APPENDIX 3
Memorandum submitted by Greater Manchester
Low Pay Unit (TAB 65)
TAX AND BENEFITS : IMPLEMENTATION ISSUES
SUMMARY
1. Welfare to work strategies must take account
of the real, rather than theoretical options open to unemployed
people. Part-time and low-paid work is increasing.
2. The effective labour market for most unemployed
people is that represented by Jobcentre vacancies. This report
uses material from four Jobcentre surveys (in Wales, Greater Manchester,
Lancashire and Seftonareas which represent nearly 12 per
cent of all employees in Great Britain) in commenting in particular
on the raising of the National Insurance threshold.
3. Increases in the number of households claiming
Family Credit, and higher awards, means that the cost of Family
Credit has been rising; at current rates of growth Family Credit
alone could cost £7.7 billion in ten years time. The more
generous provisions of the Working Families Tax Credit could mean
this cost being substantially higher.
4. Raising the threshold for NI contributions
could mean the exclusion of more workers from social insurance
protection. Jobcentre vacancy figures show that more than 10 per
cent of vacancies would be affected by the rise. This raises issues
about the nature of the protection to be offered to those falling
between the "old" and "new" thresholds, and
whether it applies only to those in this category at the time
of the change.
5. Most low-paid workers would prefer to pay
NI contributions and remain entitled to contributory benefits.
There are serious implications for income in old age for people
who are excluded from social insurance. Women will be particularly
affected by raising the threshold.
6. Raising the threshold will mean that well
over eight in 10 part-time vacancies in Jobcentres will fall below
the new threshold.
7. Lone parents are more likely to take part-time
work than parents in couples, according to Family Credit statistics.
68.5 per cent of lone parents claiming Family Credit were working
between 16 and 30 hours, compared with 30.0 per cent of parents
in couples.
8. In considering employment expansion employers
will have an increased incentive to create part-time rather than
full-time jobs, in order to avoid paying NI.
9. In addition, some employers may decide to
split full-time jobs into two part-time jobs, and the opportunities
to do this will rise significantly when the NI threshold rises.
Between 54.0 per cent and 65.1 per cent of full-time jobs in the
areas surveyed were vulnerable to splitting in this way.
10. More than half the jobs vulnerable to splitting
were in catering, offices and shops, but many other sectors had
high proportions of full-time jobs which could be split.
11. The creation of more part-time jobs by raising
the NI threshold is not only potentially detrimental to individuals
(by possibly excluding them from entitlement to contributory benefits),
but will also create increasing fiscal problems for the government.
Greater Manchester Low Pay Unit
June 1998
REPORT
1. The Greater Manchester Low Pay Unit sent
to members of the Social Security Committee earlier in the year
a report entitled "Welfare to What?", which considered
a range of issues related to welfare reform, particularly in the
context of our knowledge of labour markets. This short report,
therefore, concentrates particularly on issues related to the
Working Families Tax Credit and the raising of the National Insurance
threshold.
2. The effective labour market for most people
who are unemployed is that represented by Jobcentre vacancies.
The Unit has more than ten years' experience of conducting comprehensive
surveys of Jobcentre vacancies, not only in Greater Manchester,
but also in Wales, Lancashire and parts of Merseyside, and has
co-ordinated nationwide work in this area on behalf of the Low
Pay Network.
3. Welfare to work strategies must take account
of the real, rather than the theoretical, options open to unemployed
people. Whilst the number of vacancies available has been increasing,
the quality of jobs on offer has changed little over the last
decade, and there has been a growth in particular in part-time
work. Our most recent surveys, in 1997, showed part-time jobs
running at between 40 per cent and 60 per cent of all vacancies
in the Jobcentres studied.
4. Employment statistics generally show a shift
from production to service sector jobs, often particularly into
those service sectors which are characterised by low pay and part-time
work (such as hotel and catering, and shops).
5. We are therefore particularly concerned
that the already considerable cost of in-work benefits is likely
to increase rapidly. Analysis of recent Family Credit statistics
shows that:
the numbers on Family Credit rose
by 7.7 per cent in the year to August 1997; and over the last
five years numbers have risen by three quarters;
the rate of growth of Family Credit
awards has been significantly above inflation; over the last five
years the average weekly award has risen by 45.3 per cent.
6. We estimate that if the number of Family
Credit claimants rose by 7.5 per cent a year and awards rose in
the same way as they have done over the past five years, by the
year 2007 the cost of Family Credit alone would be £7.7 billion.
