UK benefit reforms in recent decades have followed a consistent
pattern of resulting in higher employment than the system they
replaced – but usually in part-time, low-paid work which rarely
leads to career progression. As a result, those encouraged to
enter paid work tend to remain on low pay, paying little in tax
and often still being entitled to in-work benefits.
These are among the key findings from a new study of the UK
benefit system for the IFS Deaton Review of Inequalities,
funded by the Nuffield Foundation.
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Successive changes to the benefit system have led to
higher employment. At least three major sets of
reforms have done this. The tax credit expansions of the early
2000s, and the 2008–12 reforms imposing job-search conditions
on more single parents receiving out-of-work benefits, both
boosted employment. In combination they increased the number of
single parents with jobs by more than 100,000. And the
(limited) evidence on the effect of universal credit suggests
it too is successful at speeding up the return to work for
claimants.
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Benefit reforms since the late 1990s have, on average,
strengthened the financial incentive to move from unemployment
to part-time work. Back in 1997–98, low earners with
children (the main recipients of in-work benefits) on average
lost 50p in lower benefits or higher taxes for every £1 earned
when they moved into part-time work. Today that figure is
instead 38p. For someone working at the National Living Wage of
£9.50 per hour, that equates to the difference between a net
hourly wage (after taxes paid and benefits withdrawn) of around
£5.90 rather than £4.70.
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Contrastingly, the incentive to make the transition
from part- to full-time work (again for low earners with
children) has been weakened. In 1997–98 that move
implied losing 52p to taxes or withdrawn benefits for every £1
earned, on average. Today it implies losing 58p. Universal
credit makes almost no difference to this incentive on average.
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Getting out-of-work single parents to look for work did
push them into employment, but once again a large majority of
the new jobs were part-time, and on average paid just £8,000
per year (2021 prices). Virtually none paid over
£20,000 per year – meaning that essentially all the new workers
were in the bottom 40% of the overall earnings distribution.
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Thus these reforms have tended to move claimants into
low-paid, part-time work, where they remain for long periods,
generally still receiving in-work benefits. That is
because part-time work tends to bring very little longer-run
career progression.
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Benefit policy should factor in the longer-term effects
of how reforms affect careers and progression. In
particular, one of the drawbacks of incentivising some people
to work part-time who would otherwise have worked full-time is
that their future wages are likely to be lower. For example,
changes to universal credit that reduce disincentives for
full-time work (such as cutting the universal credit ‘taper
rate’ – the speed at which it is withdrawn as earnings rise)
can in the long term boost hourly wages as well as hours
worked, due to the positive impacts of full-time work on wage
progression. This can reduce the long-term cost of such
policies, since higher wages bring more tax revenue and reduced
entitlement to in-work benefits.
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Discouraging the claiming of unemployment benefits can
also have other unintended consequences. When the
government required single parents to look for work to get
out-of-work benefits, some responded by claiming incapacity
benefits instead (where such requirements are not applied). In
fact, at 3.3% (30,000) of affected single parents, this effect
was only a bit smaller than the impact on employment (4.4%, or
40,000).
Tom Waters, a Senior Research Economist at IFS and an
author of the report, said: ‘We spend more than £100
billion each year on working-age benefits. About half of it now
goes to families in work. This reflects changes in the underlying
nature of low income in the UK, to which the benefits system
naturally responds: we have high employment and chronic low
earnings growth, meaning that an increasing share of the
lowest-income families contain someone in paid work. It also
reflects some major changes to benefits policy, including the
introduction of universal credit, aimed very deliberately at
encouraging more paid work. The challenge here is that the kind
of work they have tended to produce has been part-time and
low-paid – which generally does not serve as a stepping stone to
higher-paid work further down the line. Policymakers would do
well to look beyond the headline employment number when setting
benefits policy, and consider how the system – and other parts of
policy – can be shaped to promote longer-term career
progression.’
Alex Beer, Welfare Programme Head at the Nuffield
Foundation, said: ‘This report highlights the role of
the benefits system in dealing with problems that society has yet
to find better ways of responding to, including low pay, ill
health and housing costs. It also casts doubt on the value of
recent conditionality regimes taking a work first approach. The
findings raise concerning questions about the quality of low-paid
jobs and highlight the need to consider childcare, education,
skills and labour policies alongside the benefits regime.’
ENDS
Notes to Editor
‘Benefits and tax credits’ is a new chapter from the IFS Deaton
Review of Inequalities by Hilary Hoynes (University of
California, Berkeley), Robert Joyce (IFS) and Tom Waters (IFS).
