Making work pay.

Few sensible people would object to this as a policy aspiration. It’s at the core of the Coalition Government’s justification for its reforms to the social security system. So that’s got to be good.

The cracks begin to appear when we move on to consider quite how we’re going to make work pay.

The Government has broadly three options, in the short run. It can try to mandate an increase in low wages. Increasing the gap between income in work and income out of work should incentivise people to (re)join the active labour force. It can reduce the amount people are paid when out of work, thereby increasing their incentive to take up employment at prevailing wage rates. This is what we might call the “starve them back to work” strategy. Or it can tackle the tangle of rules and regulations in the tax and benefit system that interact to create perverse incentives and high marginal tax rates. Or it can combine these options.

The Government’s strategy so far has largely focused on options two and three. The introduction of Universal Credit is an attempt to address the perversities of the tax and benefit system. The restrictions in the uprating of out of work benefits so their real value declines, and arguably the changes to disability benefits, are a case of option two.

So how’s it going in relation to increasing low wages? No so good. Continue Reading →