Improving Incentives for the Low-Paid PDF
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IMPROVING INCENTIVES FOR THE LOW-PAID IDlproving Incentives for the Low-Paid Edited by Alex Bowen Head of Policy Analysis and Statistics National Economic Development Office and Ken Mayhew Economic Director National Economic Development Office Foreword by Walter Eltis Director General National Economic Development Office ~ M in association with the Palgrave Macmillan NEDO MACMILLAN © National Economic Development Office 1990 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WClE 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1990 Published by MACMILLAN ACADEMIC AND PROFESSIONAL LIMITED Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world Typeset by Footnote Graphics, Warminster, Wiltshire British Library Cataloguing in Publication Data Improving incentives for the low-paid. 1. Great Britain. Personnel. Remuneration. Incentive schemes I. Bowen, Alex II. Mayhew, Ken III. National Economic Development Office 331.21640941 ISBN 978-0-333-52545-6 ISBN 978-1-349-21012-1 (eBook) DOI 10.1007/978-1-349-21012-1 Contents List of Illustrations VI List of Tables VB Foreword by Walter Eltis ix Notes on the Contributors xvi 1 Incentives for the Low-Paid: Setting the Scene 1 Alex Bowen, Dominic Brewer and Ken Mayhew 2 Scaling the 'Poverty Mountain': Methods to Extend Incentives to All Workers 55 Tony Atkinson and Holly Sutherland 3 The Tax and Benefit Systems, and Their Effects on People With Low Earnings Potential 73 Hermione Parker 4 The Poverty Trap After the Fowler Reforms 121 Patrick Minford 5 Training for the Low-Paid 139 Ewart Keep 6 Job Training, Individual Opportunity and Low Pay 181 Paul Ryan 7 Lower Incomes and Employment: A eBI Analysis 225 Confederation of British Industry 8 Low Pay - A Trade Union Perspective 263 Trades Union Congress 9 Incentives for the Low-Paid: The Issues for Public Policy 283 Alex Bowen and Ken Mayhew Index 299 v List of Illustrations F.1 Marginal tax rates including the withdrawal of benefits x 2.1 The poverty mountain 58 3.1 Tax thresholds and break-even points 81 3.2 Tax incidence: tax burden relativities 82 3.3 Tax-induced poverty 83 3.4 Tax-free incomes 88 3.5 Lone parent trap, 1988-9 93 3.6 Unemployment and poverty traps, 1989 96 3.7 Existing tax-benefit system 102 3.8 Full integration 103 3.9 Spurious integration: negative income tax 104 3.10 Partial integration 105 3.11 Basic Income Guarantee: administrative structure 107 3.12 Partial Basic Income 107 3.13 Basic Income 2000 110 3.14 BIG phase 1, options for the unemployed 113 4.1 The relationship of net income to gross earnings 122 4.2 Basic Income Guarantee 126 4.3 Structure of tax reform proposals 128 4.4 Changing the withdrawal rate as net incomes rise 131 VI List of Tables 1.1 Elasticity estimates for men 8 1.2 Elasticity of hours and elasticity of participation estimates for women 10 1.3 The effect of children on the probability of participation 11 1.4 Low pay and participation: analysis by industry, 1988 16 1.5 Low pay and participation: analysis by occupation, 1988 18 1.6 Low pay and participation: activity rates, 1975 and 1987 20 1.7 Income tax and National Insurance contributions as percentages of gross earnings 23 1.8 Poverty trap: number of working families affected, pre- and post-Fowler 26 1.9 High marginal tax rates (1985) by group 27 1.10 The replacement ratio over time with constant population, 1980 29 1.11 Rights at work linked to service 38 1.12 Number of hours worked by full- and part-time working women 39 1.13 Proportions of full- and part-time employees covered by main employment protection legislation 40 2.1 Official estimates of the number of working families with children facing theoretically high marginal tax rates, 1977-81 61 2.2 Official estimates of the number of working heads of tax units facing high marginal tax rates, 1989-90 64 3.1 The unemployment and poverty traps, 1989-90 79 3.2 Family Income Support, 1939, 1959, 1979 and 1989, taxpaying families 85 3.3 Relative net incomes, 1979, 1988, 1989 86 3.4 Net income relativities, 1979 and 1986 87 3.5 Penalties for marriage: Income Support 91 3.6 Poverty trap: numbers of working families affected 97 3.7 Replacement ratios, 1988 98 3.8 Basic Income 2000: gross costs by year 2000 of illustrative Basic Incomes 111 3.9 BIG phase 1 castings 116 3.10 BIG phase 1: net incomes of non-mortgagors earnings up to £200 per week, 1988 prices and incomes 117 vii Vlll List of Tables 3.11 BIG phase 1: net incomes of mortgagors earning between £200 and £1000 per week, 1988 prices and incomes 118 4.1 Elasticities and weights in GDP 133 4.2 Possible welfare costs of BIG compared with present situation 135 6.1 Composition of low-paid and low-income groups by definition of low pay 183 6.2 Highest qualification level attained by pay category and sex, 1986 186 6.3 Training and upward mobility by occupational level and sex, 1965-75 191 6.4 Upward mobility and