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Did the Working Families’ Tax Credit work? Analysing the impact of in-work support on labour supply and programme participation. Mike Brewer, Alan Duncan, Andrew Shephard and Mar í a Jos é Su á rez. Outline. The paper: evaluating impact of changes to in-work benefits (WFTC) on labour supply

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Mike Brewer, Alan Duncan, Andrew Shephard and Mar í a Jos é Su á rez


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slide1

Did the Working Families’ Tax Credit work?Analysing the impact of in-work support on labour supply and programme participation

Mike Brewer, Alan Duncan, Andrew Shephard

and María José Suárez

outline
Outline
  • The paper: evaluating impact of changes to in-work benefits (WFTC) on labour supply
  • Take account of all tax and benefit changes between 1997 and 2004
  • Use structural ex ante evaluation, with validation from (internal and external) ex post evaluation results
  • Focus is on initial 1999 WFTC reform: more recent tax credit reforms in 2003 not covered in the paper
    • Working Tax Credits for all low-wage workers
    • Child tax credits combining non-work related child payments
aims contributions of paper
Aims & contributions of paper
  • Use micro-data from before and after WFTC to estimate structural model of labour supply and programme participation
    • Structural model needed to disentangle impact of WFTC from contemporaneous tax and benefit changes
    • Data from before and after reform identifies changes in preferences for in-work benefits (“stigma”)
    • Similar to earlier work (Blundell et al, 1999 & 2000)
    • Funded by UK Inland Revenue
    • WFTC part of sustained assault on child poverty
the wftc reform
The WFTC reform
  • WFTC replaced Family Credit in October 1999
    • Evolutionary reform
    • Weekly, requires 16hrs/wk work
    • Awards depend on hrs/wk, earnings of claimant & partner, capital, family structure & expenditure on formal, registered childcare
  • Comparison with Family Credit
    • Lower withdrawal (“phase out”) rate
    • More generous
    • New childcare credit
    • Change in administration
  • Aims: relieve poverty, encourage work and reduce stigma
budget constraints for lone parent change in in work support only
Budget constraints for lone parent (change in in-work support only)

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support

budget constraints for lone parent
Budget constraints for lone parent

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support

budget constraints for a 2nd earner in a couple with children
Budget constraints for a 2nd earner in a couple with children

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support,

partner earns £300/wk

to what extent can policies explain changing employment
To what extent can policies explain changing employment?
  • Difference-in-differences/natural experiment
    • Compares outcomes of eligibles and non-eligibles
    • Difficult to isolate impact of specific reform
  • Structural labour supply model
    • Estimate utility function of income-hours trade-off
    • Simulate effect of actual or hypothetical reforms
specifying a structural labour supply model

Where is an extreme value error.

  • Heterogeneity enters model through and
Specifying a structural labour supply model
  • For lone parents, utility function defined over net income and hours:
  • Approximate function by:
methodology continued

Budget constraint approximated by number of discrete points: lone parents choose hrs/wk point to maximise utility. With extreme value errors:

Methodology (continued)
  • Model additionally allows for:
    • Unobserved work-related (fixed) costs
    • Childcare costs
    • Programme participation (hassle or ‘stigma’) costs
methodology cont

Women choose from

  • Men choose from
Methodology (cont)
  • In couples, utility defined over total net income and individual hours choices:
estimation
Estimation
  • Data: UK Family Resources Survey 1995–2003
  • Sample includes both pre- and post-treatment data
    • valuable both for identification and validation
  • Missing wages & childcare expenditures pre-estimated
  • Structural likelihood integrated over rph and the estimated distributions of wages and childcare costs
  • Use a simulated ML technique: integrals replaced by averages over 10 random draws (independent errors)
parameters lone parents
Preferences for income

Increase with number of children, age of youngest

Decreasing in age and education attainment

Distaste for work

Increases with number of children

Decreasing in age and education attainment

Fixed costs of work

Higher with young kids

Vary by region

Stigma costs

Vary with age of youngest

Increasing in age and education attainment

Rise after WFTC, then fall

Parameters (lone parents)
simulating policy reforms
Simulating policy reforms
  • Use parameter estimates to simulate the effect of moving between two systems.
  • For given random draws, can calculate preferred choice of weekly hours and programme participation
  • Averaging over many draws gives transition matrix
  • One can calibrate transitions probabilities on observed outcomes by drawing from conditional distributions of stochastic terms
transition matrix lone parents

Post-WFTC

Pre-WFTC

Change in participation

Change in hrs/wk (all)

Change in hrs/wk (workers)

5.11

1.78

0.75

Transition matrix: lone parents
transition matrix married women

Post-WFTC

Pre-WFTC

Change in participation

(Overall)

(Partner working)

(Partner not working)

-0.57

-0.64

0.06

Transition matrix: married women
conclusions
Conclusions
  • Model suggests WFTC raised labour supply of lone parents by over 5ppt, but other reforms reduced labour supply
  • Smaller effect for couples
    • Decline in labour supply of women, increased labour supply from men in workless households
    • Non-WFTC reforms reduced labour supply
  • “Natural experiment” result broadly agree for lone parents; less robust results for couples
  • Recent reforms mean the incentive to work at all is
    • stronger for most lone parents
    • for adults in couples, more likely to be weaker than stronger
    • couples with children face larger incentive to have 1 worker and 1 carer
  • Part of sustained assault on relative child poverty