates) for most categories o f the un­ e m p l o y e d . T h e w o r k disincentive effects are t h e n explored using these h y p o ­ thetical Rs i n regression analyses. These studies are open t o the o b j e c t i o n , however, t h a t actual U B paid may be considerably lower than the m a x i m a specified i n official publications o f the D e p a r t m e n t o f Social Welfare. A t k i n s o n and F l e m m i n g ( 1 9 7 8 ) have been p a r t i c u l a r l y critical o f U K studies t h a t rely heavily o n h y p o t h e t i c a l Rs t o support the claim that "a h y p o t h e t i c a l calculation o f the replacement ratio for a supposedly t y p i c a l case may provide l i t t l e guide t o the actual levels o f income o f the people actually u n e m p l o y e d " ( p . 8 ) . I f this claim is accepted, i t undermines m u c h o f the material that has been advanced as evidence o f insurance-induced u n e m p l o y m e n t .

This paper reports the results o f a survey o f a r a n d o m sample o f the registered u n e m p l o y e d i n one L a b o u r Exchange, designed t o collect data that facilitated the calculation o f actual Rs. I t w i l l be seen that the actual Rs calculated i n this manner tend t o c o n f i r m the h y p o t h e t i c a l replacement r a t i o calculations i n the manner t h a t has been used i n previous studies. These findings suggest t h a t A t k i n s o n and Flemming's criticism is n o t relevant t o the I r i s h data.

I n Section I I , h y p o t h e t i c a l replacement ratios for the Irish labour force are examined and the problems involved i n a t t e m p t i n g t o derive a single R as being representative o f the actual Rs facing the u n e m p l o y e d are discussed. I n Section I I I , measures o f the actual replacement ratios facing a sample o f u n e m p l o y e d workers are presented, and the average R derived is compared w i t h h y p o t h e t i c a l Rs used i n previous time-series studies. F i n a l l y , i n Section I V , there is a brief discussion o f the p o l i c y implications o f the study's findings.

I I H Y P O T H E T I C A L R E P L A C E M E N T R A T I O S

T a b l e 1: 1981 (average) Live Register distribution per unemployment insurance scheme

and dependency status

Unemployment Benefit only

Single Male Single F e m a l e

A d u l t D e p e n d e n t o n l y D e p e n d e n t C h i l d r e n

Unemployment and Pay-Related Benefit

Single Male Single F e m a l e

A d u l t D e p e n d e n t o n l y D e p e n d e n t C h i l d r e n T o t a l U B

Unemployment Assistance

Single Male Single F e m a l e

A d u l t D e p e n d e n t o n l y D e p e n d e n t C h i l d r e n T o t a l U A

Percentage of total

12 4.5 7 11.5

8 3 4 5 5 5 19 3 9 14 4 5

Source: C e n t r a l Statistics O f f i c e — M o n t h l y R e t u r n o f L i v e Register Statistics.

Table 2 calculates h y p o t h e t i c a l Rs for f o u r different categories o f claimant. I n calculating the various benefits t o earnings ratios, cognisance is taken o f the revised PRSI c o n t r i b u t i o n s together w i t h the 1 per cent Y o u t h E m p l o y ­ m e n t L e v y announced b y the Minister for Social Welfare i n M a r c h , 1 9 8 2 , along w i t h the revised tax rates and personal allowances (including children's allowances) announced i n A p r i l 1 9 8 2 . Increases i n the levels o f u n e m p l o y m e n t benefit ( U B ) and u n e m p l o y m e n t assistance ( U A ) at that date are also taken i n t o account.

The table assumes t h a t the i n d i v i d u a l meets all requirements for the receipt o f the m a x i m u m benefits available i n each particular instance. The various w e e k l y durations o u t l i n e d i n the table reflect changing levels o f PRB w i t h the 6 7 t h week i n d i c a t i n g the individual's transfer t o U A . Where appropriate, payments o f PRB are reduced (or c u t o u t altogether) t o ensure the preser­ v a t i o n o f the s t a t u t o r y 85 per cent ceiling o n the benefits t o earnings r a t i o . However, i n n o case is the flat-rate benefit reduced because o f the a p p l i c a t i o n o f this r u l e .

