Media Briefings

IN-WORK TAX CREDITS FOR POOR HOUSEHOLDS RAISE INCOMES BUT INCREASE DIVORCE RISK

  • Published Date: February 2009

The Working Families Tax Credit (WFTC), which was introduced nearly ten years ago as the main package of in-work support for low-income families with children, had strong employment and divorce effects on married mothers in poor households. That is the central finding of new research by Professor Marco Francesconi and colleagues, published in the February 2009 issue of the Economic Journal.

The authors suggest that the increased risk of divorce for married women in poor households may arise from the improved employment position of single mothers as a result of the reform. This could have generated a valuable ‘outside option’ to mothers married to low-earning men.

The study, which uses longitudinal data on a large panel of British families to examine the impact of the 1999 tax credit reform on married couples, finds that:

Overall, the financial incentives of the reform had virtually no effect on many aspects of the behaviour of married mothers: eligible and full-time employment, employment transitions, use of child care and divorce rates.

But women’s responses were very diverse and depended on their partners’ labour supply and earnings.


Women with middle- and high-income partners were unaffected by the reform.

But mothers married to low-income men showed larger positive responses in employment, especially if they had younger children (of the order of 5 extra percentage points). They were more likely to remain in the labour force and had higher rates at which they entered it.

While more likely to receive the tax credit (a 3 percentage point increase), mothers married to low-income men also increased their use of paid child care (by about 2 percentage points, a relative increase of 30%) and experienced a greater risk of divorce (a 2 percentage point increase, a relative increase of 160% in the divorce rate for these women).

There were no significant responses among married men, regardless of their income.

The result that the WFTC had strong employment and divorce effects on married mothers in poor households is very important. These women are similar to single mothers and, as these findings indicate, they are more vulnerable to becoming single.

Indeed, the better employment position of single mothers as a result of the reform, in part through its more generous child care provision, could have generated a valuable ‘outside option’ to mothers partnered with low-earning men. This response could have been an unintended consequence of the reform, which may turn out to be important for the evaluation of the longer-term success of the reform itself.

An interpretation of this result is that the child care component of the WFTC might not have been strong enough to induce more couples with children into eligible employment and marriage. This is because both husband and wife had to work 16 or more hours per week in order to receive the child care credit of the WFTC.

This additional requirement may help explain why the estimated employment effects for married women with low-income partners are smaller than those estimated for single mothers. Moreover, while the improvement in the relative economic position of single mothers may have led to an increase in bargaining power of married women (especially those in poorer households), it also reduced the overall gains from marriage, resulting in a greater risk of family disruption.

ENDS

Notes for editors: ‘The Effects of In-work Benefit Reform in Britain on Couples: Theory and Evidence’ by Marco Francesconi, Helmut Rainer and Wilbert van der Klaauw is published in the February 2009 issue of the Economic Journal.

Marco Francesconi is at the University of Essex. Helmut Rainer is at the
University of St Andrews. Wilbert van der Klaauw is at the New York Fed.

The analysis underpinning this study is based on longitudinal data drawn from the first 12 waves of the British Household Panel Survey (BHPS) covering the period 1991-2002. The BHPS is a large representative sample of British households, whose members are followed and interviewed annually. The sample used in the analysis includes 3,235 couples, of which 1,430 have dependent children during the sample period and the remaining 1,805 do not have children during the observation period.

In the past two decades, a number of industrialised countries – including the US, the UK, Canada and New Zealand – have used tax credits and work-conditioned transfers as a means of alleviating poverty without creating adverse incentives for participation in the labour market. In-work benefits achieve this goal by targeting low-income families with an income supplement that is contingent on work.

Eligibility is based on family income and typically requires the presence of children, reflecting that there are higher out-of-work welfare benefits for families with children, that such families have higher costs of working (childcare) and, perhaps, that such families respond more strongly to wage changes than those without children.

As part of this new architecture of public policy intervention, in October
1999, the UK government introduced the WFTC. Although the WFTC was replaced by new tax credits in 2003, many of its key principles remain operative to date.

For further information: contact Marco Francesconi on 01206-872765 (email: mfranc@essex.ac.uk); or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).