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Making work pay is trickier than it sounds

July 11, 2013

New report: MIS and Universal Credit

The political language of “making work pay” has barely changed since I joined the workforce (on £60 a week) in the early 1980s. Then, mass unemployment was being greeted by stories of how people were “better off on the dole”. Today, we’re still being pedalled venomous myths about honest people going out to work while their neighbours lie in bed and live comfortably off the state.

Yet the realities have changed a lot. Billions poured into tax credits have helped improve returns for going out to work, as has a long-term decline in Income Support rates relative to wages.  For families with children especially, tax credits have helped make work so worthwhile that in the recent recession, there was almost no rise in the number of families without anyone in paid work, unlike in previous recessions. And Universal Credit will go further by removing any hours rules, so that even people working just a few hours a week will be better off than not working.

All this, however, has shifted the work incentive problem. Any system that gives a lot of money to encourage people to enter work for not much money needs also to decide at what earnings level this support is reduced, and how fast. The answer, unfortunately, tends to be pretty soon and pretty fast, to avoid a high level of dependency on state handouts for people not on the lowest earnings.

Unfortunately, this creates a new, “in-work” disincentive that can for example make families little or no better off working full-time than part-time. In fact, when the Conservatives came into government promising to end the “anomaly” of people losing 90 per cent or more of that they earned, it was this in-work disincentive and not the incentive to work at all that they were referring to. Universal Credit does reduce the highest headline rate to 76 per cent, but the government has also cut childcare support. As our report shows, this helps prevent additional work from increasing the disposable income of many families if they work more than a day or two a week. This traps them on a still substandard standard of living.

None of this is easy to solve. Better pay rates (such as the Living Wage) would help. So would raising the amount of pay “disregarded” before Universal Credit is reduced, or reducing the rate at which it is “tapered”, ie cut with rising income. But these measures bring considerable costs. And what is the case for helping people who are not on the very lowest incomes, when money is tight?

Our Minimum Income Standard (MIS) benchmark helps suggest answers. If there has to be a point at which state support rapidly decreases with rising income, it should ideally be above a level at which households can meet minimum needs, as defined by members of the public.  This is what the MIS level represents. It may not be affordable today, but a long-term objective of an in-work support system could be to ensure that additional work continues to increase disposable income substantially for any family still below this minimum standard.

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