Crayons
This week we have had two news reports – one an individual case and the other based on thorough research. The individual case shows a woman losing thousands of pounds in benefits as a result of getting married. She has now sunk into debt and is considering separating simply to get the benefits that will get her out of debt.

The detailed research is published by the Institute for Fiscal Studies and shows how birth rates have risen amongst those groups to which Gordon Brown has given large increases in benefits since 1997. At last these issues are out in the mainstream. Until a couple of years ago it was just the IEA, Civitas, the Adam Smith Institute, the CPS, Politeia, Policy Exchange and the Centre for Social Justice who were saying that, in welfare policy, incentives matter.

In her IEA study, Patricia Morgan showed how couples gained significant financial benefits if they lived apart, particularly if only one of them had a job. As a result we end up with large numbers of dislocations.

Households tend to have two adults working or no adults working – if one person in a workless household with two adults gets a job the incentive is to split (or pretend to split) the household or turn down the job. Children in poverty are increasingly to be found in two parent families (the very families that have taken decisions that should make them more able to support their children financially!) because the tax and welfare system is biased in favour of single parent families. The government pays benefits to 10% more children of lone parent families than exist in the country (yes, that’s as bizarre as it sounds – and this is despite the fact that some do not qualify for lone parent benefit at all).

Couples on higher incomes tend to marry before they have children (as they will be financially responsible for their children and thus wish to create a stable household) whilst there is a growing tendency for couples on lower incomes not to marry (because the financial penalties from doing so are so great – especially if only one of the adults has a job).

In the 1970s and 1980s, the state became the breadwinner for low-income families who did not make financial provision for their children. In the 1990s and 2000s, the state became the child carer too. It is time for a U-turn.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

6 thoughts on “Families respond to incentives”

  1. Posted 23/12/2008 at 12:51 | Permalink

    Agreed, it’s the more right wing think tanks who correctly identify what is wrong with the welfare state. But I think that the solution proposed by the Citizen’s Income Trust (click link above) is the way to go, all this conditionality and time limiting of benefits just causes more distortions further down the line.

  2. Posted 23/12/2008 at 12:51 | Permalink

    Agreed, it’s the more right wing think tanks who correctly identify what is wrong with the welfare state. But I think that the solution proposed by the Citizen’s Income Trust (click link above) is the way to go, all this conditionality and time limiting of benefits just causes more distortions further down the line.

  3. Posted 24/12/2008 at 11:48 | Permalink

    Lone parents also face the weakest work incentives. The combined effect of tax liability and the withdrawal of benefits means that they face effective marginal tax rates of around 70%, on average. That’s a dangerous double mill.

  4. Posted 24/12/2008 at 11:48 | Permalink

    Lone parents also face the weakest work incentives. The combined effect of tax liability and the withdrawal of benefits means that they face effective marginal tax rates of around 70%, on average. That’s a dangerous double mill.

  5. Posted 26/12/2008 at 15:24 | Permalink

    Kris, as hard evidence of the effects of tax rates on employment levels, it is interesting to compare employment rates of single and co-habiting mothers with a partner in work (click link above), whose circumstances are otherwise broadly similar.

    In the absence of this massive distortion, you’d expect co-habiting mothers to have a lower employment rate as the household would still have one income.

  6. Posted 26/12/2008 at 15:24 | Permalink

    Kris, as hard evidence of the effects of tax rates on employment levels, it is interesting to compare employment rates of single and co-habiting mothers with a partner in work (click link above), whose circumstances are otherwise broadly similar.

    In the absence of this massive distortion, you’d expect co-habiting mothers to have a lower employment rate as the household would still have one income.

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