The role of pay and benefits in
defeating poverty
Howard Reed (Landman Economics)
TUC, 8th December 2014
Research Questions
• How much of a role can increases in wages
and employment play in reducing (or
eliminating) poverty in the UK?
• What is the relative importance of
‘predistribution’ through pre-tax wages and
redistribution through the tax-benefit system
for reducing poverty?
Recent Landman Economics
research on this issue
• Understanding the parental employment
scenarios necessary to meet the 2020 Child
Poverty Targets
• Social Mobility and Child Poverty Commission
Research Report
• Co-authored with Jonathan Portes (NIESR)
SMCP Report Research Questions
• To what extent can changes in parental
employment alone enable the UK Govt to
achieve the absolute and relative income child
poverty targets in the Child Poverty Act 2010?
• How do different aspects of parental
employment (e.g. Number of people
employed, total hours worked, wage levels)
contribute to reducing child poverty in various
scenarios?
Empirical strategy
• Use a range of projections for employment
and wage growth between 2014 and 2020
• Apply these to data from the Family Resources
Survey and use Landman Economics taxbenefit model to forecast child poverty in
2020 under a range of employment and wage
scenarios.
Employment forecast assumptions
1. Central: OBR Mar 2014, extrapolated from
2018-2020
2. Optimistic: OECD average of 3 best
performing countries
3. Pessimistic: stay at winter 2013 levels
4. Central scenario but with all employment
growth from parents only
5. Extra employment growth from central to
optimistic level from parents only
Forecast employment rates for
male and female parents
Employment rate (16-74 year olds)
Scenario
Male parents
Female parents
Starting (2013)
84.0
64.7
1. Central
86.9
69.3
2. Optimistic
90.3
74.1
3. Pessimistic
84.0
64.7
4. Central with all employment growth
from parents
93.4
74.1
5. Optimistic with all employment
growth above central from parents
92.9
79.9
Earnings forecast assumptions
a. Central: OBR Mar 2014, extrapolated from
2018-2020 (+8% relative to CPI)
b. Optimistic : strong recovery, real wages make
up all the ground lost between 2008-13 in
addition to OBR projections (+14%)
c. Pessimistic: earnings continue their 2008-13
trajectory (-6%)
d. No growth from winter 2013 level (0%)
Earnings forecast assumptions
e. Central with increased wage dispersion based
on trends between 1979-2012 by Gregg et al
(2013)
f. Central with increased minimum wage (£1
per hour)
g. Central with compression in the bottom half
of the wage distribution (gap between low
earners and the median is reduced by onethird).
Other assumptions
• Tax-benefit system
– 1% nominal uprating for working age benefits and
Universal Credit until 2015/16 and then CPI
uprating
– Tax thresholds rise in line with CPI
– Universal Credit fully rolled out by 2020
– No additional cuts assumed in 2015-20 beyond
those specifically already announced (so no
additional £12 billion of cuts, etc.)
Baseline: child poverty 2012-13
Poverty measure
FRS, 2012-13
2020
target
m
%
%
Relative: Below 60% BHC income in 2012-13
2.3
17
10
Absolute: Below 60% BHC income in 2010-11
2.6
19
5
Relative poverty in 2020: impact of
employment growth
10
central
optimistic
pessimistic
central (parents only)
optimistic (parents only above central)
12
BHC relative child poverty rate (%)
14
16
18
20
22
24
Analysis
• Increased employment has an impact on the child
poverty rate in optimistic scenario compared to
central scenario but this is relatively small – largely
because:
– Employment patterns assumed to be a continuation of
2003-13 trends – around 60% of growth in this period was
non-parents
– Increased employment pushes up median household
incomes and hence pushes more children into poverty
– This partially offsets the reduction in child poverty
resulting from increased parental employment
Relative poverty in 2020: impact of
wage growth
10
central
optimistic
pessimistic
2013 levels
increased dispersion
minimum wage
lower half compression
12
BHC relative child poverty rate (%)
14
16
18
20
22
24
Analysis
• Much larger falls in child poverty when most or all of the
additional employment comes from parents
• Hence composition of employment growth v important.
• Stronger wage growth increases relative poverty rate (due to
increased median incomes)
• Wage compression and dispersion have v little impact on child
poverty
• None of the scenarios modelled come close to meeting the
10% target for 2020.
