Do Welfare Benefits and Tax Credits Affect Work Incentives in the UK - Essay Example

Do welfare benefits and tax credits affect work incentives in the UK? Background In regards to finding a relation between the welfare benefits and labor supply it is found that during the period between 1994-2000 the participation of men in the labor force was more or less stable. This applies to both the states, which obtained high and low welfare benefits. The above situation applies to the men population belonging to the native group. As regards to the men in the immigrants population it is found that the rate of labor participation in less welfare obtained states surpassed the rate of labor participation in more welfare benefits obtained states. Estimates reveal that rate of labor participation in the more welfare obtained state increased from 84.2 to 85.8 percent. On the other hand the rate of labor participation in the low welfare obtained state increased from 83.1 percent to 86.9 percent. In contrast to the men in the immigrants population the native population showed an increase in the labor force participation rate in the more welfare oriented states while it remained static for the low welfare oriented states. Estimates reveal that the rate of labor participation in the high welfare oriented states rose from 83.7 to 84.3 percent. On the contrary for low welfare oriented states the rate of labor participation for the native population showed a constant figure of 84.0 percent. Further, analysis made on the number of hours that a employee worked on an annual basis reveals that for the native population the annual working hours altered by 3 to 4 percent irrespective of their dwelling region. However, for non-citizens the annual working hours showed a huge contrast. The population of non-citizens living in the states having abundance of welfare benefits showed that the rate of increase in the working hours altered by 9 percent on an annual basis. On the other hand, the non-citizens living in the states having less of welfare benefits showed an increase in the rate of working hours by about 13 percent on an annual basis. In regards to the female population participating in the labor supply the results are not that fascinating as that of the male force. Survey made reveals that women immigrants dwelling in the states having less access to welfare benefits showed high participation to the labor force than those dwelling in the states having abundance of welfare benefits. However, data collected along these lines did not seemed consistent enough to draw inferences. (Borjas, 2003, pp. 22-24). Welfare and Labor Supply in the context of United Kingdom In the context of United Kingdom the Work Family Tax Credits (WFTC) was introduced in October 1999 replacing the Family Credit (FC) program aimed at reduction of poverty and stimulating supply of labor in families having children. Individuals who satisfied the eligibility conditions could achieve the benefits from the Work Family Tax Credits (WFTC) program. Thus, no controlling body was required to manage the program. Having said that the eligibility conditions for the Work Family Tax Credits (WFTC) program were based on the hours of paid employment, the number of small children in the family and the income level of the family. It also assessed the expenditure of the family on rearing up their children. In that couples were jointly assessed to judge the eligibility to the program. The Working Family Tax Credit program earned due popularity owing to mainly three features. Firstly, it gave huge credits especially for children wherein the family earned enough through such payment mechanisms. Further, the program having a low rate on withdrawal earned much support. Moreover, the Work Family Tax Credits program help subsidized the childcare costs of families having two or more children and working about sixteen hours or more on a day basis. The program rendered a payable childcare tax credit to the working families, which in turn subsidized the childcare expenditure by about 70 percent. It helped reduce the burden of families bearing two or more children by slashing down the child care expenditure, which rose to about 150 pounds on a week basis. In addition to the Work Family Tax Credits program other childcare programs were also prevalent in the United Kingdom. Programs like the Child Benefit rendered benefit measures to all families irrespective of their income levels. The other program Children’s Tax Credit rendered a non-refundable allowance on Income Tax on the childbearing families. (Brewer, Duncan, Shephard & Suarez, 2005, pp. 6-8; Brewer & Fredriksson, 2008, pp. 9-12). It is observed that the system of welfare benefits and tax credits in United Kingdom enabled huge transfers of funds to the individuals. The welfare benefits given to the individuals depended on their income levels and hence had a like approach as imposition of taxes. It was found that as income level of the individuals increased additional transfers made through the welfare benefits were withdrawn. It proved to be the same as tax being levied on the additional income. (Meghir & Philips, 2008) On a positive note the United Kingdom from the 1993 period revealed a steep decline in unemployment trend, which lasted for a period of twelve years. However, the steep fall in unemployment did not evade the other long-term problems like people not willing to report to work for sickness or other reasons. These people claimed themselves to be disabled and applied for huge disability benefits. Unemployment rates measured on the basis of International Labor Organization estimates show that it rose from 5 percent in 1980 to 12 percent in about 1983. The main causes attributed to this were the fall in the rate of employment as compared to the rate of output and the population growth. Some of the working population in the United Kingdom became unemployed while others took to voluntary unemployment owing to domestic reasons or ill health. In order to reduce the propensity of unemployment in the United Kingdom the program of tax credits was introduced which made the work more financially rewarding. Moreover, the childcare benefits program helped the couples to find employment benefits. These welfare benefits were extended in order to secure the job atmosphere and packaged benefits were given to the people seeking claims to find better jobs. (Gregg & Wadsworth, 2010. pp. 44-45; 49-50) References Borjas, G. (2003). Welfare Reform, Labor Supply, and Health Insurance in the Innigrant Population. Retrieved on October 26, 2010 from: http://www.rwjf-eriu.org/pdf/draftwp16.pdf Brewer, M., Duncan, A., Shephard, A. & M. Suarez. (2005). Did working families’ tax credit work? The Impact of in-work support on labour supply in the UK. Retrieved on October 26, 2010 from: http://eprints.ucl.ac.uk/18475/1/18475.pdf Brewer, M. & P. Fredriksson. (2008). Welfare Reform in the UK: 1997-2007. Retrieved on October 26, 2010 from: http://www.ifau.se/upload/pdf/se/2008/wp08-12.pdf Mehgir, C. & D. Philips. (2008). Labour Supply and Taxes. Retrieved on October 26, 2010 from: http://ftp.iza.org/dp3405.pdf Gregg, P. & J. Wadsworth. (2010). Unemployment and Inactivity in the 2008-2009 recession. Economic and Labour Market Review. Vol. 4 no. 8. Retrieved on October 26, 2010 from: http://www.statistics.gov.uk/elmr/08_10/downloads/ELMR_Aug10_Wadsworth.pdf Read More