IFS - Decades of benefit reforms have pushed more people into work but very often into part-time, low-paid work with li

From: Think Tanks
Published: Wed Feb 01 2023

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.

  • 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.
  • 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Living Wage of 9.50 per hour, that equates to the difference between a net hourly wage (after taxes paid and benefits withdrawn) of around 5.90 rather than 4.70.
  • 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 In 1997-98 that move implied losing 52p to taxes or withdrawn benefits for every 1 earned, on average.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.
  • 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.
  • 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.
  • 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.
  • 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 highlights the need to consider childcare, education, skills and labour policies alongside the benefits regime.'

Benefits and tax credits

Company: Think Tanks

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