Inequality under the Labour government

This Briefing Note will provide a brief analysis of changes to income inequality since the Labour government came to power in 1997.1 The most recent data from 2001-02 show that there has been little change in income inequality since 2000-01. An implication of this is that there has been little impact upon the slight upward trend in inequality that has been experienced over Labour's term in government

Inequality and living standards in Great Britain: some facts

This Briefing Note is designed to provide some basic facts concerning living standards and inequality in Great Britain. Wherever possible, up-to-date sources have been given for further reading. Accompanying this Briefing Note is a spreadsheet of useful statistics relating to the income distribution in Britain. This can be downloaded from the IFS web site at http://www.ifs.org.uk/bns/bn19figs.zip. Both were last updated on 9 March 2004. Section I of this Briefing Note starts by setting out some of the issues and conceptual difficulties surrounding the measuring of living standards and inequality. A picture of the income distribution in Great Britain and many of the important trends in living standards is then presented in the sections that follow. In Sections II and III, we choose weekly before-housing-costs household equivalent income1 as our measure of living standards, as well as presenting some results on an after-housing-costs basis. Section IV then considers using weekly equivalent household expenditure (including housing costs) as a comparative measure of living standards. Section V cites research tracking the income of individuals across a number of years, while Section VI looks at work that attempts to assess how income status changes across generations. Sections VII, VIII and IX proceed by examining some of the factors responsible for the changes in inequality described, looking at the labour market, demographic changes and the impact of taxes and benefits. Section X concludes

Employment, hours of work and the optimal design of earned income tax credits

This paper examines the optimal schedule of marginal tax rates and the design of earned income tax credits. The analysis is based on a structural labour supply model which incorporates unobserved heterogeneity, fixed costs of work and the detailed non-convexities of the tax and transfer system. An analytical framework is developed that allows explicitly for an extensive margin in work choices and also the partial observability of hours of work. This is contrasted to the standard case in which only earnings (and non-labour income) are observable to the government. The empirical motivation is the earned income tax credit reforms in Britain which include a minimum hours requirement at 16 hours per week and a further bonus at 30 hours. Our analysis examines the case for the use of hours-contingent payments and lends support for the overall structure of the British tax credit reforms. However, we also provide a strong case for a further reduction of marginal rates for lower earners but only those with school age children

Has Labour made work pay?

A review of the Labour Government's success in improving the financial reward to work for low-income families. Since 1997, the Labour Government has instigate a series of reforms aimed at helping to make work pay more than not working, and to make work pay enough to help families avoid poverty. This report is the first to provide an overview of all such policies since 1997, and to provide an impartial analysis of the evidence of the Government's success to date. The report examines the key outcomes targeted by 'make work pay' policies, showing trends in the proportion of parents in employment, and the number of children in households where no adult is in paid work. It reviews studies which estimate the contribution that government policies made to these changes. And it provides new evidence on the impact of changes to personal taxes, tax credits and benefits on measures of financial work incentives. The authors also anticipate where this policy agenda might take the Government in the future

Employment and the labour market

Since 1997, there have been changes in rates of employment, unemployment and inactivity. These changes have coincided with the Labour government's "Making Work Pay" agenda, which has seen the introduction of in-work tax credits, the national minimum wage and various New Deal programmes. Section 2 gives details of how the rates of employment, unemployment and economic inactivity have changed under the Labour government. Section 3 begins by detailing the national minimum wage and presents evidence on its impact, and continues in a somewhat similar vein, analysing the New Deal programmes and in-work tax credits. In Section 4, we show how financial work incentives have changed since 1997, and we briefly analyse the employment proposals of the main parties in Section 5. Finally, Section 6 concludes

Employment, hours of work and the optimal taxation of low income families

This paper examines the tax schedule for low income families with children. We take an optimal tax approach based on a structural labour supply model which incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The motivation is the British earned income tax credit reform (WFTC) and its interaction with the tax and transfer system for lone parents. Our analysis also examines the case for the use of hours-contingent payments. The results point to a tax schedule which depends on the age of children, with tax credits only optimal for low earners with school age children. The results also suggest a welfare improving role for hours-contingent payments although this is mitigated when hours cannot be monitored or recorded accurately by the tax authorities

Sharing in the nation’s prosperity? Pensioner poverty in Britain

This commentary reviews the government’s tax and benefit reforms affecting pensioners to date, and examines the evidence from the latest official low income figures on the government’s record on pensioner poverty so far

How has child poverty changed since 1998-99? An update

An additional 100,000 children were lifted out of poverty on the most commonly cited of the government's relative poverty measures between 2000-01 and 2001-02. The most recent figures show 3.8 million children (roughly 30 per cent of all children) in Britain in households with income below 60 per cent of the median income after housing costs. Although this means that almost one in three children in Britain live in poverty on this definition, this is the lowest level recorded since 1991. Since the Labour government came to power, the total drop in the numbers in child poverty has been around 500,000. In 1998-99, the government set a target for child poverty in 2004-05. If the rate of decline in child poverty observed since 1998-99 continues for three more years, then the government will miss this target. Indeed, it is now further behind schedule than it was based on figures from 2000-01. The rather slow decline in recorded child poverty is due, in large part, to the fact that the government is targeting relative, rather than absolute, poverty. Income growth has been particularly strong across society since 1998-99, and this means that the poverty line has risen significantly over this time. Although the government is continuing to increase the living standards of low-income households with children, the gap with the rest of society is not closing as fast as the government would like. Rectifying this may require additional resources to be directed to families with children in the forthcoming Budget, on top of measures already announced

An assessment of PenSim2

The Department for Work and Pensions (DWP)’s Pensim2 model is a dynamic microsimulation model. The principal purpose of this model is to estimate the future distribution of pensioner incomes, thus enabling analysis of the distributional effects of proposed changes to pension policy. This paper presents the results of an assessment of Pensim2 by researchers at the IFS. We start by looking at the overall structure of the model, and how it compares with other dynamic policy analysis models across the world. We make recommendations at this stage as to how the overall modelling strategy could be improved. We then go on to analyse the characteristics of most of the individual modules which make up Pensim2, examining the data used and the regression and predictions used in each step. The results from this examination are used to formulate a set of short and medium-term recommendations for developing and improving the model. Finally, we look at what might become possible for the model over a much longer time frame – looking towards developing a ‘Pensim3’ model over the next decade or so

Evaluating the labour market impact of Working Families' Tax Credit using difference-in-differences

A difference-in-differences methodology cannot identify the labour market impact of WFTC alone because other taxes and benefits changed at the same time as its introduction. However, a comparison of the change in employment rates for parents against adults without children should underestimate any positive labour supply impact of WFTC for lone parents. Using two different household surveys, we find WFTC and associated reforms increased lone parents' employment by around 3.6 percentage points (ppt). For couples with children, we find that WFTC and associated reforms had no significant effect on mothers' employment, and was associated with a -0.5ppt change in fathers' employment, with the reforms encouraging households to have one earner rather than two. Overall, these changes correspond to between 25,000 and 59,000 extra workers depending upon the data source used. Robustness analysis of our identifying assumptions is generally favourable to our conclusions for lone parents