Why employment insurance needs an overhaul

The UK needs a comprehensive new system to support people temporarily leaving the workplace due to sickness, maternity or unemployment

May 04, 2023
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Parents and people with caring responsibilities should benefit from a proper employment insurance system. Image: Avpics / Alamy Stock Photo

Amrita works for HMRC. She earns £35,000, which is around average for a full-time employee, and in 2021 she took 12 months off for maternity leave when her first baby was born. 

During the second half of the year her income plummeted. For three months she received just over £150 per week in statutory maternity pay, and for three months she got nothing at all.

“It just baffles me. What do they expect to be bought with that?” she told Fabian Society researchers. “No one in government would be expected to bring up a child on that amount of money.”

She didn’t know it, but she was lucky compared to many. As a civil servant, Amrita at least got help from her employer for the first six months of her time off. And the law guarantees more money to new mothers than to people who stop work for other reasons. At the time we spoke, minimum sick pay was less than £100 per week while people who take time off to care for sick relatives aren’t entitled to anything.

It is the same story if you are self-employed or recently left a job. Women in this position on maternity leave can get an allowance of up to £170 per week, but for people who are sick, unemployed or caring the figure is around £80 per week. 

Short periods away from work are a fact of life, whether it is for maternity, illness, caring or redundancy. But the statutory protections in place to help workers when their earnings stop are so threadbare that most can expect their incomes to collapse. The UK needs a proper system to temporarily replace people’s earnings when they stop work.

 A recent Fabian Society report maps how meagre existing statutory pay schemes and temporary benefits are today. The value of payments relative to earnings has been falling for decades. Jobseeker’s allowance is worth approximately 12 per cent of average earnings, statutory sick pay around 16 per cent, and maternity pay around 25 per cent. This isn’t normal for a rich country. The UK is second worst in the OECD for unemployment and sickness payments, and third worst for maternity pay.

The Fabian report calls for a complete overhaul of how we do income protection. In preference to fragmented reform on many fronts we propose a comprehensive new system which we call British Employment Insurance. It would consist of a combination of paid leave from employers and state insurance benefits.

The plan would return the UK to routinely providing income protection payments worth a percentage of people’s earnings, as was the case from the mid-1960s to the early-1980s. It leans heavily on the furlough scheme developed with remarkable speed during the pandemic and is also loosely modelled on Canada’s system of employment insurance. 

People would receive up to six months support for unemployment and 12 months for sickness, maternity or caring. Payments would typically be worth half of current or recent earnings, with a cap on the amount payable to high earners. For low-income households this would be available alongside universal credit. 

In the case of sick leave, we go further and call for workers to be paid at least 80 per cent of their earnings for up to six months. This is because we discovered that existing employer practice is generally much better than the legal minimum. Good employers are, therefore, being unfairly undercut by an exploitative minority.

The new system would offer a major boost to British business by helping firms retain and recruit good workers and by giving workers and consumers more financial security and resilience. Large- and medium-sized employers would have to fund the new sick pay system themselves but the government would pay almost all of the cost of the other new entitlements. On average, employers would spend slightly less on paid leave schemes than they do now. 

This plan represents a major extension in the protection that the state offers to citizens so inevitably there is a price tag. Introducing earnings-related insurance against all these different risks would cost the government £9bn, which is under 4 per cent of total social security spending today. 

That might not be something ministers can afford right now. But it could be phased in over the course of a decade with ease. And the reforms can be set in train without spending public money at once, for example by boosting the minimum sick pay employers must pay. 

We think British employment insurance is a big idea that could capture the public’s imagination. Politicians should seize on it to offer the protection and security that workers crave.