A new study by the Institute for Fiscal Studies analyses the financial work incentives the government uses to help people on low incomes. An 'unemployment trap' reduces the incentive to be in work at all, while the more familiar 'poverty trap' reduces the incentive to increase earnings through higher pay or working more hours.
A 4-page summary of findings from the study is available on the Joseph Rowntree Foundation website. The full 64 page report by Stuart Adam, Mike Brewer and Andrew Shephard, The poverty trade-off: work incentives and income redistribution in Britain (PDF), is also free to download. But the best soevrview of their findings is the PowerPoint (PPT) available on the IFS website. The charts show the dramatically different effects of various policy options, such as reducing National Insurance (highly regressive) versus extending child benefits (progressive). For university lecturers on social policy or public finance, they'd be a very effective way of explaining the pros and cons of various policies.
What are the key messages? First, there is a tension between providing people on low incomes with financial support directly, and encouraging them to earn more. Means-tested benefits to help the neediest children had acted as a poverty trap by discouraging some parents from working.
Second, many workers suffer from high effective marginal tax rates, and the low paid more so than most middle and high income earners. The authors estimate over two million workers in Britain stand to lose more than half of any increase in earnings to taxes and reduced benefits. Some 160,000 would keep less than 10p of each extra £1 they earned. In recent years this has got worse:
...work incentives have weakened on average since 2000. Not all changes in work incentives arise through reforms to taxes and benefits – wage growth and rent levels are also important, for example – but changes to income tax, employee National Insurance contributions, council tax, tax credits and benefits alone strengthened work incentives on average under the Conservatives and have weakened them under Labour.
The Telegraph's front page leads this morning with the headline: Brown's tax tangle 'makes it better not to find a job. This is a misreading (or misrepresentation) of the report's findings. It clearly shows, for example, that replacement rates (the percentage of net income replaced if people lose their job) has been trending donwards since the early 1980s. So life on benefits is less attractive for most than it once was - surely an incentive to get a job?
While I'd recommend it as a short, provocative read, this is hardly the final word on the subject. Its conclusions seem unduly harsh, considering the substantial gains in income for working parents and the low paid since 1997. The study ignores the effects of the minimum wage, and excluded workers such as the disabled and those aged over 55 targeted by government welfare to work programmes - which helps explain the somewhat slanted conclusions.
The most pleasing thing is that incentives are openly being discussed, quantified and calculated with respect to the poorest. This will eventually lead to better policies.
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