Labour Supply, Unemployment and Participation in In-Work transfer Programmes

This paper aims to investigate the impact of the UK Family Credit (FC) scheme (an in-work income transfer programme, i.e. one which is only payable to individuals who are in work) on the labour supply of lone mothers. The question is an important one because: in-work transfer schemes have recently been suggested as a device for encouraging labour force participation and reducing the severity of the disincentives associated with out-of-work transfer welfare programmes (such as Income Support (IS) in the UK, and Aid for Families with Dependent Children (AFDC) in the US); the USA has an in-work transfer scheme called the Earned Income Tax Credit (EITC) which has grown in importance in recent years; an extension of FC to individuals without children, to be known as Earnings Top-up (ET), has recently been proposed in the UK. One difficulty with such schemes is that their design may be unavoidably complicated or personally intrusive to ensure that they are targeted sufficiently finely. The result may be that individuals may: feel that participation in such programmes is stigmatised or not understand that they have some eligibility. The implication of such stigma or ignorance is that individuals may not participate in such programmes despite their potential entitlement. This problem is known as benefit non take-up or programme non-participation. The difficulties in estimating the impact of such transfer programmes on labour supply behaviour are that: labour supply and programme participation decisions may be determined simultaneously, for example, if labour supply depends on the marginal wage and the marginal wage depends on whether one participates in an income transfer programme; individuals may choose not to participate in the labour market if some in-work benefit is stigmatised so it is necessary to distinguish between individuals who choose this position from those individuals who would want to work (and, perhaps, claim the in-work benefit) but simply cannot find a jo(This abstract was borrowed from another version of this item.)