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)

4. 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?

5. 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.

6. 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

7. Forecast employment rates for male and female parents

8. 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%)

9. 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).

10. 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.)

11. Baseline: child poverty 2012-13

12. 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

15. 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.

16. Absolute poverty in 2020: impact of employment growth

17. Absolute poverty in 2020: impact of wage growth

18. 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

19. 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

20. 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

21. Net improvement in 2020 fiscal position compared to central scenario

22. 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

23. 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

24. 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

25. 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)

26. 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

27. 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

28. Impact of selected tax and benefit reforms on child poverty

29. 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