T a b l e 2: Hypothetical replacement ratios by earnings levels, family type and unemploy­

ment duration: April, 1982

Family type Duration Weekly gross earnings while at work (£)

(weeks) 50 60 70 80 90 100 110 120 130 140

Per cent

3 - 2 7 85 v 85 85 85 85 85 85 85 85 85 2 8 - 4 0 85 85 82 79 77 75 74 73 72 72 41 - 5 3 85 81 77 75 73 70 68 67 66 65 5 4 - 66 85 77 71 70 67 6 4 62 61 60 59 67 5 8 51 4 5 41 38 35 32 30 29 27 3 - 27 1 1 3 9 4 85 85 85 85 85 85 85 85 2 8 - 4 0 1 1 3 9 4 85 85 85 85 85 85 85 83 41 - 53 1 1 3 9 4 85 85 85 85 83 81 79 77 5 4 - 66 1 1 3 9 4 85 85 85 81 78 76 73 71 67 9 8 81 70 62 57 53 50 47 4 4 4 2 3 - 2 7 129 107 92 85 85 85 85 85 85 85 28 - 4 0 129 107 9 2 85 85 85 85 85 85 83 41 - 53 129 107 92 85 85 85 85 85 85 77 5 4 - 66 1 2 9 107 9 2 85 85 85 8 4 83 80 72 67 112 9 3 80 71 65 60 5 6 53 50 42 3 - 2 7 177 148 127 111 101 9 3 88 85 85 85 28 - 4 0 177 148 127 111 101 93 88 84 85 85 41 - 53 177 148 127 111 101 9 3 88 85 85 85 5 4 - 66 177 148 127 111 101 9 3 88 85 85 85 67 1 5 3 128 109 9 6 87 81 76 71 67 64 Single

Person

C l a i m a n t w i t h D e p e n d e n t Wife

C o u p l e w i t h one C h i l d

C o u p l e w i t h f o u r C h i l d r e n

Note: F o r the purposes o f c a l c u l a t i o n , pay-related benefit was based o n i n c o m e in the tax

y e a r 1 9 8 0 / 8 1 (the relevant tax y e a r for persons c l a i m i n g u n e m p l o y m e n t benefit in 1 9 8 2 ) w i t h gross earnings for 1 9 8 2 r e d u c e d b y 15 per cent to arrive at a comparable figure for

1 9 8 1 , as r e q u i r e d .

PRE. F u r t h e r m o r e , although the average i n d u s t r i a l wage i n 1981 was about £ 1 1 5 , the table places equal l i k e l i h o o d o n the occurrence o f all possible wage levels between £ 5 0 - £ 1 4 0 . F i n a l l y , we have seen that as few as 16 per cent o f the u n e m p l o y e d p o p u l a t i o n d r a w i n g UB are i n the category o f " m a r r i e d m a n w i t h dependent c h i l d r e n " ( o f w h i c h only one-third receive PRB). A c c o r d i n g l y , the last t w o rows o f Table 2 should n o t be awarded greater significance than their weighting i n the d i s t r i b u t i o n o f the Live Register w o u l d m e r i t .

a t t e m p t at an evaluation o f m o r e realistic replacement ratios w o u l d be t o c o m b i n e , b r o a d l y speaking, the i n f o r m a t i o n supplied i n b o t h tables and, b y using weights based o n the given d i s t r i b u t i o n o f the Live Register, arrive at a single, average replacement ratio for the u n e m p l o y e d as a w h o l e . Such an a t t e m p t was made b y Walsh (1978) w h o evaluated a single R index for the p e r i o d 1954-75. T h e table has been u p d a t e d , using similar calculations, b y Hughes ( 1 9 8 1 ) .

