Welfare integration, labour supply and take-up
Lead Research Organisation:
Institute for Fiscal Studies
Department Name: IFS Research Team
Abstract
Context
Benefits systems are crucial in protecting families and individuals from deprivation, supporting those with health conditions, and reducing inequality, as the covid-19 crisis underlines. As in many other countries, the UK benefits system has been comprised of several benefits - e.g. for unemployment, housing, and children. This system is in the midst of a radical overhaul where many of these are brought together into a single integrated payment - Universal Credit (UC). When rolled out this will be received by a quarter of working-age households at any one time. Other countries are considering similar moves. Understanding the impacts of welfare integration is thus crucial to the future of welfare policy design.
There are potential drawbacks of non-integrated welfare systems. First, families might not understand all the benefits that they are entitled to, or find it difficult or time-consuming to claim them all. Those that become entitled to a different benefit after their circumstances change - e.g., after a child is born - have to jump through new hoops to get it. This could make it harder for the system to help those it is intended to. Second, multiple parallel programmes mean that if a family increases its earnings, it can lose several benefits at once. This creates so-called poverty traps where increased earnings do little to raise household incomes overall, discouraging employment or extra work.
These are important possibilities, yet very little concrete is known about the actual pros and cons of welfare integration. This is the issue our research will tackle.
Aims
We will examine how a system of multiple benefits affects what families claim and the amount they work, and how this varies for different types of families. Understanding the relationship between claiming benefits and work is important because families often do not claim the benefits they are entitled to, with take-up rates as low as 55%. Our analysis will cover the whole tax and benefit system and the bulk of the working-age population. This is crucial for understanding the impacts of welfare integration.
We will study the extent to which having multiple programmes causes families to not claim newly entitled benefits after circumstances change (e.g. a child being born), and how prior and expected future claiming affects this. Prior receipt of a benefit can affect how well a family understands the system, the stigma they would perceive if they claimed, and the effort it would take them to start a new claim. Expectations about how long they will remain entitled to that benefit are also likely to affect whether they think it is 'worth' making a new claim. This is important when thinking about welfare integration, since integration means that when circumstances change benefit entitlements also change automatically, without the need for a new claim. Our work will help us to understand how previous and expected future receipt of a benefit affects whether or not a family claims today.
We will apply all these results to understand how UC affects employment, hours worked, benefit take-up, families' incomes, and government finances. We will also be able to use our research to examine how changes to the design of UC could affect these outcomes.
Applications and benefits
UC is a vital policy area, and our work will be of use for policymakers seeking to understand its effects or consider changes. More generally, our results will highlight the advantages and drawbacks of welfare integration, which is relevant for policymakers in other countries contemplating similar reforms, and for other kinds of integration such as 'basic income' proposals.
Moreover, because our analysis will cover the whole of the benefit system and a large share of the working-age population, we and other researchers will be able to use it in the future to analyse how other proposed tax and benefit policies might affect the labour market, incomes, and government finances.
Benefits systems are crucial in protecting families and individuals from deprivation, supporting those with health conditions, and reducing inequality, as the covid-19 crisis underlines. As in many other countries, the UK benefits system has been comprised of several benefits - e.g. for unemployment, housing, and children. This system is in the midst of a radical overhaul where many of these are brought together into a single integrated payment - Universal Credit (UC). When rolled out this will be received by a quarter of working-age households at any one time. Other countries are considering similar moves. Understanding the impacts of welfare integration is thus crucial to the future of welfare policy design.
There are potential drawbacks of non-integrated welfare systems. First, families might not understand all the benefits that they are entitled to, or find it difficult or time-consuming to claim them all. Those that become entitled to a different benefit after their circumstances change - e.g., after a child is born - have to jump through new hoops to get it. This could make it harder for the system to help those it is intended to. Second, multiple parallel programmes mean that if a family increases its earnings, it can lose several benefits at once. This creates so-called poverty traps where increased earnings do little to raise household incomes overall, discouraging employment or extra work.
These are important possibilities, yet very little concrete is known about the actual pros and cons of welfare integration. This is the issue our research will tackle.
Aims
We will examine how a system of multiple benefits affects what families claim and the amount they work, and how this varies for different types of families. Understanding the relationship between claiming benefits and work is important because families often do not claim the benefits they are entitled to, with take-up rates as low as 55%. Our analysis will cover the whole tax and benefit system and the bulk of the working-age population. This is crucial for understanding the impacts of welfare integration.
We will study the extent to which having multiple programmes causes families to not claim newly entitled benefits after circumstances change (e.g. a child being born), and how prior and expected future claiming affects this. Prior receipt of a benefit can affect how well a family understands the system, the stigma they would perceive if they claimed, and the effort it would take them to start a new claim. Expectations about how long they will remain entitled to that benefit are also likely to affect whether they think it is 'worth' making a new claim. This is important when thinking about welfare integration, since integration means that when circumstances change benefit entitlements also change automatically, without the need for a new claim. Our work will help us to understand how previous and expected future receipt of a benefit affects whether or not a family claims today.
