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Capping welfare payments for workless families increases employment and economic inactivity: evidence from the UK's benefit cap

Author

Listed:
  • Reeves, Aaron
  • Fransham, Mark
  • Stewart, Kitty
  • Reader, Mary
  • Patrick, Ruth

Abstract

In this paper, we examine the labour market effects of lowering the UK's benefit cap in 2016. This policy limits the total amount a working-age non-disabled household with no-one in employment can receive in social security. We treat the sharp reduction in this benefit cap as a natural experiment, comparing those at risk of being capped and those who were not before and after the cap was lowered. Drawing on data from ~500,000 individuals, we find that this reform reduced unemployment compared to those not at risk of being capped. The reform also increased economic inactivity, partly because the cap harmed mental health but also because those at risk of being capped were eligible to claim disability-related welfare payments that made them exempt. Limiting total monthly welfare payments of low-income families may increase employment for some but it can also push others out of the labour market altogether.

Suggested Citation

  • Reeves, Aaron & Fransham, Mark & Stewart, Kitty & Reader, Mary & Patrick, Ruth, 2024. "Capping welfare payments for workless families increases employment and economic inactivity: evidence from the UK's benefit cap," LSE Research Online Documents on Economics 122338, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:122338
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    File URL: http://eprints.lse.ac.uk/122338/
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    References listed on IDEAS

    as
    1. Dunning,Thad, 2012. "Natural Experiments in the Social Sciences," Cambridge Books, Cambridge University Press, number 9781107017665, November.
    2. Paul Frijters & David W. Johnston & Michael A. Shields, 2014. "The Effect Of Mental Health On Employment: Evidence From Australian Panel Data," Health Economics, John Wiley & Sons, Ltd., vol. 23(9), pages 1058-1071, September.
    3. Ariella Kahn-Lang & Kevin Lang, 2020. "The Promise and Pitfalls of Differences-in-Differences: Reflections on 16 and Pregnant and Other Applications," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(3), pages 613-620, July.
    4. Dunning,Thad, 2012. "Natural Experiments in the Social Sciences," Cambridge Books, Cambridge University Press, number 9781107698000, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    welfare reform; disability; economic inactivity; mental health; FR-23208;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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    This paper has been announced in the following NEP Reports:

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