How do income-support systems in the UK affect labour force participation?

This paper reviews how income-support systems affect labour force participation in the UK. The UK’s approach to social insurance is “basic security”, with modest, typically flat-rate, benefits; insurance-based benefits are relatively unimportant. Compared with the EU, the UK has high employment rates, but a high proportion of non-workers say that they are not working through disability. In general, the low generosity of out-of-work benefits means that positive incentives to work exist for almost all benefit recipients, but weak work incentives exist for those receive Housing Benefit, and for primary earners in couples who have low earnings. Recent reforms to strengthen work incentives have altered the in-work tax credits, rather than the benefit system, and recent reforms to the out-of-work benefits have involved toughening and extending job-search requirements. The two main political parties seem to agree that future reforms will involve more conditionality, a greater use of the private sector, and a unification of the different labour market programmes.Institutions; incentives; reforms; labour supply; disability

Welfare reform in the UK: 1997 - 2007

This paper, written at the request of the Economic Council of Sweden, presents a tour of welfare reform in the UK since the last change of government, summarising the most important changes in active labour market policies, and in measures intended to strengthen financial incentives to work. It argues that developments in the UK's active labour market policies occurred in two broad phases: first, the Government sought to strengthen ALMPs for those individuals deemed to be unemployed, through the New Deal programme. Second, the Government has reformed benefits for individuals traditionally viewed as inactive and thus excused job search activity, such as lone parents, and the sick and disabled. Accompanying these have been changes to direct taxes, tax credits and welfare benefits aiming to strengthen financial work incentives. However, financial work incentives have been strengthened by less than might be expected given the early rhetoric: the expansion in family-based tax credits have weakened the financial work incentives of (potential) second earners in families with children, many more workers now face combined marginal tax and tax credit withdrawal rates in excess of 60% than a decade ago, and a desire to achieve broad reductions in relative child poverty has led the Government to increase substantially income available to non-working families with children. We also summarise evaluations of three important UK welfare-to-work reforms (WFTC, NDYP and Pathways to Work), but without comparing their efficacy.

Comparing in-work benefits and the reward to work for families with children in the US and the UK

The income transfer systems for low-income families in the US and the UK try both to reduce poverty and to encourage work. In-work benefits are a key part of both countries' strategies through the earned income tax credit and the working families' tax credit (and predecessors) respectively. But tax credits are only one part of the whole tax and welfare system. In-work benefits, taxes and welfare benefits combine in both countries to provide good financial incentives for lone parents to do minimum-wage work, but poorer incentives to increase earnings further. But direct comparisons of budget constraints hide important points of detail. First, not enough is known about what determines take-up of in-work benefits. Second, the considerable differences in assessment and payment mechanisms and frequency between EITC and WFTC mean that low-income families in the US and the UK may respond very differently to apparently similar financial incentives.welfare-to-work, New Deal, tax credits, in-work benefits

Changes to the Working Tax Credit may not always make work pay and raise serious questions about fairness

Kate Bell and Mike Brewer evaluate the government’s changes to Working Tax Credit, arguing that challenges remain to ensure that “work always pays”

The impact on incentives of five years of social security reform in the UK

The UK's Labour Government has expanded means-testing of social security but attempted to do so while minimising the disincentive effects typically associated with such an approach. We test whether it has succeeded by reviewing the effect of 5 years of reforms on a range of incentives across the British population, undertaking micro-simulations on survey data. The incentive to enter work increases for the first earner in families, but for second- earners in couples the incentive to work has generally been dulled. Effective marginal tax rates have generally increased for workers, in spite of reductions in benefit withdrawal rates, owing to the increasing numbers facing means-tested benefit withdrawal. Reforms have reduced the number of pensioners facing very high effective marginal rates, but increased the number on moderately high rates. Incentives regarding family life have been affected: partnering has become less financially attractive for low-income individuals; having children has become more financially attractive.

Starting School And Leaving Welfare: The Impact of Public Education on Lone Parents' Welfare Receipt

Childcare costs are often viewed as one of the biggest barriers to work, particularly among lone parents on low incomes. Children in England are eligible to attend free part-time nursery classes (equivalent to pre-kindergarten) from the academic term after they turn 3, and are typically eligible to start free full-time public education on 1 September after they turn four. These rules mean that children born one day apart may start nursery classes up to four months apart, and may start school up to one year apart. We exploit these discontinuities to investigate the impact of a youngest child being eligible for part-time nursery education and full-time primary education on welfare receipt and employment patterns amongst lone parents receiving welfare. In contrast to previous studies, we are able to estimate the precise timing (relative to the date on which part-time or full-time education begins) of any impact on labour supply, by using rich administrative data. Amongst those receiving welfare when their youngest child is aged approximately three and a half, we find a small but significant effect of free full-time public education on both employment and welfare receipt (of around 2 percentage points, or 10-15 per cent), which peaks eight to nine months after the child becomes eligible (aged approximately 4 years and 9 months). We find weaker evidence of an even smaller effect of eligibility for part-time nursery education. This suggests that the expansion of public education programmes to younger disadvantaged children may only encourage a small number of low income lone parents to return to work (although, of course, this is not the primary aim of such programmes).labour supply, school entry, regression discontinuity, lone parents, welfare receipt

