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Welfare-to-Work, Wages and Wage Growth

Author

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  • 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.

Suggested Citation

  • Lydon, Reamonn & Walker, Ian, 2004. "Welfare-to-Work, Wages and Wage Growth," IZA Discussion Papers 1144, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1144
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    References listed on IDEAS

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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. Dickins, Richard & McKnight, Abigail, 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.
    3. Azmat, Ghazala Yasmeen, 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.
    4. 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.
    5. repec:cep:sticas:/134 is not listed on IDEAS
    6. Dickins, Richard & McKnight, Abigail, 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.

    More about this item

    Keywords

    welfare-to-work; wage growth;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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