We will apply all these results to understand how UC affects employment, hours worked, benefit take-up, families' incomes, and government finances. We will also be able to use our research to examine how changes to the design of UC could affect these outcomes.
Applications and benefits
UC is a vital policy area, and our work will be of use for policymakers seeking to understand its effects or consider changes. More generally, our results will highlight the advantages and drawbacks of welfare integration, which is relevant for policymakers in other countries contemplating similar reforms, and for other kinds of integration such as 'basic income' proposals.
Moreover, because our analysis will cover the whole of the benefit system and a large share of the working-age population, we and other researchers will be able to use it in the future to analyse how other proposed tax and benefit policies might affect the labour market, incomes, and government finances.
Publications
Alexandru Codreanu M
Do work search requirements work? Evidence from a UK reform targeting single parents
| Description | This project has focused on understanding how design aspects of in-work transfers affect employment earnings and the take-up of benefits. The first paper on this project has considered how in-work benefits, which tend to incentivise active labour market participation, affect workers' prospects in the long term. The paper reflects on the fact that in-work transfers are normally subject to earnings-related phase-outs, and so tend to most strongly incentivise part-time work and weaken incentives to work more hours among those already actively engaged in market work. But part-time work may generate relatively little in the way of human capital and career progression. The paper investigates the ways in which these dynamic considerations should impact the design of in-work transfers. It uses a dynamic model of female labour supply with endogenous human capital accumulation to assess this. It finds that among reforms that would cost the same amount on a no-behavioural-response basis, those that incentivise full-time work can end up costing considerably less than those that incentivise part-time work, once the dynamic responses - including human capital accumulation - are accounted for. They also do more to increase incomes, including among poorer households, and to raise welfare. Results suggest that in-work transfers could be refined by paying greater attention to the intensive margin effects through the design of their phase-outs. A second paper, still under construction, considers how changes in the structure of benefits affect their take-up. In many developed countries the welfare system is comprised of many separate programmes, such as unemployment, housing, and child-contingent benefits, with claimants often entitled to more than one benefit at once. This creates two potential problems. First, marginal effective tax rates can be very high as multiple benefits are withdrawn as earnings increase. Second, the complexity and transaction costs of applying for multiple benefits may result in eligible individuals not claiming their full entitlement. Several countries are considering integrating benefits together, and the UK has implemented a radical reform to integrate six existing benefits into one - Universal Credit, expected to be received by a quarter of the working-age population at any given time. We assess the consequences of benefit integration on labour supply and take-up, using Universal Credit as an example. To do this we build a model of family labour supply with take-up decisions in multiple programmes. We find that integration increases labour supply by removing the highest effective marginal tax rates, and reduces bunching at specific hours points by smoothing out the budget constraint. In addition, by reducing transactions costs for those entitled to multiple benefits, it incentivises workers to move from full- to part-time work (as they are typically entitled to fewer benefits in the latter state). Thus, while integration can simplify the process for claimants, it can increase the costs to the government. |
| Exploitation Route | This projects advanced current understanding of the effects of benefits and the role of various behaviour responses in driving these effects. It also developed the methods needed to understand those impacts. We therefore expect these advances to lead to further analysis of important aspects of benefit design and their consequences. For instance, research on the dynamic features of benefit take-up, or on the incidence of tax credits, are likely to next items on teh research agenda on this topic. This agenda is of high policy relevance, as it sheds light on under-studied aspects of benefit design and their possible consequences. We expect it to inform the debate on how to best design policies that incentivise workers to participate while minimising some of their costs. |
| Sectors | Education,Government, Democracy and Justice |
| Description | Our research has led to discussions with senior civil servants at DWP and HMT, which we led on April 2022 and are organising for April 2023. These are forums for the exchange of ideas about the best design of benefits meant to incentivise participation and employment among low-paid workers while providing financial security and insurance from poverty. These meetings provided the opportunity to discuss the findings of both papers and to lead a two-way discussion on how these can be used to inform policy and what else would be important to consider to ensure that our work has maximum value. Our paper on the "Intensive margin labour supply and the dynamic effects of in-work transfers" also impacted the public discussion of how benefits can be designed and the consequences of these choices. It has been extensively covered in the press and other media, including in the Guardian (https://www.theguardian.com/society/2023/feb/01/uk-benefit-changes-have-pushed-people-into-dead-end-low-paid-jobs-says-ifs), Bloomberg (https://www.bloomberg.com/news/articles/2023-02-01/uk-taxpayers-are-paying-50-billion-to-top-up-low-wage-work), Yahoo Finance (https://consent.yahoo.com/v2/collectConsent?sessionId=3_cc-session_9376bd59-cb4f-4dfb-a8f5-18ba1b925e68), ITV (https://www.itv.com/news/2023-02-01/benefit-reforms-have-pushed-many-into-part-time-low-paid-jobs-think-tank-says), Evening Standard (https://www.standard.co.uk/business/money/benefit-reforms-have-pushed-many-into-parttime-lowpaid-jobs-ifs-b1057095.html), Independent (https://www.independent.co.uk/money/benefit-reforms-have-pushed-many-into-parttime-lowpaid-jobs-ifs-b2273468.html), Daily Mail (https://www.dailymail.co.uk/news/article-11700789/Benefit-reforms-boosted-number-Britons-working-low-paid-time-jobs.html). |
