Escaping from the Poverty Trap
There is a timely article on the existence of the poverty trap here in the Financial Times. The article draws on some of the recent research by the Centre for Social Justice which has looked at the disincentives facing people who want to earn extra income either by leaving the unemployment register or by taking a second job or working some extra hours. There are hundreds of thousands of people whose ’effective marginal tax rate‘ is well in excess of sixty per cent.
As this article in the Times makes clear “Marginal tax rates actually refer to the extra tax you pay in proportion to every extra pound you earn as your income rises.:
And for others, the net gains from earning higher gross incomes are even smaller.
The poverty trap comes about because for every £10 of higher incomes many lower-income families
1: A loss of income from tax and national insurance
2: The withdrawal of means-tested social security (welfare) benefits
Add in the financial costs of child care, traveling to and from work and the deterrent to finding a job or accepting some extra hours can be tough to overcome.
Disincentives matter hugely in the labour market and benefit reforms are likely to figure prominently in the manifesto of the Conservative Party at the next general election. It seems at the moment that they are taking a lead in developing a more radical approach to labour market reform. The Centre for Social Justice appears to be influential in reshaping their strategies to get people off benefits and into work.
One family in six in the UK has no one in work
There are now over 3 million households in the UK where no one of working age is in any form of work - the relentless rise of the ’workless household‘ is highlighted by new figures from the Office for National Statistics who have found that the number of working-age people in workless households jumped by 500,000 to 4.8 million in the year to June. 17% of households with people of working age have no one participating in the formal labour market. 2 million children belong to them and the risks of persistent and deep poverty are greatest for these groups. Little wonder that benefit dependency is rife for such families - the paradox is that those on the lowest incomes or whose main source of income are transfer payments, often face the highest effective marginal tax rates. Crucially the depth of non-employment is highest among lone-parent families - the workless household rate was highest for lone parent households, at 40.4 per cent,
Here is a regional snapshot of the problem - with the North East, Inner London and Northern Ireland suffering from the highest rates of economic inactivity among families with one or more people of working age
Revision - Labour Market Failure (presentation)
Here is a revised streamed presentation on market failure in the labour market
read more...»Paying tax at 90% - the poverty trap
The Independent carries an article today which flags up the disincentives facing thousands of households on low incomes. According to the piece, “A total of 60,000 households receiving income-related benefits or tax credits will face handing 90p of every extra pound they earn to the Treasury next year, twice this year’s total.... and the number of low-income households with a marginal tax rate of more than 60 per cent will grow by 85,000 to more than 1.9 million next year.”
The reason is the complex working of the tax credit and benefit system where working a few extra hours a week causes benefit recipients to lose means-tested (income related) benefits as well as having to pay more in income tax and national insurance contributions. Single mothers returning to work are thought to be especially at risk of the povert ytrap effect - currently, anyone working more than 16 hours a week loses their right to benefits.
This is an important issue - the effective tax rate paid by many thousands of people towards the lower end of the pay ladder can be twice that paid by the richest in society - raising questions not just about economic efficiency and incentives to work (key supply side issues) but basic fairness / equity.
Poverty Trap worsens
The soaring cost of child care is worsening the poverty trap according to a new report commissioned for the save the Children Fund in Scotland. More than one quarter of Scots parents on low incomes cannot work full time because of the cost of registered childcare which has risen by more than 10 per cent this year across most of the country. The average cost of child care in Britain during the holiday season is nearly £90 per week.
The Times has this article
“Joanne Brady, a single mother of two children from Glasgow, is unable to work because she loses more in means-tested child tax credits than she gains in income. “They take 20 per cent off for each child when you go to work. You still have to pay your housing, travel and lunches and it’s just not adequate.” Ms Brady, 27, is among the 28 per cent of parents with children under 18 and an income of less than £15,000.”
And the BBC also covers the report.
Aspects of labour market failure
I have been researching some video clips for a presentation on labour market failure at the Tutor2u revision workshops - here are a couple of good ones. This BBC report looks into exploitation of migrant workers by a gangmaster business which has had its licence revolked. And Hugh Pym reports on the rising level of relative poverty in the UK despite sixteen years of economic growth. Finally this clip comes a series of progammes from BBC South East on ‘Breadline Britain’.
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