Decades of reforms and changes to the benefits system have pushed people into low-paid part-time work with little hope for either wage or career progression, according to a revealing new report.
In recent decades, benefit changes in the United Kingdom have consistently resulted in greater employment than the system they replaced, although in part-time, low-paying jobs that seldom lead to career advancement.
Consequently, people who are encouraged to enter paid employment tend to remain on low salaries, pay little tax, and are frequently still eligible for in-work benefits.
This is according to a new report from the Institute for Fiscal Studies (IFS), on behalf of the Nuffield Foundation, which explores the impact of benefit changes since the late 1990’s.
Since the late 1990s, welfare changes have, on average, increased the financial incentive to transition from unemployment to part-time job.
In 1997–1998, low earners with children (the primary recipients of in-work benefits) lost, on average, 50 pence per pound earned in reduced benefits or higher taxes when they went into part-time employment. Today, this value is 38 pence.
For someone earning the National Living Wage of £9.50 per hour, this corresponds to a net hourly wage of around £5.90 rather than £4.70 (after taxes and benefits are deducted).
In contrast, the incentive to switch from part-time to full-time employment (again, for low-income parents with children) has diminished.
In 1997–1998, this shift resulted in an average loss of 52 pence per pound earned due to taxes and benefits withdrawal. Today, it signifies a loss of 58p. The universal credit has a negligible effect on this incentive on average.
In general, welfare reforms have pushed claimants into low-paying, part-time employment, where they remain for extended periods of time while continuing to receive in-work benefits. This is due to the fact that part-time work typically results in minimal long-term professional advancement.
The research proposes that future benefit policy should take into account the longer-term consequences of how reforms influence careers and advancement.
Particularly, one of the disadvantages of encouraging those who would have otherwise worked full-time to work part-time is that their future salaries are likely to be lower.
For instance, modifications to Universal Credit that minimise barriers to full-time employment. Due to the favourable effects of full-time employment on pay progression, a reduction in the Universal Credit ‘taper rate’ can increase hourly income and hours worked over time.
This can minimise the cost of such measures over the long run, as higher salaries generate more tax revenue and limit eligibility for in-work benefits.
The study warns that reducing unemployment benefits claims may potentially have unforeseen repercussions.
When the government told single parents to seek work in order to get unemployment benefits, some claimed disability benefits instead (where such requirements are not applied). In fact, at 3.3% (or 30,000) of impacted single parents, this effect was only slightly less significant 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.”
