A cheer for Iain Duncan Smith – but he will make enemies

“The purpose of my life here is to improve the quality of life of the worst off in society.” Such ambitious rhetoric is not unusual for new incumbents at the Department for Work and Pensions. The difference with Iain Duncan Smith is that he means it, having advocated an overhaul of Britain’s rotten welfare system for years while being far away from the lure of power. If IDS is to deliver on his goals of tackling poverty, chronic welfare dependency and low intergenerational mobility, he will not just need zeal but also a good deal of stoicism, because he will make enemies.

The issues he raises featured high in the early years of the New Labour project as well, but today, not even staunch Labour supporters would claim that much of it has been delivered. Yet, between 1997 and 2007, external conditions could hardly have been more favourable for welfare reform. The labour market performed robustly and unemployment rates fell steadily. Tax revenue was rising, enabling the government to pick the low-hanging fruit: making low-paid work more attractive through tax credits, instead of applying sanctions to those who turned down suitable job offers. Also, the government was backed by a largely sympathetic community of anti-poverty campaigners.

As far as the first two points are concerned, it goes without saying that IDS will not be in a similarly favourable position. And if he follows up on his announcements to apply sanctions to people who do not take up work, he will soon find himself confronted with an angry campaigner community.

In his account of Wisconsin’s welfare reforms, Lawrence M. Mead describes the initial opposition to the work-first approach there: “most intellectuals [...] view work as a threat to poor families”. It would be unfair to claim that this was also true for the poverty advocacy community in the UK. But my impression is that they are more concerned with the dangers of low-paid work than with worklessness. They frequently emphasise that 59% of all children in poverty live in households were at least one adult works.

This figure tells us next to nothing. First of all, it includes children whose parents are self-employed (12%), which means that their income is volatile and not reflective of their living standards. Secondly, it defines anyone who works a few hours per week as ‘in work’ (16%). Measuring child poverty by the consumption-based Material Deprivation Index, the profile is a bit different: 76% of all children in MD-poverty live in households with no adult in full-time work; while 3% of them live in households with all adults in full-time work.

The 59% figure partly reflects the structure of Working Tax Credit, which is payable to parents who work at least 16 hours per week, and which is then withdrawn with earnings. WTC makes it relatively attractive to work at or just above this threshold, but is punitive to those who extend their weekly working hours from then on. Unsurprisingly, then, half of all lone parents (the key target group) in receipt of WTC get stuck at or just above the threshold.

IDS has criticised this trap-like nature of the present welfare system, and pointed out the absurdity of levying the highest effective marginal tax rates on the weakest groups in the labour market. Spot on. Yet, reducing those rates will cost money, and since this is hardly the time for spending increases, other parts of the benefit system will have to be made stingier. The poverty campaigner community will not like it, but work requirements, with effective sanctions for non-compliance, are the most suitable candidate. 

I’ve seen the Wisconsin plan work here in Israel and it is not half bad. In an average class about half the people really benefit from their new skills and their self-confidence is seriously improved. They get work they like and they stick to it. The other half have problems that cannot be solved in such a plan and some of them really do not want to work no matter what.I think helping the one half is worth the cost of the other half.

The problem with work requirements imposed on pain of sanction is that they distort the market by coercing only the supply side. You have to balance it by imposing sanctions on employers who unreasonably refuse to hire an unemployed person.

It seems we all have a long way to go when not getting paid for not doing any work is termed a “sanction”.

Michael,As a small businessman, there are many unemployed people who I am not employing – all of them in fact. What sanction do you suggest should be applied to me for each unemployed person that a bureaucrat judges I am unreasonable in not employing? What tests do you suggest to establish whether a business is being unreasonable in not creating a job?On the other hand, I agree with you about claims that unemployment can be cut by pushing unemployed people at a job market where there aren’t enough real jobs. All the parties seem to be prey to this delusion. They need to focus on creating a climate that encourages wealth creation and employment, and the jobs will look after themselves.

Work requirements mean that benefit recipients can be expected to work for, say, the local council, and lose benefits when they turn down available job offers. In a situation in which there really are no jobs available, work requirements do not apply.
I agree, of course, with the need to create a climate in which business can thrive and job creation is easy.
But benefit dependency can become so entrenched that even a labour market boom goes past long-term recipients.

Kris, As we’ve never had intelligent welfare policy, I’m not sure it’s possible to say whether the reason for persistent, long-term unemployment is because of the lack of “government push” or the disincentives created by the tax and welfare system. I have enough faith in the market, and enough scepticism of government programs (which have been pretty well tested to destruction already), that I believe the market will do a better job than government of getting people back into work if the obstacles are removed.

Bruno,
the two are not mutually exclusive. I fully agree on removing obstacles and all that.
Scepticism of government programmes is surely appropriate; in fact, the practice of tax credits is the best demonstration: They are not such a bad idea in principle, but in the political process, they have been turned into an overcomplex nightmare. Granted, work-push policies could turn out in the same way.
However, I can’t see how the government can be completely removed from welfare provision anytime soon, and if the government is to be involved, I’d prefer a poorly performing push-into-work programme over perfectly administered long-term dependency.

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