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Welfare-to-Work, Wages and Wage Growth

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Author Info

  • Lydon, Reamonn

    () (University of Warwick)

  • Walker, Ian

    () (Lancaster University)

Abstract

This paper attempts to uncover the effects of a welfare-to-work programme that acts as a wage subsidy on wage growth by exploiting an expansion to this welfare programme in the UK. 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 subsidy for low income workers induces, reduces the benefits to on-the-job training and so reduces wage growth. In fact, a wage subsidy will also reduce the costs of 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 levels and growth in the UK before and after Working Families’ Tax Credit (WFTC) replaced Family Credit (FC). We exploit nonlinearities in the system and overall, we find that wage growth for those on WFTC exceeded wage growth for those on FC, although for those already on the programme wage growth declined, reflecting the fact that under WFTC the wage growth is implicitly taxed over a wider range of wages.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1144.

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Length: 38 pages
Date of creation: May 2004
Date of revision:
Publication status: published in: Fiscal Studies, 2005, 26 (3), 335–370
Handle: RePEc:iza:izadps:dp1144

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Keywords: welfare-to-work; wage growth;

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References

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  1. Bingley, Paul & Walker, Ian, 1997. "The Labour Supply, Unemployment and Participation of Lone Mothers in In-Work Transfer Programmes," Economic Journal, Royal Economic Society, vol. 107(444), pages 1375-90, September.
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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," CASE Papers case134, Centre for Analysis of Social Exclusion, LSE.
  2. 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.
  3. 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.

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