Making work pay is trickier than it sounds, says Donald Hirsch.
Politicians love to promise that they will “make work pay”, suggesting that the main problem with the welfare system is that it makes people “better off on the dole.” Actually, working tax credits have done much to prevent that from happening, and Universal Credit (UC) will go further to ensure that people are better if they work. But this help has shifted the work incentive problem. Since in-work support disappears as you earn more, many families with low wages and high childcare costs now find that they are little or no better off working five days a week than working one or two days.
It’s worth noting that when the Conservatives came into government saying it was disgraceful that people could lose over 90 per cent of what they earned, this issue of in-work rewards was precisely the problem that they were referring to. Yet our new report on Universal Credit shows that the new system has simply replicated this in-work income trap in a slightly different form.
This is not an easy problem to solve. The more you give families to make it worth working, the more there is to withdraw as earnings improve. Better pay rates (such as the Living Wage) would help. So would raising the amount of pay ‘disregarded’ before Universal Credit is reduced, or reducing the rate at which it is ‘tapered’ (cut with rising income). And above all, more help with childcare would improve work incentives. But these measures bring considerable costs. And what is the case for helping people who are not on the very lowest incomes, when money is tight?
Our Minimum Income Standard (MIS) benchmark helps suggest answers. If there has to be a point at which state support rapidly decreases with rising income, it should ideally be above a level at which households can meet minimum needs, as defined by members of the public. This is what the MIS level represents. It may not be affordable today, but a long-term objective of an in-work support system could be ensuring that additional work continues to increase disposable income substantially for families still below this minimum standard.
Read more about our work on a Minimum Income Standard on UC and making work pay.