These h y p o t h e t i c a l Rs have, as n o t e d , been criticised b y A t k i n s o n and F l e m m i n g as being possibly unrepresentative o f the actual Rs facing the u n e m p l o y e d . T h e y also suffer f r o m the defect o f t a k i n g n o account o f tax rebates or means-tested L o c a l A u t h o r i t y rents. Under our present system o f Pay-As-You-Earn ( P A Y E ) income t a x a t i o n , an i n d i v i d u a l w h o loses his j o b d u r i n g the tax year w i l l , i n all p r o b a b i l i t y , be e n t i t l e d t o a refund o f w i t h ­ held t a x . Secondly, i n estimating the various replacement ratios, no account is taken o f the effect o f u n e m p l o y m e n t o n the rents payable b y tenants o f L o c a l A u t h o r i t y housing stock under the n a t i o n a l differential rents scheme. A b o u t one-third o f the u r b a n p o p u l a t i o n , and p r o b a b l y a m u c h higher p r o ­ p o r t i o n o f the u n e m p l o y e d , live i n dwellings p r o v i d e d under this scheme. Given the o p e r a t i o n o f the scheme (the tenant's rent is calculated as a p r o p o r t i o n o f his assessable income f r o m all sources), the r e d u c t i o n i n i n c o m e i n going f r o m e m p l o y m e n t t o u n e m p l o y m e n t is accompanied b y a r e d u c t i o n i n the individual's l i a b i l i t y f o r differential r e n t .

A n o t h e r factor, h i t h e r t o ignored i n the calculation o f p o s t - u n e m p l o y m e n t i n c o m e , is the l u m p - s u m p a y m e n t available t o m a n y u n e m p l o y e d workers under the Redundancy Payments Scheme. The p r o p o r t i o n o f the u n e m p l o y e d w h o qualify for payments under this scheme has been g r o w i n g consistently since the i n c e p t i o n o f the scheme i n 1968. T h e e n t i t l e m e n t t o w e e k l y redun­ dancy payments ended i n 1979, b u t spreading the value o f the lump-sum p a y m e n t over a 52 week p e r i o d w o u l d serve to raise the benefits t o earnings ratio o f the i n d i v i d u a l . O f course, any calculation o f an individual's replace­ ment r a t i o ignores the possibility t h a t an u n e m p l o y e d person can supplement his U B or U A w i t h income f r o m o d d j o b s , " n i x e r s " , etc. Given t h a t t o a d m i t receiving a d d i t i o n a l i n c o m e f r o m such sources w o u l d a u t o m a t i c a l l y disqualify the i n d i v i d u a l f r o m receiving any further social welfare payments, any a t t e m p t t o allow for this variable i n a study o f Irish replacement ratios, no matter h o w comprehensive the approach, w o u l d be d o o m e d t o failure. T h e possibility o f this supplementary income for the u n e m p l o y e d should, h o w ­ ever, be k e p t i n m i n d .1

F i n a l l y , a somewhat a r b i t r a r y adjustment c o u l d be made t o take account o f t h e individual's job-related expenses, p a r t i c u l a r l y w i t h regard t o t r a n s p o r t a t i o n costs t o and f r o m w o r k , w h i c h w o u l d , o f course, cease w i t h u n e m p l o y m e n t . I n a d d i t i o n , children's allowances c o u l d be i n c l u d e d i n b o t h the calculations o f p r e - u n e m p l o y m e n t and p o s t - u n e m p l o y m e n t " i n c o m e " . These allowances are p a i d t o those w i t h dependent children regardless o f their labour force status or i n c o m e .2 A n e x a m i n a t i o n o f the replacement ratios o f the I r i s h

u n e m p l o y e d , t a k i n g a l l o f these a d d i t i o n a l factors i n t o account, w o u l d surely give a m o r e realistic basis f o r any effort t o evaluate job-disincentives amongst the u n e m p l o y e d . There is, therefore, an obvious need t o explore actual Rs, defined t o take account o f the widest possible range o f relevant considerations, and t o compare these w i t h the h y p o t h e t i c a l Rs presented i n Table 2.

