Analysing the interaction of the national minimum wage with the tax and benefits system

Analysing the interaction of the national minimum wage with the tax and benefits system is a project looking at the interaction between the National Minimum Wage and the UK personal tax and benefit system.

The project looks specifically at the likely impact of Universal Credit on the incomes and incentives of families containing NMW workers/families.

The analysis was completed before the December 2012 autumn statement and Spring 2013 Budget, and so will not reflect any changes to personal taxes and benefits for 2014-15 announced then.

Background

With the introduction of Universal Credit from October 2013, the government hopes to make it easier for people who are out of work and on low incomes to claim benefits, make the gains to work more transparent, and reduce the amount spent on administration and lost in fraud and error.

Its introduction represents a substantial reform to the system of means-tested benefits and tax credits for working-age families, with almost all existing benefits and in-work tax credits combined into the new single programme.

Universal Credit will be administered by the Department for Work and Pensions (DWP) and be payable to families where no one is in work, and to families on a low income where someone is in work.

Recipients of Universal credit will also have to adhere to a new set of conditions in order to qualify. Some part-time workers will face obligations to seek better-paid or longer-hours work, and some non-working adults whose partners are in work will face obligations to look for work.

Project aims

The project’s main aim is to examine the likely impact of Universal Credit on the incomes and incentives of families containing NMW workers.

The researchers will look at:

• where NMW families lie in the income distribution
• the on incomes of NMW families
• the importance of earnings from NMW jobs to NMW families
• the marginal effective tax rate facing NMW workers
• the impact of a rise in the NMW on the incomes of NMW families
• the incentives to work of non-working adults in NMW families

In all cases, the researchers will examine these issues in a world with and without Universal Credit. They will also estimate how many adults in NMW families are likely to be affected the new work-search conditions attached to Universal Credit.”

Methods

The key issue in assessing the interaction between the NMW and the tax and benefit system is that no single survey or administrative dataset records accurately both whether a worker receives the NMW and the characteristics of that workers’ family or household needed to estimate entitlement to means-tested benefits and tax credits.

In order to address this, researchers are making use of microsimulation models together with a synthetic dataset made up of two existing resources. These are:

• The UK component of the tax and benefit microsimulation model EUROMOD
• Family Resources Survey
• Labour Force Survey

The Family Resources Survey provides a relatively accurate impression of a household’s composition, characteristics and income sources and the Labour Force Survey provides a relatively accurate impression of the hourly wage earned by workers.

Having produced this synthetic dataset, the research team combines it with the EUROMOD model to produce an estimate of the net income of each household, and of various measures of the financial incentive to work.

The researchers will then analyse incomes and incentives under two hypothetical tax and benefit systems:

• their estimate of the personal tax and benefit system in October 2014, assuming that Universal Credit has not been implemented at all – called the “base system”.
• their estimate of the personal tax and benefit system in October 2014, assuming that Universal Credit has been fully implemented – called the “Universal Credit system”

Neither system corresponds exactly to what the tax and benefit system is actually expected to look like in 2014 (hence hypothetical).