Newly unemployed see living standards fall and financial distress increase despite benefits

23rd January 2026

How much protection does the benefit system afford the newly unemployed? We use UK bank account data to track financial impacts of job loss.

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 supermarketspending 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.’

Source
Institute for Fiscal Studies
https://ifs.org.uk/news/newly-unemployed-see-living-standards-fall-and-financial-distress-increase-despite-benefits