7. However, the cost of supplementing low wages
is likely to be significantly greater given the more generous
provisions of the proposed Working Families Tax Credit, and the
associated childcare credits. We are in no way opposed to more
generous support for low-waged families, and we welcome increased
help with childcare. We think it is absolutely right that the
government should ensure that low-income working families receive
proper support (although we have considerable concerns about the
use of tax credits, and about the arbitrary criteria inherited
from Family Credit, such as the 16 hour threshold, and we have
addressed these issues at some length in "Welfare to What?").
However, in the absence of significant improvements in the labour
market itself it is likely that the cost of in-work support will
become ever more difficult to sustain.
8. The national minimum wage will make some
impact in limiting costs, since there will be a floor below which
employers will not be able to pay. However, the proposed figure
of £3.60 is excessively modest, and will produce a weekly
income (before tax and National Insurance) of only £144 even
for a 40 hour week. Since a couple with two children, one aged
under 11 and one aged between 11 and 15, would receive over £130
a week in Income Support/Jobseeker's Allowance, it is clear that
the minimum wage will just about produce a net income equivalent
to this Income Support level. This is little reward for 40 hours'
work, and it is clear that the minimum wage will in no way obviate
the need for substantial top-ups to pay if it is to be worthwhile
for families with children to re-enter the labour market.
9. Whilst not wishing to comment in detail on
the working of the proposed Working Families Tax Credit, we would
reiterate our concern that relying upon such a measure alone will
prove to be exceptionally costly.
10. Alongside this concern about rising costs
is an allied concern about possible losses of income to the government
as a result of raising the National Insurance threshold. The
raising of the threshold from the current level of £64 to
a new level of £81 will obviously, at a simple level, mean
fewer employers and employees paying National Insurance. However,
we believe that the consequences of raising the threshold will
be more wide-ranging and complex than simply excluding more jobs
from the requirement to pay NI, and this is one of the key concerns
of this particular paper. In addition, we are concerned about
the possible exclusion of more and more workers from social insurance
protection.
11. In considering this issue we will draw on
four Jobcentre surveys undertaken by the Unit (sometimes in conjunction
with other partners) in 1997. These were in Greater Manchester
(all the ten major Jobcentres), Wales (sixteen Jobcentres, including
Cardiff), Lancashire (seven Jobcentres, including Blackpool, Blackburn,
Preston and Lancaster), and Sefton (all three Jobcentres). The
Labour Force Survey shows that in Winter 1997/98 employees in
these four areas accounted for nearly 12 per cent of all employees
in the United Kingdom, so the survey results are not insignificant.
12. Table 1 shows the proportion of job vacancies
in each area which paid below the then National Insurance threshold
of £62, and the proportion of jobs which paid below £81.
TABLE 1
|
|
| Below £62
per cent
| Below £81
per cent | Change
|
|
Greater Manchester | 28.2 |
37.4 | +9.2 |
Wales | 33.2 | 46.2
| +13.0 |
Lancashire | 27.3 | 38.7
| +11.4 |
Sefton | 49.8 | 64.3
| +14.5 |
|
13. As Table 1 shows, raising the NI threshold to £81
would affect between 9.2 per cent and 14.5 per cent more jobs.
The effect is greatest in those areas (eg Sefton and Wales) which
already have significant proportions of jobs under the NI threshold.
In Greater Manchester and Lancashire the proportions under the
NI threshold would rise from just under three in ten to just under
four in ten, whilst in Wales over 46 per cent and in Sefton over
64 per cent of all jobs would pay too little for the employer
to pay National Insurance.
14. The Chancellor has said that entitlement to NI benefits
will be protected for those who would otherwise lose out as a
result of the raising of the NI threshold. We welcome this commitment.
However, we are not clear how this is to be done, nor who will
be covered. In many past changes to benefit levels and entitlements
there has been transitional protection for those affected at the
time of the change, We are concerned, however, that there may
not be protection for those who subsequently take up jobs which
would have paid sufficient for NI contributions to be payable
under the "old" system but which will not do so under
the "new" system. If this is the case then significantly
more people will fall outside and we assume that this is the minimal
position to be adopted by the government. entitlement to contributory
benefits.
15. Martin Taylor in his report on Work Incentives has suggested
that reducing the requirement to pay NI contributions will make
low-paid jobs financially more attractive. However, it is our
experience that most low-paid workers want to have entitlement
to NI benefits. Indeed, we have already had calls from workers
concerned that they might lose their entitlement if the NI threshold
is raised. We believe most workers would prefer to pay the relatively
small amounts required in NI rather than lose their entitlements
to statutory sick and maternity pay, Jobseeker's Allowance, and
a state pension.
