Monday, August 2, 2010

Creating Incentives To Work

When I find myself agreeing with the front page of the Daily Telegraph and Tories like Iain Duncan Smith, I always start to feel a little anxious something must be wrong. But, overall, I do wholeheartedly support their policies to end the situation where those on benefits have little or no incentive to get a job.

It is surprising we have tolerated the situation for so long. For example, there was much comment that a 50% marginal income tax rate was a disincentive for people to work in the UK. We heard how footballers were put off coming to the English Premiership e.t.c. and people were put off doing overtime. But, what about an effective marginal income tax rate of 90-100%? That is the real disincentive, and that is what many people on benefits face. (see: No incentive to Work)

The participation rate in the UK is currently 63% (see: UK Participation rate). This means 37% of adults 16-65 are economically ingactive i.e not working or not even looking for work. This is not just due to Welfare system, but, it is a significant issue. The Tories suggest that 5 million people have been abandoned on out of work benefits, with 1.4 million on benefits for nine years or more. When William Beveridge laid the framework for founding the Welfare State in 1945 to have so many on benefits was never the intention.

Ministers are planning a benefit top up so when people work more hours, they will get at least an extra 40p for every £1 that they earn. (That is still a marginal tax rate of 60%. But, at least there starts to be an incentive to get a job.)

In the short term, the scheme could be expensive (£3bn to give more top benefits for those in work). But, it would have many benefits.
  • Tackling the culture of non-participation in the labour market.
  • In the long term getting people into work, will help reduce costs and improve tax revenues.
  • Increase productive capacity of the economy
  • Increase size of labour force, - important as economy increasingly ages.
  • Human Welfare effects. Living on welfare benefits encourages a culture of dependency. Working for a living gives a greater sense of satisfaction and purpose.
Increasing labour market participation is not as simple as a more graded benefit system. For example, mothers with children will still need good access to childcare e.t.c. But, it is a start.

Related

1 comment:

supernova said...

Getting more people into work is indeed a desirable objective. There are two way of achieving this.
The carrot technique:
1/ providing financial incentives for people leaving unemployed. This would require financial support from government which is unlikely in the current budget cuts climate.
The stick:
2/ Clear new disincentives are applied for unemployed people making their life much less comfortable. For example, support for housing is reduced forcing unemployed to move into worse but cheaper accommodation. This reduces the bill for goverment and may prove to be the chosen option in the current cutting climate.

Most likely it's going to be a mix of the two...