I l l A C T U A L R E P L A C E M E N T R A T I O S

A r a n d o m sample o f 224 individuals i n receipt o f either flat-rate u n e m p l o y ­ m e n t benefit, flat-rate benefit plus pay-related, or u n e m p l o y m e n t assistance was taken f r o m the register o f u n e m p l o y e d persons i n the D u n Laoghaire E m p l o y m e n t Exchange for the week ending 1 0 t h A p r i l , 1982. The sample was stratified i n accordance w i t h the d i s t r i b u t i o n o f the Live Register i n 1981 t o ensure t h a t such a sample w o u l d be representative o f the national d i s t r i b u t i o n o f the u n e m p l o y e d . T h e E m p l o y m e n t Exchange itself was con­ sidered sufficiently representative, w i t h its o w n register o f a p p r o x i m a t e l y 3,000 u n e m p l o y e d i n c l u d i n g claimants f r o m such areas as Ballybrack, S h a n k i l l , Sallynoggin and D u n Laoghaire itself. I n a d d i t i o n , a r a n d o m sample o f 25 short-time workers o n the Exchange Register was also taken. O f course, i t is i m p o r t a n t t o emphasise t h a t any conclusions d r a w n f r o m a study o f this sample must have regard t o the necessarily restricted nature o f the sample. A p a r t f r o m its size, the sample related t o the Greater D u b l i n Area o n l y . Nevertheless, i t is considered that the sample is sufficiently stratified and representative t o give a g o o d general picture o f the situation and t o enable reasonable conclusions t o be d r a w n .

For each i n d i v i d u a l sampled, the disposable income before and after u n e m p l o y m e n t was calculated o n the basis set o u t i n A p p e n d i x A . T o arrive at net disposable income w h e n fully e m p l o y e d , the weekly value o f children's allowances (where payable) was added t o gross weekly earnings and the appropriate deductions made for social welfare c o n t r i b u t i o n s , income

t a x a t i o n , housing costs (rent/mortgage) and estimated j o b expenses. Net disposable income when u n e m p l o y e d was arrived at b y adding children's allowances (where payable) t o the individual's e n t i t l e m e n t t o U B and PRB ( i f applicable), or U A , as supplied b y the E m p l o y m e n t Exchange, together w i t h the weekly value o f tax-rebates or lump-sum redundancy payments

(again, i f applicable) and m a k i n g the appropriate deductions for housing and travel costs. Some o f the assumptions used i n arriving at the required replace­ m e n t ratios for the sample are set o u t , i n some d e t a i l , i n A p p e n d i x B . The m a i n results o f the analysis are summarised i n Table 3.

The evidence f r o m the sample suggests that, o n average, an u n e m p l o y e d person w i t h dependants suffers o n l y a slight drop i n disposable income during the first 15 m o n t h s o f u n e m p l o y m e n t compared w i t h his situation while at w o r k ; excluding short-time w o r k e r s , 14 (or 6 per cent) o f those sampled were f o u n d to be literally "better o f f o n the d o l e " . D u r i n g this period the i n d i v i d u a l m a y , o f course, have the o p p o r t u n i t y o f raising his disposable income above that o f his previous e m p l o y m e n t t h r o u g h o d d j o b s , " n i x e r s " etc. A f t e r his p e r i o d o f UB has been exhausted, the i n d i v i d u a l may then receive an inexhaustible supply o f U A at a level close t o t w o - t h i r d s o f his pre-unemployment income, w i t h , o f course, the same options for " m a l i n ­ g e r i n g " remaining. The R value for the single person, while n o t so high i n the long r u n , is considerable i n the short t e r m , w i t h four-fifths o f pre-unemploy­ ment income available i n benefits t o the single female, and slightly less for

T a b l e 3: Analysis of sample survey

R (Weighted average)

Per cent

71

Fully unemployed person R Range of R Weight.

Per cent Per cent

U B Single Male 77.5 5 9 - 9 3 .20 U B Single F e m a l e 81 5 4 - 99 .075 U A Single Male 4 1 . 5 31 - 5 3 .19 U A Single F e m a l e 4 5 . 5 28 - 67 .03 U B M a r r i e d M a n 9 4 7 2 - 1 1 5 . 2 7 5 U A M a r r i e d M a n 6 2 4 9 - 9 2 .23

S h o r t - t i m e W o r k e r 121 98 - 135

Note: A l t h o u g h the sample was stratified in a c c o r d a n c e w i t h the k n o w n d i s t r i b u t i o n o f the

the single male. I n the l o n g r u n , however, U A amounts t o a l i t t l e over t w o -fifths o f the single person's pre-unemployment income.

