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Study Notes

The Unemployment Trap

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 3 Apr 2021

In this study resource we focus on the unemployment trap as a barrier to some people finding and accepting paid work in the labour market.

The Unemployment Trap

What is the unemployment trap?

The unemployment (or welfare) trap is an incentives problem facing some of those actively wanting to accept paid work. The combined effects of a country’s tax and welfare system in addition to extra work-related costs can make it financially unattractive for someone to accept a part-time or full-time job offer.

What can cause the unemployment trap to exist?

Consider someone currently unemployed but with the offer of a new full-time job paying the minimum wage of £8.92 an hour

Gross earnings: 40 hours x £8.92 per hour = £356.80 per week – equivalent to around £18,500 per year

This is well above the standard rate for Job Seekers’ Allowance

But ……

Around £6,000 of these earnings will pay income tax at a marginal tax rate of 20%

You pay National Insurance contributions at a rate of 12% if you earn more than £183 a week

Some welfare benefits including universal credit are taken away if you earn above a certain amount (the taper rate applied is 63%)

And then there are work-related costs to consider such as:

1.Travel expenses to and from work

2.Workplace clothing

3.The costs of finding good quality childcare / daycare

The net result is that there might be financial barriers to accepting full-time and part-time work even if it is available and that some people will remain unemployed for longer which makes it harder for them to find jobs as they become less attractive to potential employers.

How might the unemployment trap be reduced as a barrier to people finding work?

  • Cutting down the overall level of social security welfare benefits
  • Higher income-tax free allowances (income earned before tax)
  • Smaller taper rate for the removal of earnings-related welfare
  • Higher minimum wage / more extensive use of living wage to help make work pay
  • Measures to reduce the cost of commuting, childcare and renting
  • Consideration of some form of universal basic income – Unconditional basic income with the same sum for every adult (regardless of housing costs) – perhaps replacing a range of welfare

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