16. The pensions issue is particularly important. It is our
contention that increasing numbers of workers in today's labour
market are not likely to have occupational pensions and will be
unable to afford personal pensions. Their sole possible pension
entitlement is likely to be the state pension, and if they are
excluded from this possibility then they will be forced to rely
on means-tested benefits in old age. Many workers resent this.
Moreover, it is important to note that because liability to pay
NI is based on each job individually, it is possible for someone
to do two or three part-time jobs which equate to full-time hours
but to pay no NI contributions (unlike the tax system where income
from all jobs is counted when assessing tax liability).
17. This issue is of particular importance to women, since
far more women work part-time than men (although the proportion
of male employees who work part-time is now over one in ten).
Table 2 shows the proportion of part-time jobs in our surveys
which paid below the two different levels. (Part-time has been
defined as those jobs under 30 hours a week.)
TABLE 2
|
|
| Below £62
per cent
| Below £81
per cent | Change
|
|
Greater Manchester | 64.8 |
85.0 | +20.2 |
Wales | 62.2 | 87.4
| +25.2 |
Lancashire | 60.4 | 83.9
| +23.5 |
Sefton | 72.7 | 92.6
| +19.9 |
|
18. As Table 2 shows, the impact of raising the NI threshold
is greater when part-time jobs alone are considered. In all cases
the change would affect a further fifth or more of part-time jobs
on offer. Even with the current NI threshold over six in ten
part-time jobs in Jobcentres pay below the threshold, but if the
threshold were raised this would become well over eight in ten.
19. This is likely to be of particular significance in relation
to welfare to work initiatives affecting lone parents. Family
Credit statistics show that lone parents are far more likely to
take part-time work than are parents who are members of couples.
34.4 per cent of lone parents claiming Family Credit work between
16 and 20 hours, 21.4 per cent work between 20 and 24 hours, and
12.7 per cent work between 24 and 30 hours. This means that 68.5
per cent of lone parents claiming Family Credit were working part-time,
compared with 30.0 per cent of parents in couples.
20. The effective labour market for most lone parents seeking
to move off welfare and into work is that represented by Jobcentre
vacancies. The figures in Table 2 show that already significant
proportions of part-time jobs fall below the NI threshold, and
that if the threshold is raised the vast majority will fall below
the threshold. Unless there is protection of benefit for all
workers earning between the "old" and "new"
thresholds, whether or not they were in this position at the time
of the transition, then it is likely that the raising of the threshold
is likely not only to be discriminatory to women but to be particularly
disadvantageous to lone parents.
21. It could be argued that the introduction of a national
minimum wage at the level of £3.60 proposed by the Low Pay
Commission might help to raise some part-time jobs above the new
NI threshold. However, at £3.60 a worker would have to work
22.5 hours to equal the new threshold. The vast majority of part-time
jobs in Jobcentres are for less than 22.5 hours, as Table 3 shows.
TABLE 3
|
|
| Part-time jobs
below 22.5 hours
per cent
|
|
Greater Manchester | 84.9 |
Wales | 83.6 |
Lancashire | 83.7 |
Sefton | 94.4 |
|
22. It will be noted that these proportions are not dissimilar
to those shown in Table 2 for the proportions of part-time vacancies
which currently fall below the £81 threshold.
23. It is clear that even with the profile displayed by current
Jobcentre vacancies, the vast proportion of part-time jobs would
fall below the new NI threshold. However, it is likely that there
will be an increase in the number of jobs below this threshold,
because raising the threshold will change employer behaviour.
Indeed, it is an explicit aim of the proposal to raise the threshold
that it will increase incentives for employers to create low-paid
jobs, by removing the employer on-costs which are alleged to be
a barrier to employment creation.
24. In considering employment expansion, therefore, employers
will have an increased incentive to create part-time rather than
full-time jobs, because they will then not have any liability
for National Insurance employer contributions. This in itself
is likely to increase the trend towards part-time work.
25. However, there is also the distinct possibility that
raising the threshold will also encourage some employers to split
jobs which are currently full-time and make two part-time jobs.
(There have been numerous examples of this in recent years, particularly
in the retail trade.) With the NI threshold now at £64 a
week, any employer with a full-time job paying less than £128
could split the job into two part-time jobs and not have to pay
NI. When the threshold is raised to £81, any full-time job
for less than £162 could be split into two part-time jobs
and give the employer this financial advantage. (It is likely
that there is far less incentive to split a full-time job into
three or four part-time jobs because of problems of continuity,
etc.) Table 4 shows the proportions of full-time jobs which fall
below £128 and below £162, and thus the proportion of
full-time jobs which would become vulnerable to splitting when
the NI threshold is raised.