Using weights i n accordance w i t h the data supplied i n Table 1 , the sample estimates an average replacement ratio for the Irish u n e m p l o y e d labour force o f 7 1 per cent. This actual average R can n o w be compared w i t h an average

hypothetical replacement ratio w h i c h can be estimated f r o m the i n f o r m a t i o n

given i n Table 2. Average weekly earnings i n 1981 were £ 1 1 3 . 6 9 ,3 so the

most appropriate comparison w i t h the h y p o t h e t i c a l ratios is for gross earnings o f £ 1 1 0 per week. Hence, using the weights given i n Table 3, and a p p l y i n g these t o the data i n Table 2 for a single person and a married person w i t h four c h i l d r e n , weighted average h y p o t h e t i c a l replacement ratios o f 72 per cent and 66 per cent are calculated for the periods 3-27 weeks' and 54-66 weeks' d u r a t i o n o n U B respectively. T h e h y p o t h e t i c a l figure for the d u r a t i o n category 3-27 weeks is almost i d e n t i c a l w i t h , and that o f the d u r a t i o n category 54-66 weeks is o n l y slightly less t h a n , the actual R for all durations. The empirical studies o f Walsh (1978) and Hughes ( 1 9 8 1 ) derived weighted Rs b y using the average industrial wage for males and females and assuming that u n e m p l o y m e n t had lasted f r o m 3-27 weeks. T h e i r approach, therefore, gives h y p o t h e t i c a l Rs that are highly correlated w i t h the actual Rs.

The size o f the replacement r a t i o estimated f r o m the sample for short-time workers points t o an obvious anomaly. A w o r k e r must be u n e m p l o y e d for at least three days o u t o f six in order t o be e n t i t l e d t o U B . A w o r k e r on a three-day short-time w o r k i n g week w o u l d accordingly qualify, although a w o r k e r on a four-day short-time week w o u l d n o t . Hence, the three-day short-time w o r k e r is i n receipt o f net pay for his three day w o r k i n g week plus the daily value o f u n e m p l o y m e n t and possibly pay-related benefit t o w h i c h his status entitles h i m . A benefit l i m i t is imposed b y the Department o f Social Welfare i n an effort t o stifle this financial bonanza for the short-time w o r k e r , the proviso being that the c o m b i n e d t o t a l o f gross wages, flat-rate benefit, and pay-related benefit may n o t exceed an individual's reckonable weekly earnings while in full e m p l o y m e n t . However, as before, i n no circumstances w i l l the flat-rate benefit be reduced because o f the application o f the benefit l i m i t . Hence the average replacement ratio o f 1 2 1 per cent for short-time workers in Table 3 .4

3. As given by Table 15 of the Economic Review and Outlook, Summer, 1982.

I n assessing the i m p l i c a t i o n s o f the average disposable income available d u r i n g u n e m p l o y m e n t compared w i t h disposable income w h i l e at w o r k , i t may be useful t o consider the c o m p o s i t i o n o f the p o s t - u n e m p l o y m e n t dis­ posable income for various categories o f claimants, as is set o u t i n Table 4 . T h e table shows that the inclusion o f b o t h the tax rebate and redundancy p a y m e n t (where applicable) i n the calculations has a small b u t none the less significant effect o n the level o f the individual's replacement r a t i o . I n the m a i n , however, the actual magnitude o f the social welfare p a y m e n t t o the recipient is, i n itself, the d e t e r m i n a n t o f the individual's R value f o l l o w i n g u n e m p l o y m e n t .

F i n a l l y , i n Table 5 we examine the c o m p o s i t i o n o f the average disposable i n c o m e o f short-time workers as a percentage o f t h e i r disposable income w h e n i n f u l l e m p l o y m e n t . I n 22 o u t o f 25 cases examined, PRB was n o t p a i d t o

T a b l e 4 : Components of sample replacement ratios

Value of Individual Components of R

Per cent UB Married Man

U n e m p l o y m e n t a n d P a y - R e l a t e d Benefit 9 7

C h i l d r e n ' s A l l o w a n c e s 4 T a x R e b a t e / R e d u n d a n c y P a y m e n t 4.5

H o u s i n g C o s t s - 1 0 . 5 O t h e r costs - 1

Total 9 4

UA Married Man

U n e m p l o y m e n t A s s i s t a n c e 6 4 C h i l d r e n ' s A l l o w a n c e s 6 H o u s i n g C o s t s - 7 O t h e r C o s t s - 1

Total 62 UB Single Man

U n e m p l o y m e n t a n d P a y - R e l a t e d B e n e f i t 75

C h i l d r e n ' s A l l o w a n c e s — T a x R e b a t e / R e d u n d a n c y P a y m e n t 8

