Getting them to try any job in order to be in employment is the key issue for any party that wants to cut the welfare rolls. But this is really difficult for one reason in particular: the financial incentives to work are really low for anyone on benefits who can only hope for a job that pays the minimum wage. Places like Neath, where 27 percent of people are out of work, have suffered from the problem for years. Like anywhere else, it needs firms to come and soak up its pool of unemployment. But if the firms can’t attract skilled workers, and anybody who might retrain knows that they won’t be much better off in work than on welfare, why would they come?
A Policy Exchange report out today shows why incentives to work are so important to the size of Britain’s welfare rolls and the social problems faced in many areas. By comparing the income of typical benefit claimants to what they would get were they in work (and taking into account the costs of work like travel and office clothing), the report reveals how, for example, two people claiming Jobseeker’s Allowance will only be £29.06 better-off after one of them has worked for 40 hours – a wage rate of 73p per hour.
This problem is repeated to varying degrees across all of the main benefits. As Incapacity Benefit (the Employment and Support Allowance) or Income Support, say, are withdrawn and taxes imposed as claimants do more hours in work, the financial gain from earning any money is eroded. This is what causes the effective tax rates on some of the poorest people in Britain to be as high as 100 percent – yes, by losing their welfare as they earn, some people don’t take home any of their wages.
To get our welfare rolls down and help some of the poorest areas in Britain to start benefitting from the extra energy and better community cohesion that comes with having more people in work, benefit claimants need to be allowed to keep more of their earnings once they get a job. If the government were to curtail the tax credits system, then it could afford to let claimants keep the first £92.80 of their earnings, enough to make even a part-time job worthwhile. Then it really would get Britain working again.
Lawrence Kay is a Research Fellow in the Policy Exchange Economics Unit