Labour supply, unemployment and participation in in-work transfer programmes

The question is an important one because:

• in-work transfer schemes have recently been suggested as a device for encouraging labour force participation and reducing the severity of the disincentives associated with out-of-work transfer welfare programmes (such as Income Support (IS) in the UK, and Aid for Families with Dependent Children (AFDC) in the US);
• the USA has an in-work transfer scheme called the Earned Income Tax Credit (EITC) which has grown in importance in recent years;
• an extension of FC to individuals without children, to be known as Earnings Top-up (ET), has recently been proposed in the UK.

One difficulty with such schemes is that their design may be unavoidably complicated or personally intrusive to ensure that they are targeted sufficiently finely. The result may be that individuals may:

• feel that participation in such programmes is stigmatised or
• not understand that they have some eligibility.

The implication of such stigma or ignorance is that individuals may not participate in such programmes despite their potential entitlement. This problem is known as benefit non take-up or programme non-participation.

The difficulties in estimating the impact of such transfer programmes on labour supply behaviour are that:

• labour supply and programme participation decisions may be determined simultaneously, for example, if labour supply depends on the marginal wage and the marginal wage depends on whether one participates in an income transfer programme;
• individuals may choose not to participate in the labour market if some in-work benefit is stigmatised so it is necessary to distinguish between individuals who choose this position from those individuals who would want to work (and, perhaps, claim the in-work benefit) but simply cannot find a job - i.e. labour market rationing.

Here we estimate a labour supply model which allows for endogenous in-work welfare programme participation. We also allow for involuntary unemployment so as to distinguish between programme non-participation and an inability to obtain work and thereby generate an eligibility to the programme. This is applied to the UK Family Credit programme for a sample of 4248 lone mothers drawn from Family Expenditure Surveys 1978-92.

The estimates suggest that FC plays an important role in overcoming the adverse incentive effects associated with Income Support and that it does this without having an adverse effect on the probability of working full-time. However, the probability of working would rise further (although the incentive to work full-time would be correspondingly diminished) were it not for some apparent stigma associated with FC participation.