Hat-tip to Sarah Wilson on Twitter for linking to this 1995 piece by Brian Easton on the “unintended” consequences of abating people’s benefits when they get part-time work – to the extent that it’s just not worth getting “off” the benefit at all.
John stopped persevering with the job, when he discovered he was not being paid for it. The employer paid him a fair wage, but John was on the unemployment benefit. When he reported his additional earnings, the Income Support Service reduced (abated) his benefit. After he paid income tax too, he was left with 2 cents of every dollar he earned, not enough to cover even the cost of the bus fare work. In the economist’s jargon he faced an “effective marginal tax rate” (EMTR) of 98 percent (plus the costs of the job). There was no financial incentive for his working, and so he gave it up. John has been trapped into unemployment by the abatement rules of his benefit. There are many like John.
The problem of high EMTRs has always been there, but things have changed since 1972 when they last went under a major review. In those days jobs were easier to find, and it was not necessary to build up a series of part time jobs to obtain a full time one. Under full employment people jumped from a benefit (if eligible) to a full time job, so the high EMTR in between did not matter. But that situation rarely applies today.
Yet, our Income Support Service, handing out unemployment benefits worth over a billion dollars a year, is still basing its abatement rates on the assumption that there is full employment. Meanwhile, the strategy of reducing taxes on those with high incomes has meant the revenue has to be raised from the poor by putting up their EMTRs. If one’s heart bleeds for the rich facing a disincentive from an income tax rate of 33 percent, why the hard hearted view that a 98 percent rate will inspire John to get a job?
The abatement rates aren’t as bad today as they were then – but the top rate is still 70 cents on the dollar.
How on earth can we blame people for being on benefits when there simply isn’t fulltime work available, and when they’re financially punished for taking part-time jobs? (Oh, and we’ve removed the support they need to study and “improve” themselves, and even if they’re sick we’re going to force them to undergo humiliating checks-and-balances just to make sure their chronic illnesses haven’t magically disappeared.)
Easton notes that the idea of what we now call a Universal Basic Income would address some of these issues. Hopefully we’re a lot closer to that becoming a reality than we were in 1995 – but not much, I suspect.