H o u s i n g C o s t s - 4 . 5 O t h e r C o s t s - 1

Total 77.5

Note: T h e i n d i v i d u a l c o m p o n e n t s o f p o s t - e m p l o y m e n t i n c o m e are s h o w n as percentages

T H E E C O N O M I C A N D S O C I A L R E V I E W

T a b l e 5 : Composition of replacement ratio for short-time worker

Short-time worker Value of individual components of R

Per cent

G r o s s Wage

U n e m p l o y m e n t a n d P a y - r e l a t e d Benefit C h i l d r e n ' s A l l o w a n c e s

T a x R e b a t e

S o c i a l Welfare C o n t r i b u t i o n s I n c o m e T a x

H o u s i n g C o s t s O t h e r C o s t s

Total

9 3 62 4 1 - 7 - 9 - 1 7 - 6 121

the i n d i v i d u a l concerned i n accordance w i t h the benefit rule o u t l i n e d earlier. Y e t the value o f the flat-rate u n e m p l o y m e n t benefit was, o n average, almost 60 per cent o f the individual's previous disposable income (as derived f r o m A p p e n d i x A ) w h e n i n full-time e m p l o y m e n t . This figure and that o f the gross wage c o m p o n e n t o f R o f 93 per cent f o l l o w i n g the switch t o a three-day w o r k i n g week, are the m a i n reasons for the rather e x h o r b i t a n t (accord­ ing t o the sample) average replacement r a t i o o f 121 per cent facing the short-time w o r k e r i n I r e l a n d t o d a y .

H o w impressive one finds the arguments against the n o t i o n o f u n e m p l o y ­ m e n t insurance ( U I ) either i n d u c i n g , or, at least, p r o l o n g i n g u n e m p l o y m e n t is p r o b a b l y h i g h l y correlated w i t h one's attitudes towards a w i d e range o f socio-economic p o l i c y issues. However, empirical evidence is far more i m p o r t a n t t h a n dogma, and, f r o m an e x a m i n a t i o n o f the available studies, the evidence w o u l d seem t o suggest that current u n e m p l o y m e n t insurance schemes t e n d t o increase b o t h the rate and d u r a t i o n o f u n e m p l o y m e n t . However, the exact order o f magnitude o f these induced u n e m p l o y m e n t effects are d i f f i c u l t t o establish w i t h any degree o f precision. F u r t h e r m o r e , even i f i t is felt t h a t the inducement effects o f a particular U I scheme are significant, the ensuing social costs must be weighted against such social benefits as income r e d i s t r i b u t i o n , etc., before any decision is taken t o alter the scheme.

Since any proposals t o reduce the induced u n e m p l o y m e n t effects c o u l d impose hardships o n some o f the u n e m p l o y e d , the t o t a l i m p a c t o f such

changes o n overall social welfare c o u l d be negative. Clearly, one w a y o f reducing j o b disincentives amongst the u n e m p l o y e d w i t h o u t p r o d u c i n g a h a r m f u l , overall negative effect, w o u l d be t o make u n e m p l o y m e n t benefits reckonable for tax purposes. This is a matter t h a t has been the focus o f m u c h p u b l i c debate i n Ireland i n recent years, w i t h the government's decision t o tax short-term social welfare benefits i n its ill-fated Budget o f February,

1982 being f o l l o w e d b y a statement b y the subsequent Minister for Finance, i n his Budget speech, t h a t "such a tax w o u l d impose an unfair b u r d e n o n many w h o are u n f o r t u n a t e enough t o be made r e d u n d a n t " .

I n Table 6, the effect o f imposing regular t a x a t i o n rates o n the range o f benefits received b y the sample p o p u l a t i o n is examined, having regard, o f course, t o the respective entitlements t o tax free allowances for the various classes o f claimants. As can be seen f r o m a comparison w i t h Table 3, the effect o f imposing n o r m a l t a x a t i o n o n the various social welfare payments had, for example, no effect whatsoever o n the R value o f those i n sole receipt o f U A , the levels o f assistance never exceeding the various tax-free allowances i n each particular case. Such a result w o u l d be socially favourable, given the general characteristics and social standing o f those i n receipt o f U A . T h e effect o n the various u n e m p l o y m e n t benefit categories, although t o all appearances negligible, was quite considerable i n some cases sampled, par­ t i c u l a r l y in the " m a r r i e d and o n U B " category, w i t h some reductions i n R o f up to 12 per cent; b u t , o n the w h o l e , o n l y served t o reflect the relatively l o w levels o f income (irrespective o f their e m p l o y m e n t incomes) being received b y the u n e m p l o y e d .5 A significant r e d u c t i o n i n R for short-time