Absolute poverty in 2020: impact
of employment growth
5
central
optimistic
pessimistic
central (parents only)
optimistic (parents only above central)
BHC absolute child poverty rate (%)
10
15
20
25
30
Absolute poverty in 2020: impact
of wage growth
5
central
optimistic
pessimistic
2013 levels
increased dispersion
minimum wage
lower half compression
BHC absolute child poverty rate (%)
10
15
20
25
30
Analysis
• In central scenario, absolute poverty forecast to be much
higher than relative poverty
• This is largely due to falling real incomes between 2010 and
2014
• Also, earnings growth does not keep pace with RPI between
2014 and 2020 in central scenario
• Impact of employment growth on poverty is more
straightforward for absolute than for relative poverty as the
poverty line is fixed: therefore, bigger reductions
• Likewise for wage growth
Further increases in parental
employment
• Is it possible to meet the 2020 child poverty
targets with a large enough increase in
parental employment?
– As an experiment, parental employment was
increased (in stages) to 100%, holding
employment of non-parents constant
– At a parental employment rate of 100%, BHC
relative poverty is projected to fall to 11.1%, with
absolute poverty falling to 13.8%
• Result: The targets are unattainable even at
100% parental employment
Potential improvements in the
Govt’s fiscal position
• So far we have not considered the role of the
tax and benefit system in reducing child
poverty
• Increases in employment and real wages in
excess of OBR forecasts have potential to
deliver improvements in public finances which
could be recycled into tax cuts or (e.g.) UC
increases without increasing the deficit
Net improvement in 2020 fiscal
position compared to central scenario
-80
net change in Exchequer fiscal position (£bn)
-60
-40
-20
0
20
40
optimistic/optimistic
pessimistic/pessimistic
central/wage dispersion
central/minimum wage
central/wage compression
increased tax
reduced benefits
60
Policy implications - employment
• Employment levels and the number of hours worked
by parents have a significant impact on absolute and
relative poverty
• But these are not enough by themselves to hit 2020
targets
• Implausibly high parental employment rates plus
increases in working hours beyond UC claimant
commitment levels are required to meet the relative
poverty target
Policy implications - employment
To meet the relative poverty target through increases in
parental employment/hours would require radical
policy reforms including:
• More extensive childcare provision
• (even) tougher Claimant Commitment for UC
• More employer flexibility over full-time work and
parenting
• Macroeconomic environment generating sufficient
demand for full-time jobs for parents
• Increased in-work support through UC for families
with children
Policy implications – wages and net
incomes
• Increased wages tend to increase relative child poverty
• Higher wages for lower earners have only a limited impact on
relative child poverty.
• Main channel for positive impact of higher wages on child
poverty is indirect - through higher tax revenue and lower inwork transfer expenditure which can then be recycled into
investments in low income families with children
• Higher wages do help reduce absolute poverty – measures
which enable low income families to keep more of what they
earn (e.g. Increased tax allowances/higher in-work benefits)
useful in this regard
Focusing on the role of the social
security system
Reforming Universal Credit (funded by
CPAG/TUC)
• Looks at potential reforms to UC which would
reduce child poverty and/or improve work
incentives
• Focusing on the situation now (assuming full
roll-out)
A UC reform consisting of:
•
•
•
•
Increasing per child amounts by £80/month
Increasing disability additions by £80/month
Raising work allowances by 30%
Introducing 2nd earner work allowance at 50% of
single person work allowance level
• 16 hours/week bonus (£40/month)
Reduces relative child poverty by 5 percentage points
(around 650,000 children)
• Costs around £12.5bn – an alternative to raising the
income tax personal allowance further
The role of social security in the
future
Inequality, Work and Social Security in 2030
(joint with Fabian Society; funded by
CPAG/TUC)
• Models the UK labour market in 2030 (using
OBR projections for employment & earnings,
and variants; adjusting for demographic
changes
• Models the cost and impact on poverty of
several suggested reforms to the tax and
benefit systems
Impact of selected tax and benefit
reforms on child poverty
Reform
Child poverty
forecast
(2030)
Extra cost
(£bn, 2014
prices)
“Business as usual” scenario
23.7
(0)
Double Child Benefit
20.3
10
Earnings-index all benefits
15.2
34
UC reforms package modelled for CPAG/TUC
17.4
16
Living Wage
23.6
(-5)
Conclusions
• Policy measures designed to increase employment
and earnings for low-income households have a clear
role to play as part of a strategy to reduce poverty
• Partly through direct impact of increased
employment on poverty, and partly through
improvements in the govt’s fiscal position which can
be recycled into anti-poverty measures
• Increases in child-related transfer payments will be a
key component of any successful strategy for
defeating poverty