TABLE 4
|
|
| Below £128
per cent
| Below £162
per cent | Change
|
|
Greater Manchester | 24.0 |
54.0 | 30.0 |
Lancashire | 21.9 | 62.1
| 40.2 |
Wales | 25.8 | 58.7
| 32.9 |
Sefton | 38.9 | 65.1
| 26.2 |
|
26. Apart from Sefton, which has particularly low levels
of pay, in the other Jobcentre surveys the proportion of full-time
jobs which could be split into part-time given the £64 NI
threshold is between a fifth and a quarter. However, with the
raising of the threshold the figures more than double, with a
particularly large rise in Lancashire, where the figure almost
trebles. The rise for Sefton is less dramatic, but only because
the proportion of full-time jobs already vulnerable is higher.
27. In each area surveyed the two occupations which had the
highest proportions of full-time jobs below £162 were catering
and offices. In Greater Manchester the third highest category
was security, followed closely by shops; in the other three areas
the third highest category was shops. It is clear, therefore,
that catering, office and shop jobs figure particularly prominently
amongst those jobs which are vulnerable to being split. Table
5 shows the proportion of the jobs falling between £128 and
£162 which were in catering, offices and shops.
TABLE 5
|
|
| Greater
Manchester
per cent
| Wales
per cent | Lancashire
per cent
| Sefton
per cent |
|
Catering | 18.3 | 25.6
| 22.9 | 38.5 |
Office | 22.5 | 14.4
| 20.3 | 10.3 |
Shops | 8.9 | 14.9
| 16.1 | 5.1 |
These 3 sectors | 49.7 |
54.9 | 59.3 | 53.9
|
|
28. As the table shows, half or more of all the jobs vulnerable
to splitting were in these three occupations. Since these are
occupations where part-time work is already prevalent (particularly
catering and shops) it is likely that many of these jobs could
be split fairly easily.
29. Table 6 shows for each occupation the proportion of full-time
jobs which become vulnerable to splitting if the threshold is
raised.
TABLE 6
|
| All | Lancashire
| Wales | Greater
Manchester
| Sefton |
| per cent | per cent
| per cent | per cent | per cent
|
|
Warehouse | 54.30 | 58.50
| 0.00 | 52.00 | 100.00
|
Shop | 52.00 | 57.40
| 49.20 | 48.60 | 28.60
|
Labouring | 51.10 | 51.10
| | |
|
Catering | 43.10 | 48.60
| 40.40 | 40.40 | 39.50
|
Office | 42.90 | 53.10
| 40.80 | 37.00 | 57.10
|
Production | 41.20 | 48.00
| 53.80 | 26.50 |
|
Clothing | 34.90 | 58.30
| 66.70 | 27.60 |
|
Cleaning | 32.00 | 33.30
| 27.80 | 33.30 | 33.30
|
Security | 28.10 | 12.10
| 28.00 | 32.60 | 20.00
|
Hairdressing | 28.10 | 40.00
| 41.70 | 16.70 | 0.00
|
Sales | 27.00 | 34.30
| 41.30 | 19.80 | 0.00
|
Care work | 25.00 | 33.30
| 26.40 | 18.50 | 15.80
|
Driving | 22.90 | 27.60
| 27.30 | 18.70 | 12.50
|
Motor trade | 12.20 | 25.00
| 5.90 | 14.30 | 0.00
|
Professional | 11.10 | 0.00
| 14.30 | 28.60 | 0.00
|
Skilled | 11.50 | 10.00
| 7.50 | 15.00 | 11.10
|
Managerial | 6.80 | 0.00
| 0.00 | 10.30 | 25.00
|
Nursing | 3.40 | 0.00
| 0.00 | 11.10 | 0.00
|
Engineering | 2.40 | 0.00
| 0.00 | 3.50 | 0.00
|
|
30. Whilst a large number of the full-time jobs which are
vulnerable to splitting are in just three occupational sectors,
it is clear that there are a number of occupations where a high
proportion of the total full-time job vacancies are vulnerable
to this action by employers. Of course it is not possible to estimate
what proportion of these jobs may be changed from full-time to
part-time, but we are concerned at the possibility of this kind
of cost-cutting exercise by employers.
31. If this were to happen then the fiscal consequences would
be substantial. More and more people would be entitled to the
more generous provisions of Family Tax Credit (rather than relying
on Income Support/Jobseeker's Allowance), but there would loss
of revenue to the government.
32. We would therefore argue that encouraging the creation
of more part-time jobs by raising the NI threshold is not only
potentially detrimental to individuals (by possibly excluding
them from entitlement to contributory benefits), but will also
create increasing fiscal problems for the government.
Greater Manchester Low Pay Unit
June 1998
|