Tim Worstall

The Welfare Trap

Gosh, aren’t we lucky today, two international reports putting Britain at the bottom of the table for something. This one is from the OECD on the Welfare Trap:

Labour’s tax and benefits system makes it more lucrative for single
mothers to stay on state handouts than return to work, according to
research from the world’s chief economic and social authority.

Mmmm Hmmm, how bad is it?

"Quite simply, it’s not really rewarding to re-enter
the workforce if you are either a lone parent or a second earner," he
said. "We are basically forbidding a lot of women from going back into
work."

The OECD found that, of all the world’s
major economies, Britain has the worst benefits trap for women. A
single mother moving back into work would have to forfeit 101.3 per
cent of the extra cash she earned because of the extra tax, childcare
costs, and relinquished benefits payouts.

The calculations show that the situation is almost as severe for mothers whose husbands are working.

They
face losing out on 89.5 per cent of their extra earnings, meaning that
if they received a pay rise of £5,000 from getting back into work, they
would only see £525 of the extra cash.

Where it gets interesting is that the other report, on child poverty, used living in a household with no one in full time work as one measure of said poverty. And Britain has the highest level of single parents in Europe, and as above, for almost all of them it is economically sensible not to work. Voila! It is actually Gordon Brown’s policies, this Welfare Trap, that increases the child poverty measured by Unicef.

So, in theory, we could lower the incidence of child poverty by reducing benefits to single parents, thus making it more attractive for them to go back to work.

Hey, I’m game to try it out.

In

9 responses

  1. sean Avatar
    sean

    We have managed to replace the family with the new surrogate family of the state.

    Reply
  2. john b Avatar
    john b

    “Where it gets interesting is that the other report, on child poverty, used living in a household with no one in full time work as one measure of said poverty.”
    Got a link? I was sceptical about that report’s conclusions but couldn’t find it on the UNICEF site. If it does indeeed say that all children who live in a household with no-one in full-time work are poor, that’s an insane thing to do (for example, it would count children as poor if their parents are divorced, their mum looks after them full-time, and their dad is a millionaire who pays £150K a year in alimony and sends them to public school…).
    Tim adds: It’s in the blog post dealing directly with that report, two or three down.

    Reply
  3. Jim Avatar
    Jim

    “or almost all of them it is economically sensible not to work.”
    Er, most lone parents do work you know. Although I suppose you probably didn’t – it’s not the kind of thing the Telegraph likes to highlight.
    “If it does indeeed say that all children who live in a household with no-one in full-time work are poor, that’s an insane thing to do”
    It doesn’t, it just uses growing up in a workless household as one indicator of ‘material well-being’ alongside relative poverty and reported deprivation. Tim just misunderstood and got over-excited the implications of his misunderstanding, as is his wont.

    Reply
  4. Mark Wadsworth Avatar
    Mark Wadsworth

    Jim, fair point, according to official statistics, two-third of lone parents whose youngest child is at school are in work (half full-time, half part-time) as against one-third of lone parents whose youngest child is pre-school age (ONS “Families and Work” by Annette Walling).
    But, this still compares very unfavourably with the figures for married or cohabiting women, which are three-fifths and four-fifths respectively.
    So, let’s consider the net benefit income of single and married women. Unemployed single mum, two kids nets (after housing costs) about £165 per week (DWP tax and benefit model tables). If she gets a job for £400 a week, her household’s net income goes up by a meagre £120 or so.
    Married mum on the other hand probably gets f*ck all in the way of benefits, and if she finds a job paying £400 a week, her net salary is £305 a week.
    So now tell me that the tax and welfare systems don’t significantly distort the labour market.
    Nothing that a Citizen’s Income/flat tax system wouldn’t sort out of course! And don’t get me started on the bloody National Minimum Wage…

    Reply
  5. Sam Avatar
    Sam

    “Quite simply, it’s not really rewarding to re-enter the workforce if you are either a lone parent or a second earner,” he said. “We are basically forbidding a lot of women from going back into work.”
    Umm, yes. That’s because childcare is expensive. If you provide childcare for your own children in your own house, there are no frictional taxes and no overheads.
    There isn’t anything that you can do about the true expense of childcare, because it is labour intensive, just like nursing care for the elderly. (For the elderly, you can up to a point substitute capital for labour, by installing lifing machines, stairlifts and so on, but that doesn’t work with infants.)
    It immediately follows that it makes no sense at all for a low-skill person to work and place his children in a childcare facility. This is true regardless of whether the parent pays the direct cost of the childcare, or whether it is provided by the rest of us.
    Of course, once the kids are in school, the equation changes, and work becomes sensible. Similarly, leaving the kids with a relative who would be economically inactive otherwise (Grandma?) is always a winner.

