The role of pay and benefits in defeating poverty

1
The role of pay and benefits in defeating
poverty

• Howard Reed (Landman Economics)
• TUC, 8th December 2014

2
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?

3
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)

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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?

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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 tax-benefit
  model to forecast child poverty in 2020 under a
  range of employment and wage scenarios.

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Employment forecast assumptions

• Central OBR Mar 2014, extrapolated from
  2018-2020
• Optimistic OECD average of 3 best performing
  countries
• Pessimistic stay at winter 2013 levels
• Central scenario but with all employment growth
  from parents only
• Extra employment growth from central to
  optimistic level from parents only

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Forecast employment rates for male and female
parents
Employment rate (16-74 year olds) 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
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Earnings forecast assumptions

• Central OBR Mar 2014, extrapolated from
  2018-2020 (8 relative to CPI)
• Optimistic strong recovery, real wages make up
  all the ground lost between 2008-13 in addition
  to OBR projections (14)
• Pessimistic earnings continue their 2008-13
  trajectory (-6)
• No growth from winter 2013 level (0)

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Earnings forecast assumptions

• Central with increased wage dispersion based on
  trends between 1979-2012 by Gregg et al (2013)
• Central with increased minimum wage (1 per
  hour)
• Central with compression in the bottom half of
  the wage distribution (gap between low earners
  and the median is reduced by one-third).

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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.)

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Baseline child poverty 2012-13
Poverty measure FRS, 2012-13 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
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Relative poverty in 2020 impact of employment
growth
13
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

14
Relative poverty in 2020 impact of wage growth
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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.

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Absolute poverty in 2020 impact of employment
growth
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Absolute poverty in 2020 impact of wage growth
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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

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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

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Potential improvements in the Govts 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

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Net improvement in 2020 fiscal position compared
to central scenario
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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

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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

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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 in-work 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

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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)

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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

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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

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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)
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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 govts 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