T a b l e 6: Effect of tax imposition on sample replacement ratio

Fully Employed Person R Weights R as Weighted Average

Per cent Per cent

U B Single Male 75.5 .20 U B Single F e m a l e 76 . 0 7 5 U A Single Male 4 1 . 5 .19

U A Single F e m a l e 4 5 . 5 . 0 3 69 U B M a r r i e d M a n 8 9 . 2 7 5

U A M a r r i e d M a n 6 2 .23

S h o r t - t i m e W o r k e r s 1 0 3

w o r k e r s , however, ( f r o m 121 per cent t o 103 per cent) was recorded, suggest­ ing, perhaps, t h a t a p p l y i n g a system o f t a x a t i o n o n short-term social welfare payments w o u l d , far f r o m " i m p o s i n g an unfair b u r d e n " o n recipients, rather serve as an insurance device for the scheme against the incidence o f obviously anomalous cases arising, thereby reducing the possibility o f j o b disincentive effects occurring w i t h i n the system. I n c l u d i n g u n e m p l o y m e n t benefits in taxable income w o u l d reduce these adverse incentives and direct a large share o f the t o t a l net benefits t o families w i t h lower incomes. The yield to the Exchequer o f such an arrangement (the February, 1982 Budget estimated a y i e l d o f £10.5 m i l l i o n for the 1982 tax year) could be used very p r o f i t a b l y , and w i t h f u l l support, t o raise the levels o f assistance payments t o the longer-t e r m u n e m p l o y e d .

Such a progressive o p e r a t i o n , no matter h o w restricted its effect, w o u l d be far m o r e acceptable as a proposal towards reducing j o b disincentives in this c o u n t r y t h a n a direct attack o n the i m p l i e d subsidy t o n o n - e m p l o y m e n t for the u n e m p l o y e d person t h r o u g h either indiscriminately reducing the average benefit p a y m e n t or reducing the d u r a t i o n o f benefit entitlement. Cuts in social welfare payments t o the u n e m p l o y e d w o u l d necessarily involve hard­ ship for some groups, chiefly the long-term u n e m p l o y e d . The p r o b l e m w i t h u n e m p l o y m e n t insurance i n I r e l a n d , p a r t i c u l a r l y w i t h the advent o f pay-related benefit i n 1974, is that the system is regressive in nature w i t h perhaps n o t a sufficient level o f payments available for those w h o really need i t , and t o o m u c h for those w h o p r o b a b l y do n o t .

V C O N C L U S I O N

REFERENCES

A T K I N S O N , A . B . , a n d J . S . F L E M M I N G , 1 9 7 8 . " U n e m p l o y m e n t , S o c i a l S e c u r i t y a n d I n c e n t i v e s " , Midland Bank Review, ( A u t u m n ) , p p . 6-16.

D O W L I N G , B R E N D A N , 1 9 7 7 . Integrated Approaches to Personal Income Taxes and

Transfers, D u b l i n : N a t i o n a l E c o n o m i c a n d S o c i a l C o u n c i l , R e p o r t N o . 3 7 .

H M S O , 1 9 7 3 . Report of the Committee on Abuse of Social Security Benefits, C m n d . 5 2 2 8 .

H U G H E S , G E R A R D , 1 9 8 1 . Social Insurance and Absence from Work in Ire land, D u b l i n : T h e E c o n o m i c and S o c i a l R e s e a r c h I n s t i t u t e , Paper N o . 1 0 8 .

T I P P I N G , B R I A N , 1 9 8 2 . " S c r o u n g i n g i n N o r t h e r n I r e l a n d : the Beginnings of an Inves­ tigation", The Economic and Social Review, V o l . 1 3 , N o . 3 , p p . 2 1 7 - 2 3 2 .

