Earnings bunching at benefit abatement thresholds: evidence from recent policy changes

This paper analyses the response to incentives associated with the main benefit abatement regimes. Policy changes substantially raised the abatement-free income thresholds for benefit recipients in April 2020 and 2021: e.g. for non-Sole-parent Jobseeker Support (JSS) recipients, the threshold (beyond which benefits are abated at 70%) increased from $80 per week before April 2020 to $160 in April 2021; over the same period, the part-time threshold beyond which Sole-parents' benefits were abated at 30% increased from $100 to $160, and the full-time threshold beyond which their benefits were abated at 70% increased from $200 to $250 per week. Using Inland Revenue (IR) data from April 2019 to July 2022, we first analyse the weekly earnings distributions of benefit recipients. We find distinct bunching in the weekly earnings of Single-JSS recipients around the abatement thresholds, and some bunching at the part-time thresholds for Sole-parent recipients. We estimate statistically significant but small bunching elasticities with respect to the change in the effective marginal tax rate (EMTR) around the thresholds for Single-JSS and Sole-parent recipients. For Single-JSS recipients, the estimated elasticities are on the order of 0.07 and 0.02 in 2019/20 and 2021/22 respectively; while for Sole-parents, the estimated elasticities around the part-time thresholds are about 0.11 and 0.07 these years. We assess the contributions of the abatement policy changes to changes in net incomes of benefit recipients over the period, and to fiscal costs. For Single-JSS recipients, we estimate that average net weekly incomes increased $60 (27%) between 2019/20 and 2021/22: however, the threshold increases contributed only 3% ($2) and responses to the abatement changes up to 8% ($5) of this average increase; the dominant contribution was from increasing weekly benefit rates, accounting for 87% ($52) of the increase. We estimate similar patterns for Sole-parent recipients: their average weekly net incomes increased $71 (19%), of which 87% ($62) is due to benefit rate increases, and the abatement threshold changes and responses to these changes contribute only 6% ($4) and 3% ($2) respectively. Finally, we estimate the fiscal transfer cost of the policy changes for Single-JSS recipients are $22-24m annually.