Because more equal societies work better for everyone

Do the behavioural effects of the benefits cap reduce inequality?

Monday, 15 December, 2014

On Sunday the Work and Pensions Secretary was featured in the news talking about the behavioural effects of changes to social security. He was suggesting that the benefit cap had caused people to move into work and that limiting child benefit to two children could have similarly positive behavioural effects. It is currently the policy of all the major parties to retain the benefit cap, and this focus on behavioural effects by the government reflects a tendency common to all the parties. They focus too much on the behavioural effects that they would like to see and very little on those that are less desirable. The positive headlines that the DWP’s latest research is receiving should be tempered by a better understanding of what exactly the research shows and the negative consequences it also creates.

This research is being reported as showing that those affected by the benefit cap are 41% more likely to get a job than those who were unaffected. The detail of the research shows that once you look at the type of households affected what this actually means is that 4.7% of those hit by the cap moved into Working Tax Credit (WTC) who wouldn’t have otherwise. The distinction between work and receiving WTC is important for two reasons. Some of those who weren’t getting WTC before could have been working but not enough hours to reach the threshold and because self-employed people get WTC. People who receive WTC are not affected by the benefit cap. If a person were to declare themselves self-employed and get WTC they may not have actually increased the amount of work they were doing but increase the amount of benefits they receive due to not being affected by the gap. This quibble aside it still suggests that for 95% of those who were hit by the benefit cap their response wasn’t to find work which they weren’t previously looking for.

So how are the vast majority of people affected by the cap responding? Many of those hit by the cap would have entered employment anyway regardless of the cap. DWP interviews with those affected by the gap suggest that an even greater proportion were already looking for work but failing to find it and that the cap increased the size of this group. The interviews also suggest that it’s caused some of those effected to abandon training to become more qualified in order to accept a lower paid job or to stop looking for more highly paid jobs for which they are already qualified. The group affected by the benefit cap are too small for this to have a large economic effect but it is worth considering in the context of wider social security reforms. The basic economics of job search theory suggests that cutting short the amount of time a person spends looking for work results in a less optimal match. This would result in an overall loss of productivity in the economy. If, like some, you think that Welfare reform is the reason for our lower than expected unemployment rates then you may also need to think about whether it’s also partly to blame for the country’s low productivity which is associated with the UK’s high proportion of low-paid jobs.  

Others affected by the cap reported that caring duties or being ill themselves prevented them from working. A tiny portion may have moved house who wouldn’t have otherwise but the DWP analysis says that is so small a group that you cannot be sure if they exist or not[i]. Those affected by the cap commonly reported that they were already in the cheapest accommodation they could find. This suggests that for the majority of those hit by the cap the main effect has been to simply reduce their budget and increase inequality with its associated negative health and social effects. Most of those interviewed by the DWP reported that their finances were struggling even before the cap. Some of their responses to the cap include skipping meals, not paying utility bills, not using their heating and borrowing from door step lenders or going into bank overdrafts.

Somehow politicians tend to focus on the less than 5% of those affected by social security changes rather than the real human suffering and economic damage of hitting the other 95%.

Tim Stacey, Senior Policy and Research Advisor

 

[i] The finding was not statistically significant

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