W A L S H , B R E N D A N M . , 1 9 7 8 . " U n e m p l o y m e n t C o m p e n s a t i o n and the R a t e of U n ­ e m p l o y m e n t : T h e I r i s h E x p e r i e n c e " , i n H e r b e r t G r u b e l and M i c h a e l W a l k e r (eds.)

Unemployment Insurance: Global Evidence of its Effects on Unemployment, V a n ­

A P P E N D I X A

I L L U S T R A T I O N O F T H E M E T H O D O F C A L C U L A T I O N O F S A M P L E R E P L A C E M E N T R A T I O S

Name Address —

Revenue and Social Insurance No. (R.S.I. No.) —

Sex Male Age 33 Marital status Married

Number of children 4 Employer —

Occupation F o r k l i f t driver

Fully employed £ Normal weekly wages (gross) 132.30

+ Children's allowances 8.25 + Other additions ( i f any) —

— PRSI 6.28 — Income tax 18.16

— Housing costs 13.50 (rent of local a u t h o r i t y or mortgage

of private house)

— Other deductions ( i f any) 4.50 N e t w e e k l y disposable income — A 9 8 . 1 1

Unemployed

Unemployment/Disability benefit 80.80*

+ Gross wage (short t i m e ) — + Pay-related benefit 9.80 + Weekly redundancy pay — + Children's allowance 8.25

+ Tax rebate 4.65 + Other additions ( i f any) —

Unemployment Assistance —

— Housing costs 11.15 — Social welfare c o n t r i b u t i o n s (short t i m e ) —

— I n c o m e tax (short t i m e ) — — Other deductions ( i f any) .75 Net w e e k l y disposable income — B 91.6

A P P E N D I X B

S O U R C E D E T A I L S O F C O M P O N E N T S O F S A M P L E R E P L A C E M E N T R A T I O S ( I N C L U D I N G U N D E R L Y I N G A S S U M P T I O N S )

Each case was analysed o n the lines o f the example i n A p p e n d i x A . T h e n o r m a l w e e k l y wages for all cases were derived f r o m Revenue records. These records also p r o v i d e d details o f i n c o m e tax paid and tax rebates received. Details o f lump-sum redundancy payments, where applicable, were supplied b y the D e p a r t m e n t o f L a b o u r . Social Welfare c o n t r i b u t i o n s and children's allowances e n t i t l e m e n t were calculated o n the basis o f A u t u m n , 1981 s t a t u t o r y rates.

For the purposes o f the calculations, those i n receipt o f u n e m p l o y m e n t assistance had their p r e - u n e m p l o y m e n t i n c o m e (earned i n 1980) updated i n value b y 15 per cent so as t o relate the resultant R values t o current wage rates.

The relevant amounts o f u n e m p l o y m e n t benefit, pay-related benefit, and u n e m p l o y m e n t assistance being received i n the cases sampled were supplied b y the e m p l o y m e n t exchange ( A p r i l , 1982 rates).

As far as housing expenses were concerned, the cases sampled were classified as living i n L o c a l A u t h o r i t y or private housing o n the basis o f their addresses and w i t h the help o f the D e p a r t m e n t o f the E n v i r o n m e n t . A p p r o x i m a t e l y 70 per cent o f those sampled were tenants, p r i n c i p a l or subsidiary, o f L o c a l A u t h o r i t y housing. For such cases the rents payable were calculated i n accordance w i t h the terms o f the Department; s 1981/82 D i f f e r e n t i a l Rents Scheme. For m a r r i e d persons i n private housing, i t was assumed that there w o u l d be a £ 2 0 a week l i a b i l i t y for rent/mortgage whether or n o t the person concerned was at w o r k . I t was assumed that single persons w o u l d be living at h o m e and w o u l d be paying one-sixth o f their i n c o m e i n r e n t , whether i n e m p l o y m e n t or n o t . Travel costs were c o m p u t e d on the basis o f the cost o f a m o n t h l y c o m m u t e r t i c k e t i n December, 1 9 8 1 , giving w e e k l y travel costs as follows:

f u l l y e m p l o y e d : £ 4 . 5 0

p a r t l y e m p l o y e d : £3.00 (3 days t o w o r k and 1 day t o the exchange) f u l l y u n e m p l o y e d : £ 0 . 7 5 (travel t o the exchange)