Welfare to work, wages and wage growth

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.