Work Incentives in low-Income Families

Work incentives are part government efforts in ensuring more labor participation in the economy especially by the low income families. Basically, aim of work incentives (income transfer systems) in U.K and U.

S.A for low-income is to reduce poverty and welfare dependency as well as encourage work. U.S.A and U.K have had in work benefits for more than two decades. (Brewer p 1). The effectiveness of these transfers systems depends on various factors.

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Workers will compare their income out of work with the income they are likely to receive if they were employed. As rational economic agents, they will opt not to take jobs whose pay is below the income when out of work. Workers are also sensitive to leisure and work hours trade off. Where utility derived from leisure is high than income expected at work, then as rational being, a worker will opt not to be employed. The withdrawal rates of these incentives also have affects their effectiveness.(Brewer p5; Blundell 2000)).

Work incentives to low income families in U.K and U.S.A have been in form of direct financial support and other means to ensure low income families earns more.

This has been through tax and benefit system. This incentives aim at encouraging low income workers to be at work at all and also to progress in work. In U.S.A, welfare benefits for low income families are Earned Income Tax Credit (EITC), Food Stamps, and Temporary Assistance for Needy Families (TANF). Other programs have included supplemental food program for women, infants and children, energy assistance, school lunch program, Head Start, training programmes.

These incentives aim at increasing low income labor participation.  Under TANF block grant, states and counties were expected to meet certain targets on employment of those who receive welfare benefits i.e. have 40% and 50% into work by 2000 and 2002 respectively. One of the aims of this benefit (TANF) was to ensure that parents ceased from depending on benefits, became ready to work, (Brewer 2000 p5; Blundell 2000).

Other, benefits such as Food Stamps are also available to those at work and those out of work. Recipients who are out of work are required to have  enough evidence that they have been searching for job or being trained (Brewer 2000 p6).Work Families’ Tax Credit (WFTC) is one of the work incentive in U.K. WFTC  is a refundable tax available for families working for more than 16 hours a week.

(Brewer 2000; Blundell 2000).Budget Line AnalysisAs rational economic agents low income households will consider the benefits associated with being at work and being out of work.  e.

g. in US it was possible for lone parent to have an income between  40% and 77% of the official US poverty line in 1997. A part time worker would be above the poverty line. Thus such trade off greatly influences the low income workers participation in the labor force. (Brewer 2000 p20; Acs etal1998).

These decisions can be explained using the indifference curve analysis. Assuming a low income family has a certain income (fixed), when out of work, the family purchases two commodities (A and B) from the market, and that increase in income will lead to an increase in commodities purchased, then, fixed income can be represent by the budget line, and combination of commodities purchased from the market by the low income family be represented by indifference curve, then this case can be represented in the following diagram (Gruber 2004). Work incentives are meant to increase income earned by the low income families and encourage labor participation among low income families. Work incentives will increase income and cause a shift of family initial budget line AB to DC. The commodities purchased will increase from A1B1 to A3B3 and increase utility of the family in question.  If a family income when at work is represented by budget line ST, then it is likely that low income family will not be willing to be at work since the combination of goods at this income A2B2 is smaller than A1B1 available when the family is out of work.

Withdrawal of work incentives has also been causing negative effects on employment of the low income families. (Gruber 2004).EffectsIn his study, Brewer found that work incentives provided good financial incentives for taking minimum-wage jobs but on the other side these incentives did not provide financial incentives to increase workers earnings owing to higher marginal withdrawal rates.The work incentives in both countries have increased employment to low-income families. They have reduced unemployment traps for low income families. They have encouraged the low income families to take minimum wage jobs.

Mostly, employment to the lone parents and workerless married couples with children has modestly increased. However the eventual withdrawal work incentives in UK have lead to some mixed effects of these incentives. Additionally, the WFTC has lead to reduction in employment in two-earner couples with young children.

(Brewer p36; Blundell 2000)

Author: Armando Mendoza


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