| First Year Of Impact | 2022 |
| Sector | Education,Government, Democracy and Justice |
| Impact Types | Societal,Policy & public services |
| Description | DWP-HMT roundtable on benefits policy research |
| Geographic Reach | Local/Municipal/Regional |
| Policy Influence Type | Participation in a guidance/advisory committee |
| Description | DWP-HMT roundtable on benefits policy research |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Local |
| Primary Audience | Policymakers/politicians |
| Results and Impact | Held a roundtable at IFS discussing our research on benefits policy with senior officials from DWP and HMT |
| Year(s) Of Engagement Activity | 2022 |
| Description | Euroepean Economic Association conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | International |
| Primary Audience | Postgraduate students |
| Results and Impact | IFS presentation in the European Economic Association conference. |
| Year(s) Of Engagement Activity | 2021 |
| Description | European Association of Labour Economists conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Regional |
| Primary Audience | Postgraduate students |
| Results and Impact | European Association of Labour Economists conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Year(s) Of Engagement Activity | 2021 |
| Description | European Association of Labour Economists conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | International |
| Primary Audience | Policymakers/politicians |
| Results and Impact | IFS presentation in European Association of Labour Economists conference. |
| Year(s) Of Engagement Activity | 2021 |
| Description | Roundtable with senior civil servants (2022) |
| Form Of Engagement Activity | A formal working group, expert panel or dialogue |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Policymakers/politicians |
| Results and Impact | We hosted a roundtable discussion with senior staff at DWP and HMT (April 2022). We talked about the results from both the papers. We will do the same this coming April at a similar roundtable. |
| Year(s) Of Engagement Activity | 2022 |
| Description | Royal Economic Society conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Regional |
| Primary Audience | Postgraduate students |
| Results and Impact | We develop a static model of family labour supply using UK data to estimate responses to tax and benet reforms. We model choices over male and female labour supply (including detailed hours choices for women with children) and participation in multiple benet programmes. We also account for childcare costs. We use the model to understand the impact of integrating together multiple benets, taking as our specic application a topical UK benet reform - the introduction of Universal Credit. Universal Credit makes signicant changes to the budget constraint, and also may change the cost of benet participation: by integrating six benets into one, it obviates the need for multiple benet applications, but it also applies job search requirements to a wider group of claimants. We evaluate the contribution of these eects to the labour supply impact of the reform. |
| Year(s) Of Engagement Activity | 2022 |
| Description | Royal Economic Society conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Postgraduate students |
| Results and Impact | IFS presentation in the Royal Economic Society conference. Well attended conference in the UK, brings in many academics, practitioners and policy makers. Sparked discussion on design of conditionality in UC. |
| Year(s) Of Engagement Activity | 2021 |
| Description | Society of Labor Economists conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Regional |
| Primary Audience | Professional Practitioners |
| Results and Impact | We develop a static model of family labour supply using UK data to estimate responses to tax and benefit reforms. We model choices over male and female labour supply (including detailed hours choices for women with children) and participation in multiple benefit programmes. We also account for childcare costs. We use the model to understand the impact of integrating together multiple benefits, taking as our specific application a topical UK benefit reform - the introduction of Universal Credit. Universal Credit makes significant changes to the budget constraint, and also may change the cost of benefit participation: by integrating six benefits into one, it obviates the need for multiple benefit applications, but it also applies job search requirements to a wider group of claimants. We evaluate the contribution of these effects to the labour supply impact of the reform. |
| Year(s) Of Engagement Activity | 2021 |
| Description | Society of Labour Economists conference - "Family labour supply and the tax and benefit system: the impact of universal credit" |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | International |
| Primary Audience | Postgraduate students |
| Results and Impact | IFS presentation in Society of Labour Economists conference. Well attended conference that facilitates discussion of various policies and interactions between academics and other audiences. |
| Year(s) Of Engagement Activity | 2021 |