Simulating policy measures to combat in-work poverty

Based on microsimulation results for Belgium, a recent study examined the effect of four policy options to tackle in-work poverty (higher minimum wages, reduced employee social security contributions, tax relief for low-paid workers and a version of the UK Working Tax Credit). The authors concluded that all four had cost or other disadvantages, and called for policies that look beyond targeted measures to universal child benefits and support for employment of carers.

Introduction

A recent article in the Journal of Social Policy by Ive Marx, Josefine Vanhille and Gerlinde Verbist on ways to combat in-work poverty in continental Europe based on the case of Belgium begins with a discussion of the data from Belgium, definitions and methods. It continues with a brief sketch of the extent and specific nature of in-work poverty in continental European welfare states and Belgium in particular. The focus then turns to an examination of four policy options:

• raising minimum wages and effective wage floors;
• reducing personal income taxes;
• reducing social security contributions for low-paid workers;
• introducing a UK-style tax credit.

The final section discusses the key elements of a suitable policy mix for combating in-work poverty in continental Europe.

Study methodology

European Union Statistics on Income and Living Conditions (EU-SILC) data for Belgium for 2006 were used to identify those in work the previous year and living in a household with a total disposable household income below the commonly used 60% of median equivalent income threshold, using the Organisation for Economic Co-operation and Development (OECD) modified equivalence scale.

Microsimulation modelling was then used to obtain an empirical assessment of the policy options in Belgium. According to the article’s authors, this technique is particularly well-suited to investigate the consequences of policy changes as these interact with the existing tax-benefit structure.

‘In-work poverty’ does not equal ‘low pay’

The authors stress that it is first essential to understand that low-paid work and in-work poverty are largely separate phenomena. What matters is the combined labour market position of household members. Having only one earner in the household is the key poverty risk factor at a time when the average living standard, and hence the relative poverty threshold, is increasingly determined by the dual-earner model.

Profile of the working poor in Belgium

The article begins by examining the extent and structure of in-work poverty in Belgium (see table). The main conclusions are summarised below. The incidence and distribution of in-work poverty across household configurations was found to be particularly important.

• In-work poverty is primarily a phenomenon affecting prime-age workers.
• There is no strong gender bias.
• Workers of all levels of educational attainment are confronted with in-work poverty, albeit those with lower education levels relatively more strongly.
• The overlap between in-work poverty and low-pay employment is relatively limited.
• There is a strong association with work intensity in that full-time workers are considerably less likely to be confronted by in-work poverty than part-time workers.
• Employed lone parents and single-earner couples with dependent children are most at risk of poverty.
• Single people have a lower poverty risk, but because of their population share, they constitute a significant share of poor workers.
• In-work poverty is virtually non-existent among dual-earner households without children.

Hence, the population of workers confronted with poverty is a heterogeneous one. This is clearly important when it comes to framing policies.

Notes: Characteristics of working poor based on poverty line at 60% of median equivalent income.

Workers are defined as those whose main activity status was ‘in work’ (full-time or part-time) for at least one month during the reference year and who earned a strictly positive income from employment, excluding self-employment.

Low pay is defined as earning less than two-thirds of the median gross hourly wage for all employees.

Source: Marx et al (2012) based on SILC 2006

Measures to lift people out of in-work poverty

The article goes on to simulate the effect of four policy measures on in-work poverty:

• higher minimum wages;
• reductions in employee social security contributions;
• tax relief for low-paid workers;
• the implementation of a stylised version of the UK Working Tax Credit.

It is demonstrated that, at least in Belgium, even substantially higher minimum wages would have a limited impact on in-work poverty and that this would be at the cost of increases in labour costs and significant spillovers to households in the middle and upper regions of the income distribution. Yet the authors argue that minimum wages still constitute the foundation of minimum income protection for workers. Higher minimum wages do not have a budgetary cost as long they do not destroy jobs and cause people to become dependent on benefits. There is no hard empirical evidence that this is the case at the currently prevailing levels in Belgium, but such effects cannot be excluded at the higher simulated levels.

The authors highlight that reduced social security contributions and well-targeted individual tax credits increase the net pay of low earners. Nonetheless, since most of them do not live in a household with a combined disposable income below the poverty line, the impact on poverty is again very limited.

In order to be effective as anti-poverty device in Belgium, tax relief for households rather than individuals on low earnings would need to be strongly targeted. However, strong targeting at households with low earnings is bound to create mobility traps and would probably also lack public support.

Conclusion

In conclusion, the authors make a plea for policy options that do not seek to target specific segments among the poor. Universal child benefits, for example, have an immediate impact on poverty – both among those who depend on earnings and those on replacement benefits – without adversely affecting work incentives. Together with policies that facilitate and support the dual-earner model, particularly the employment of carers, such universal benefits are bound to constitute a key component of any effective policy package to tackle in-work poverty.

Reference

Marx, I., Vanhille, J., Verbist, G. (2012), ‘Combating in-work poverty in continental Europe: An investigation using the Belgian case’, Journal of Social Policy, Vol. 41, No. 1, pp. 19–41.

Guy Van Gyes, HIVA-KU Leuven