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Welfare to work, wages and wage growth

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  • Reamonn Lydon
  • Ian Walker

    ()
    (Institute for Fiscal Studies and University of Warwick)

Abstract

This paper attempts to uncover the effects of a UK welfare-to-work programme on individual wage growth by exploiting an expansion to this welfare programme. The conventional wisdom is that such programmes trap recipients into low-wage, low-quality work - this comes from the simple argument that the ‘poverty trap’, which a wage sub-sidy for low-income workers induces, reduces the benefits to invest-ments, such as on-the-job training, and so reduces wage growth. In fact, a wage subsidy will also reduce the costs of, at least, general training because we would normally expect workers to pay for their own general training in the form of lower gross wages. So a wage subsidy is a way of sharing these costs with the taxpayer. Thus, the net effect on wage progression depends on whether it reduces costs by more or less than it reduces the benefits. The paper uses Labour Force Survey panel data to look at wage growth in the UK before and after working families’ tax credit (WFTC) replaced family credit (FC). We exploit non-linearities in the programme and, overall, we find that wage growth for those on WFTC exceeded wage growth for those on FC. This is particularly the case for individuals receiving the maximum amount of the credit in both the FC and WFTC periods.

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Bibliographic Info

Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 26 (2005)
Issue (Month): 3 (September)
Pages: 335-370

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Handle: RePEc:ifs:fistud:v:26:y:2005:i:3:p:335-370

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References

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  1. Daron Acemoglu & Jörn-Steffen Pischke, 2002. "Minimum Wages and On-the-Job Training," CEP Discussion Papers dp0527, Centre for Economic Performance, LSE.
  2. Michael Lechner, 1999. "Nonparametric bounds on employment and income effects of continuous vocational training in East Germany," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 1-28.
  3. Peter Gottschalk, 2000. "Wage Mobility within and between Jobs," Boston College Working Papers in Economics 486, Boston College Department of Economics, revised 03 Apr 2001.
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Citations

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Cited by:
  1. Richard Dickens & Abigail McKnight, 2008. "The Impact of Policy Change on Job Retention and Advancement," CEP Occasional Papers 23, Centre for Economic Performance, LSE.
  2. Richard Dickins & Abigail McKnight, 2008. "The impact of policy change on job retention and advancement," LSE Research Online Documents on Economics 47490, London School of Economics and Political Science, LSE Library.
  3. Richard Dickins & Abigail McKnight, 2008. "The impact of policy change on job retention and advancement," LSE Research Online Documents on Economics 23984, London School of Economics and Political Science, LSE Library.
  4. Ghazala Yasmeen Azmat, 2006. "The incidence of an earned income tax credit: evaluating the impact on wages in the UK," LSE Research Online Documents on Economics 19859, London School of Economics and Political Science, LSE Library.
  5. Luc Godbout & Matthieu Arseneau, 2005. "La prime au travail du Québec : Un véritable outil d’incitation au travail ou une simple façon de baisser l’impôt?," CIRANO Working Papers 2005s-01, CIRANO.
  6. Richard Dickens & Abigail McKnight, 2008. "The Impact of Policy Change on Job Retention and Advancement," CASE Papers /134, Centre for Analysis of Social Exclusion, LSE.
  7. Ghazala Azmat, 2006. "The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK," CEP Discussion Papers dp0724, Centre for Economic Performance, LSE.

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