Sticking with the job – the benefits of in-work credits

In-work tax credits are a well-established policy tool in many countries for increasing employment and tackling poverty. However, because in-work tax credits can be paid indefinitely, they are expensive for governments to provide. In comparison, time-limited in-work credits that are paid to former welfare recipients who move into work should be considerably less expensive because they are only paid for, at most, a few years. By making payments only to people who have previously received welfare, they may also be better targeted on low-potential- wage individuals than conventional tax credits. However, most of the evidence on the effectiveness of these time-limited credits comes from the Self Sufficiency Project (SSP) in Canada, where evidence suggests that the incentives had little or no long-term impact on employment or wages.

This research looks at two time-limited in-work credits for lone parents that were piloted in Britain in the mid 2000s, known as “In-Work Credit” (IWC) and the “Employment, Retention and Advancement Demonstration” (ERA). IWC was paid to lone parents who had been on welfare for at least a year if they moved into work of 16 or more hours per week; it was worth £40 per week and was paid for a maximum of 12 months. ERA paid £400 for every 17 weeks of full-time work (short gaps out of work were disregarded), for a maximum of 2 years.

We were able to use rich administrative data available through the Work and Pensions Longitudinal Study that gives detailed information on the time that lone parents spent receiving DWP benefits, such as Income Support, and the periods of time in which they were doing paid work. Key to the research was a model that accounted in full for the different ways in which the two programmes affected lone parents’ moves into or out of work, and how the impacts of the two programmes on lone parents’ decisions changed over time. Although both IWC and ERA had been previously evaluated, our work had access to previously unavailable administrative data from HM Revenue and Customs that gave detailed information on the amount of paid work being done by lone parents.

The research looked at whether the time-limited in-work credits led to sustained increases in employment, and whether it mattered whether the credits rewarded part- or full- time work. We found that credits got more lone parents off welfare and into work, especially for ERA, the credit that was conditional on full-time work. Once in work, both programmes incentivised lone parents to stay in work, and this rise in the numbers in work (and the consequential fall in the numbers claiming welfare) persisted even after payments of IWC or ERA had stopped. Second, the research found a marked difference between the credit that rewarded only full-time work, and the one that was also available to lone parents working part-time. Paying IWC to those working 16 or more hours a week did increase numbers in part-time work, but led to slightly fewer in full-time work. However, paying ERA only to those working 30 or more hours a week led to more lone parents working full-time, fewer not working at all, and fewer working part-time.

A version of the research is available as ISER Working Paper 2017-01, Lone parents, time-limited in-work credits and the dynamics of work and welfare, and also as an IZA Discussion Paper. Professor Brewer presented these findings at a workshop on 24 May 2017, “Retention and progression in work: what do we know (now)?”, alongside speakers from the Resolution Foundation and the Joseph Rowntree Foundation, and a summary report of the whole project will be published by the Nuffield Foundation later in 2017. This research was funded by the Nuffield Foundation and is supported by a research contract with the Department for Work and Pensions.