Eradicating child poverty in Britain: welfare reform and children since 1997

Over the past 20 years the incidence of relative poverty among Britain's children has tripled. These changes are related to increased earnings inequality, growth in the number of single (lone) parent households, and an increased share of households with children with no working adult. The Labour Government has responded by adopting as a policy objective ending child poverty by 2020. Initial steps toward this end include increasing direct financial support to families with children, creating financial incentives for work for parents, adopting more intensive case management for the welfare caseload, and ameliorating the long-term consequences of the deprivation poverty brings. The Working Families' Tax Credit (WFTC) is the centerpiece of the financial support innovations but there is a broader swathe of welfare reforms which has received less attention. Overall, the U.K. system provides more generous support to the lowest-income families than is available in the U.S., and recent reforms have directly reduced child poverty. For most households, the reforms have reduced marginal benefit deduction rates and increased incentives to work. Preliminary evidence suggests the changes have had greatest effect on single parents. Continued progress requires the adoption of a more specific procedure for defining and measuring child poverty.Welfare, inequality, in-work benefits, child poverty

Starting school and leaving welfare: the impact of public education on lone parents' welfare receipt

Please note: This paper was updated on 26 October 2010. Childcare costs are often viewed as one of the biggest barriers to work, particularly among lone parents on low incomes. Children in England are eligible to attend free part-time nursery classes (equivalent to pre-kindergarten) from the academic term after they turn 3, and are typically eligible to start free fulltime public education on 1 September after they turn four. These rules mean that children born one day apart may start nursery classes up to four months apart, and may start school up to one year apart. We exploit these discontinuities to investigate the impact of a youngest child being eligible for part-time nursery education and full-time primary education on welfare receipt and employment patterns amongst lone parents receiving welfare. In contrast to previous studies, we are able to estimate the precise timing (relative to the date on which part-time or full-time education begins) of any impact on labour supply, by using rich administrative data. Amongst those receiving welfare when their youngest child is aged approximately three and a half, we find a small but significant effect of free full-time public education on both employment and welfare receipt (of around 2 percentage points, or 10-15 per cent), which peaks eight to nine months after the child becomes eligible (aged approximately 4 years and 9 months). We find weaker evidence of an even smaller effect of eligibility for part-time nursery education. This suggests that the expansion of public education programmes to younger disadvantaged children may only encourage a small number of low income lone parents to return to work (although, of course, this is not the primary aim of such programmes).Labour supply, school entry, regression discontinuity, lone parents, welfare receipt

Eradicating Child Poverty in Britain: Welfare Reform and Children Since 1997

In 1997 the new Labour government in the UK inherited a situation where nearly one in 5 children lived in a household where no adult worked and around one in 3 lived in relative poverty. Children had replaced pensioners as the poorest group in society. The incoming government set about an ambitious set of reforms designed to reduce poverty and worklessness amongst families with children. This policy reform agenda contained some features akin to the welfare reform process being undertaken in the US since 1996. But with one fundamental difference, that welfare payments to jobless families rose rapidly and there is no time restriction in access to these payments. This paper describes the key features of the welfare reform process and documents the reforms to welfare payments and in particular contrasts them with the US system. The results show that the reformed UK welfare support system, taxes and benefits, for children is more generous to low-income families with children but less for better off families. So the UK system is more progressive among families with children. The paper goes on to look at the emerging evidence of the impact of the UK policy reform process on poverty and welfare dependence.welfare reform, poverty, children

Understanding the relative generosity of government financial support for families with children

The principal of horizontal equity can be interpreted as requiring that households with the same pre-transfer incomes and the same consumption needs should receive the same post-transfer incomes. We argue the generosity of government financial support to families with children should be analysed with respect to such a baseline. Although not without problems, equivalence scales form an important part of such a procedure. The comparison of financial support to families with children with a corresponding equivalence scale, both over time and between countries, should give a more accurate picture of generosity than comparisons of cash values alone. We discuss potential advantages and drawbacks of such comparisons, illustrating with comparisons of the US and UK systems. The main drawback is that we can only evaluate the generosity of support for children relative to that for adults. With this restriction, horizontal equity is more likely to be achieved for couples with 1 child than for those with 2 children. For some groups, the US is more generous to children (relative to adults) than the UK, but this difference is partly generated by the US system being less generous to childless households than the UK.