training by occupational level and sex, 1965-75 192 6.5 Interest in training and promotion by sex and income, 1987 194 6.6 Attributes of recent training by income category, sponsorship and sex, 1987 197 6.7 Attributes of recent training provided by employers by income category, 1987 198 6.8 Sources of funding for recent self-sponsored training by level of income, 1987 200 6.9 Career Development Loans approved by current and intended occupation of employed applicants, 1989 203 7.1 Low pay definitions, April 1988 230 7.2 Lower pay in selected industries, April 1988 232 7.3 Lower pay by selected occupations, April 1988 233 7.4 Lower pay by region, April 1988 234 7.5 Percentage of total employees in selected manufacturing industries employed in small firms 235 7.6 Employment of women as a proportion of total employment and proportion of women part-timers in selected industries 238 7.7 Full-time manual men working in each April, 1970-4: numbers in relation to the lowest-paid tenth 239 7.8 Lower pay by age 240 7.9 Household income and economic activity, 1986 242 7.10 Families where both husband and wife work: in and out of poverty 243 7.11 Estimated numbers of families and persons with incomes close to Supplementary Benefit level, 1985 244 Foreword Walter Eltis When I became Director General of the National Economic De velopment Office (NEDO) in November 1988, it was agreed that the National Economic Development Office would organize two con ferences a year in which important economic or industrial policy issues would be discussed by an expert group of academic economists and representatives of the CBI and the TUe. Representatives of government departments would be present at the conferences to listen but they would not introduce policy papers. The issues for such conferences are ideally areas where governments are interested, where the precise policies they will adopt are still undecided, and where advice will therefore be helpful. The enhancement of incentives for the low-paid is such an issue, and the National Economic Development Office organized its first policy seminar to discuss this in September 1989. The present book contains revised versions of the papers presented then, together with a concluding chapter (Chapter 9) which highlights some of the main themes which emerged. In the last ten years, incentives have been improved at all income levels, but they have been enhanced far more for the high- than the low-paid. Until 1979 the highest earners kept 17 per cent of their marginal earnings but they now retain 60 per cent. In 1979 a good many of the lowest-paid were in fiscal and social security traps where they actually became worse off if they obtained a pay increase or took on extra part-time work that the authorities were aware of. Effective tax rates of over 100 per cent (including money lost from the withdrawal of benefits) are now far rarer than in 1979 but it is by no means uncommon for low earners to gain only 20p when they earn an extra £. Figure F.1 shows the extent to which effective tax rates have been reduced at different income levels between 1978 and 1989 and it demonstrates how there are still low earners who in effect face marginal tax rates that are comparable to those that the highest earners had to pay in 1979. They cannot arrange to be paid through corporations registered only in the Cayman Islands but the very poor will be no less anxious than the wealthy to avoid paying effective tax rates of 80 per cent. Like the highest earners they react to such rates ix X Foreword Figure F.I Marginal tax rates including the withdrawal of benefits (married man, two children)* % 120r-------------------------------------------------, 100 80 60 40 1989 20 0.2 0.3 0.4 0.5 0.8 1.0 2.0 3.0 4.0 5.0 8.0 10.0 Multiples of average male earnings * Wife not working and two children aged 4 and 6. Source: DSS, NEDO estimates and smoothing. by attempting to hide income, by going through tortuous processes to minimize what they must pay to the state (and maximize what they receive from it), and by simply not taking on extra work. It is very damaging socially that there are known to be more than 200,000 families who are subject to such pressures because they face marginal tax rates of over 80 per cent. We know of 200,000 such families because they have legally known incomes which are subject to marginal deductions of 80 per cent or more. It is likely that there are many more who have reacted to. such potential marginal tax rates by arranging with the cooperation of those who employ them to be paid in a manner where the surveillance of the state is evaded. It is a matter of concern that families are subject to this degree of temptation to break laws. It is equally damaging that because the poorest stand to gain least from extra work, citizens are persuaded to acquiesce in breaches of the law by being willing to pay for work in cash without written receipts.
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