Working on It?

What Use is Part-time Work If Your Benefit is Cut and You Earn Little More?

Listener: 16 September, 1995.

Keywords: Social Policy

Mike was finishing his university degree when he was offered a part time job with one of the biggest employers in the city. He took the job, did it well, and the employer eventually gave Mike a full time job. Three years later he is still working there. Mike’s experience is not unusual. Once the young worker walked into a full time job. Today’s young start off with bits and pieces of part-time work, obtain work skills and a reputation for good work disciplines, which eventually leads on to full time work.

John, who was unemployed, knew this. He worked voluntarily in an opportunity shop to get experience and a reference for potential employers. He began picking up little pieces of work, broadening his experience, building a reputation as a reliable and conscientious worker. When his friend Mike found him a part time job with Mike’s employer he jumped at the chance. But he gave it up after a fortnight. John is still unemployed and working odd jobs.

John stopped persevering with the job, when he discovered he was not being paid for it. The employer paid him a fair wage, but John was on the unemployment benefit. When he reported his additional earnings, the Income Support Service reduced (abated) his benefit. After he paid income tax too, he was left with 2 cents of every dollar he earned, not enough to cover even the cost of the bus fare work. In the economist’s jargon he faced an “effective marginal tax rate” (EMTR) of 98 percent (plus the costs of the job). There was no financial incentive for his working, and so he gave it up. John has been trapped into unemployment by the abatement rules of his benefit. There are many like John.

We have known about these poverty traps for decades. I had a student do a paper on them back in the mid 1970s. Susan St John of Auckland University has tirelessly reported on them in great detail over the years. The Task Force on Employment says that something should be done. The rhetoric of the politicians is how people on benefits help themselves. And yet nobody does anything to remove the impediments to self-sufficiency.

Instead government policy changes have made things worse. Mike happened to be lucky he was not involved in the tertiary students loan scheme. It generates complex poverty traps. Add in the abatement effects of the community services card, family support, and housing assistance: the resulting system is so complicated hardly anybody understands it (perhaps only Susan St John). Instead beneficiaries avoid the ferocious EMTRs, and so do not better themselves.

The problem of high EMTRs has always been there, but things have changed since 1972 when they last went under a major review. In those days jobs were easier to find, and it was not necessary to build up a series of part time jobs to obtain a full time one. Under full employment people jumped from a benefit (if eligible) to a full time job, so the high EMTR in between did not matter. But that situation rarely applies today.

Yet, our Income Support Service, handing out unemployment benefits worth over a billion dollars a year, is still basing its abatement rates on the assumption that there is full employment. Meanwhile, the strategy of reducing taxes on those with high incomes has meant the revenue has to be raised from the poor by putting up their EMTRs. If one’s heart bleeds for the rich facing a disincentive from an income tax rate of 33 percent, why the hard hearted view that a 98 percent rate will inspire John to get a job?

Raising this in official circles creates as the reaction between embarrassment and advocation of the easy solution. Abatement problems can be abolished by abolishing the benefit (no doubt using the extra revenue to reduce tax rates on those struggling with a 33 percent income tax rate). I suspect that is why there has been so little official progress. It is difficult to design a fair tax system where there is a degree of income support. It is easier to opt out by advocating the abandonment of the support. Even so, I have been surprised at the unwillingness of politicians to kick butt over the official’s dilatoriness. They seem to prefer to abuse those trapped in a poverty and unemployment not of their own making.

There is a proposal (not currently supported by any party) to have the government pay a guaranteed minimum income, with additional market income taxed to pay for the state income (and other state services). However it generates high marginal tax rates for any decent guaranteed minimum income. In the most simple case, if the minimum is 60 percent of the average, then the average tax rate has to be 60 percent. The more generous the minimum, the higher the tax rate. There are ways around this, but they involve thoughtful and skilled analysis. It is easier to advocate abolishing income support, or to abuse those trapped in poverty and unemployment by policies over which they have no control.