Select Committee on Social Security First Report


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 Sefton—areas 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 Manchester28.2 37.4+9.2
Wales33.246.2 +13.0
Lancashire27.338.7 +11.4
Sefton49.864.3 +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 Manchester64.8 85.0+20.2
Wales62.287.4 +25.2
Lancashire60.483.9 +23.5
Sefton72.792.6 +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 Manchester84.9
Wales83.6
Lancashire83.7
Sefton94.4


  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 Manchester24.0 54.030.0
Lancashire21.962.1 40.2
Wales25.858.7 32.9
Sefton38.965.1 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

Catering18.325.6 22.938.5
Office22.514.4 20.310.3
Shops8.914.9 16.15.1
These 3 sectors49.7 54.959.353.9


  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

AllLancashire WalesGreater
Manchester
Sefton
per centper cent per centper centper cent

Warehouse54.3058.50 0.0052.00100.00
Shop52.0057.40 49.2048.6028.60
Labouring51.1051.10
Catering43.1048.60 40.4040.4039.50
Office42.9053.10 40.8037.0057.10
Production41.2048.00 53.8026.50
Clothing34.9058.30 66.7027.60
Cleaning32.0033.30 27.8033.3033.30
Security28.1012.10 28.0032.6020.00
Hairdressing28.1040.00 41.7016.700.00
Sales27.0034.30 41.3019.800.00
Care work25.0033.30 26.4018.5015.80
Driving22.9027.60 27.3018.7012.50
Motor trade12.2025.00 5.9014.300.00
Professional11.100.00 14.3028.600.00
Skilled11.5010.00 7.5015.0011.10
Managerial6.800.00 0.0010.3025.00
Nursing3.400.00 0.0011.100.00
Engineering2.400.00 0.003.500.00


  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


 
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