The UK does not have particularly high economic inactivity rates. Large numbers of women tend to work and worklessness amongst those approaching state retirement age is not as high in the UK as in many other countries. What marks our country out from other countries, however, is the number of people in workless households. In other words, worklessness is not particularly prevalent but it is concentrated in particular households. There are large numbers of households where everybody works (thus raising average labour force participation) and depressingly large numbers of households where nobody works (thus pushing it back down again).
Of course, this might not arise as a result of financial considerations alone but, as Patricia Morgan pointed out in The War Between the State and the Family, a strong finger of suspicion can be pointed at the welfare state. We have, as is well known, very high withdrawal rates of benefits for those who move into work. This encourages worklessness in the first place (even amongst single people) – or, at the very least, it encourages people to only work for two or three days a week. Then the interaction of the tax and benefit system together produces real chaos. If one of a couple with children goes out to work they will pay tax and the household will lose benefits because of the way the tax system interacts with the benefit system. It is much better to split up (thus causing a single-parent workless household together with a single person working household), pretend to split up or turn down the job. All these actions raise the proportion of workless households. These problems do not occur, however, if both parties in the couple get a job – hence the high level of labour participation amongst women in the UK in households where the man also works.
Who is it that suffers most from this problem of worklessness? Clearly it is those households where at least one person is prone to low earnings or the risk of unemployment, perhaps because they are not well educated. That is, we have created a welfare system whereby the most vulnerable people in our society are penalised most heavily when a person in a couple gets a job.
Of course, the recent decision to remove child benefit from single earner families earning above c.£40,000 from 2013 (the higher rate tax band is going to be lowered over the next few years so the relevant cut off point is not £44,000) leads to many of the same set of effects. It will be better for two people to go out to work than one person for the same household earnings; there will be a huge range of earnings (from £40,000 to £60,000) where the marginal benefit from additional work will be extremely low. This decision will not create workless households (because the alternative to earning £40,000 is a life on much lower benefits), but it will create new incentives not to form couple households amongst the better off as well as serious unfairness (to use the phrase beloved by the coalition).
The bottom line is one sixth of all children grow up in households with nobody in work. This is a shocking figure. Welfare reform cannot be too comprehensive. I do not believe that the middle class should be allowed to hang on to their benefits, but let us at least learn the lessons from the perversities of our welfare system and not repeat the mistakes in a process of ad hoc reform further up the income scale.