    Reply
  6. VS Avatar
    VS

    Of course, another way of incentivising low-income single parents to work would be to reduce the rate at which benefits are reduced as income rises. As you point out, almost 90% of extra income earned by someone who takes up a low-income job is then deducted from their benefits entitlement. To create more incentive to work, you could change the tapering to 20 or 30%. But that would be expensive, since you would still be paying benefit to them at a moderate rate.
    You have jumped to the conclulsion that _cutting_ benefits is the way forward. That seems to me unlikely to tackle poverty given that benefits are set below the relative poverty line. A solution that doesn’t involve making the poor worse off is what i said above – reduce the rate of tapering. After all, it hardly seems fair the poor pay a marginal rate of 80 or 90p in the pound as their income rises from benefit level to just-above whereas the richest pay only 40%
    Tim adds: Indeed. That is the sensible solution, to increase the tapering. Excuse my over the top rehtoric on such matters. Personally, I woul, if I were being serious, advocate castly higher personal allowances, taking the poor out of the income tax net altoghether: this would increase that tapering.

    Reply
  7. VS Avatar
    VS

    Tim, but that still doesn’t take into account the fact that most of the 80-90% marginal rate some low-income families with children face is because of the withdrawal of means-tested benefits. Thus, to reduce the tapering, you would have to keep paying benefits over a wider range of income. That would be expensive since, instead of taking (say) £80 of benefits away from a low-income worker, you would only be taking £20 or £30. Thus, to my mind, tackling the poverty trap requires a more left-wing solution of paying out more money by paying benefits over a wider range of income.
    Tim adds: I’m well aware of tapering. There are a number of solutions. Like taking the poor out of the tax net altogether, raising the personal allowance to 10k or 15k, for example. Or paying a cbi. Or, as you say, tapering the withdrawal of the benefits. I’d prefer either of the first two though.

    Reply
  8. VS Avatar
    VS

    Taxes at maximum only make up 32p in the £ of benefit withdrawal (22% income tax and 10% NI). The other 50% or so is withdrawal of means-tested benefits.
    Thus, I am convinced that properly tackling the poverty trap involves reducing the taper (since even if the personal allowance was £10k+, they would still be facing a benefit withdrawal rate of 50%+). And reducing the taper is expensive, just like a CBI is expensive. And, if I as a social-democrat think this, I am surprised that the Right is so keen on a CBI – a CBI high enough to keep people out of relative poverty would be v expensive.
    Of course, you could say that you want a CBI to keep people out of absolute poverty. In which case, i think you should be quite open about the fact that this would worsen the standard of living of the poorest (as they moved from having a plethora of means-tested benfits to a CBI that was lower based on an abstract calculation of what the minimum needed to avoid absolute poverty was). I am also not convinced that even a low CBI would be cheaper than the current system.
    Tim adds: It’s not just people on the right who advocate a CBI. The Greens, for example, or from the rational left, Chris Dillow. Absolute poverty is the target for me: something like the minimum pension guarantee (£113.50 a week or so now isn’t it?).
    Yes, it probably would be more expensive than the current system, but it would remove vast distortions from the economy and thus pay for itself over time (probably a long time though, a decade or more).

    Reply
  9. VS Avatar
    VS

    The pension minimum income guarantee excludes housing benefit and other in-kind benefits – so changing what pensioners get to just £113 _would_ make them worse off. A CBI of £113 per person per week is around £350bn a year (113 x 52 x 60m). That’s far more than the current social security/in-work benefits budget of £150bn or so (i recall reading transfer payments were around 16% of GDP, so as our GDP is around £1trn; that is in the region of £150bn).

    Reply

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