Are the unemployed ‘better off’ staying on the dole?

Are unemployed people “ better off” staying on the dole? It is always a fiercely debated area, touching as it does not only on statistics but also on perceptions that some people have a financial incentive not to seek work.

New ESRI research suggests that for the vast majority of people, work does “pay”. However how does this fit with the controversy back in 2012 about another ESRI paper, which suggested that for more than 40 per cent of families with children, going to work could actually cost them financially?

The 2012 paper was later withdrawn by the ESRI. Its lead author, Richard Tol, subsequently left the organisation, saying that he felt its independence was influenced by its partial reliance on the government to fund its operations.

The ESRI denied this and said the paper was withdrawn following a review by other ESRI experts who believed that the correct figure was closer to 10 per cent. Tol, in turn, disputed this.

While this argument was never satisfactorily resolved, it is clear that this is one area where you need to be completely clear of what your are measuring.

The latest ESRI study, to be presented at the institute’s pre-budget conference on Wednesday, measures what is available to jobseekers via benefits against what they might be expected to earn in work.

It calculates that fewer than 3 per cent would be better off not working, while eight out of ten would see their income increase by at least 40 per cent.

Even for families with children – representing about one third of jobseekers – the new paper calculates that fewer 1 in 15 (6.6 per cent) would be better off staying out of work.

The paper says that changes to its economic models and some changes to support payments for households have lowered its estimates of the so-called “replacement ratios” – the balance between what they earn from benefits and what they can expect from work. This may be one reason why the numbers are so much lower than the controversial 2012 study.

Still, the financial decision for this group with children is much tighter. In addition to the 6.6 per cent who would be better off on benefits, another 12.8 per cent who gain 10 per cent or less in income.

So one in five of the unemployed with children have a limited financial incentive to work, though as the research points out, many people still choose to work when an opportunity presents itself, reckoning that in the long term they will still be better off.

There is one other significant difference between the latest study and the 2012 one. The earlier one was specifically undertaken to calculate the add-on costs of working, including travel to and from work and, crucially, childcare. The study published this week focuses purely on the benefits versus likely wages calculation, saying that this is the internationally accepted way of measuring these things.

Either approach is entirely valid, of course, though the range of different circumstances faced by households makes it hard to generalise in areas such as childcare.

There would be a big difference, for example, between a household which had a grandparent close by, or a non-working spouse, versus one which had to pay for childcare five days a week.

This could swing the financial balance for a significant number of houses with children, particularly given the relatively high cost of childcare in Ireland.

A new back-to-work family dividend aims to help, here, by allowing families to hold on to certain payments for a period after returning to work.

However for some, the cost of childcare will remain the biggest barrier to a return to work.