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Welfare-to-Work, Wages and Wage Growth

  • Lydon, Reamonn

    ()

    (University of Warwick)

  • Walker, Ian

    ()

    (Lancaster University)

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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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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  1. Manski, C.F., 1989. "Nonparametric Bounds On Treatment Effects," Working papers 8909, Wisconsin Madison - Social Systems.
  2. Skinner, Chris, et al, 2002. " The Measurement of Low Pay in the UK Labour Force Survey," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(0), pages 653-76, Supplemen.
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  4. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
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  8. Widerstedt, Barbro, 1998. "Moving or Staying? Job Mobility as a Sorting Process," Umeå Economic Studies 464, Umeå University, Department of Economics.
  9. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  10. Lechner, Michael, 1996. "Nonparametric bounds on employment and income effects of continuous vocational training in East Germany," ZEW Discussion Papers 96-31, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  11. Charles F. Manski, 1997. "Monotone Treatment Response," Econometrica, Econometric Society, vol. 65(6), pages 1311-1334, November.
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  13. Gary Burtless, . "The Job Prospects of U.S. Welfare Recipients: Lousier Pay but Bigger Earnings Supplements," Canadian International Labour Network Working Papers 14, McMaster University.
  14. Neumark, David & Taubman, Paul, 1995. "Why Do Wage Profiles Slope Upward? Tests of the General Human Capital Model," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 736-61, October.
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  16. Chris Skinner & Nigel Stuttard & Gabriele Beissel-Durrant & James Jenkins, 2002. "The Measurement of Low Pay in the UK Labour Force Survey," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(s1), pages 653-676, 08.
  17. Helen Connolly & Peter Gottschalk, 2000. "Stepping-stone Jobs: Theory and Evidence," Boston College Working Papers in Economics 427, Boston College Department of Economics, revised 02 Apr 2001.
  18. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, vol. 83(2), pages 173-194, February.
  19. 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.
  20. Manski, C.F. & Sandefur, G.D. & Mclanahan, S. & Powers, D., 1990. "Alternative Estimates Of The Effect Of Family Stucture During Adolescence On Hight School Graduation," Working papers 90-31, Wisconsin Madison - Social Systems.
  21. Connolly, Helen & Gottschalk, Peter T., 2004. "Do Earnings Subsidies Affect Job Choice?," IZA Discussion Papers 1322, Institute for the Study of Labor (IZA).
  22. Joseph G. Altonji & Nicolas Williams, 1992. "The Effects of Labor Market Experience, Job Seniority, and Job Mobility on Wage Growth," NBER Working Papers 4133, National Bureau of Economic Research, Inc.
  23. David Card & Charles Michalopoulos & Philip K. Robins, 2001. "The Limits to Wage Growth: Measuring the Growth Rate of Wages For Recent Welfare Leavers," NBER Working Papers 8444, National Bureau of Economic Research, Inc.
  24. 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.
  25. Donna K. Ginther, 2000. "Alternative Estimates of the Effect of Schooling on Earnings," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 103-116, February.
  26. Williams, Nicolas, 1991. "Reexamining the Wage, Tenure and Experience Relationship," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 512-17, August.
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