The arguments are actually about two issues. Long term supply-side incentives and income distribution. The first is much more straightforward to explain than the second.
One of the biggest problems faced by those out of work is the difference between in-work and out-of-work income. When the difference between the two is small the incentive to take a job is less and may prompt some people to remain on benefits rather than take a job. This is known as the unemployment trap.
During the period since 2008 the incomes of those in work have risen only slowly and at less than inflation, and for some nominal wages fallen. But benefits have gone up in line with inflation, which in some years has been well above target. So the difference between in and out-of-work income has narrowed. The government argue that the cap on benefits will restore the balance and raise incentives to work.
The case on income distribution can be argued both ways. Those on benefits are the least well off in the UK and it has been long established that they will be guaranteed an income that allows them to at least take a part in the normal activities of society. Therefore raising benefits by less than inflation represents a real cut in their incomes and breaks this social contract.
However against this the case can be made that the faster rise in benefits than in wages has led to an unintended change in the UK's distribution of income. While those on benefits will be worse off through this measure they will simply join the rest of society in the experience of recession. The distribution of income will be restored to the one that existed before.
There is no doubt that the distribution of income is the macroeconomic target which gets the lowest priority. The question really is do we want to prioritise long-run efficiency or compassion. No easy choice.
I think it is unfair to say that those on benefits 'will simply join the rest of society in the experience of recession'. It is people who are being hit by these changes are people who have been hit the most because of the recession. Many people on benefits, are on benefits because of their experience of the recession because they have lost their jobs or who have had to take part-time jobs. But crucially, the majority of people who will be effected are in work. Also, there is no incentive to work it just hits the families, the disabled, people on parental leave and the hard-working people on low wages.
ReplyDeleteI agree with Renie. Many of these people are on low wages and they are more likely to spend their money. That helps the economy.
ReplyDelete"While those on benefits will be worse off through this measure they will simply join the rest of society in the experience of recession". This on face value seems bad, but remember as good old David Cameron said "We are all in this together."
ReplyDeleteTimothy Armoo.
In theory I agree with the government’s argument to do with in-work and out-of-work income. If the gap is narrow there is no incentive to work, so why not increase the gap and try and encourage those out of work to get a job and increase their income? Sounds reasonable, however I agree with Renie, the recession has hit people hard. Now is not the right time necessarily to push the people out of work, into work, when a lot of them have just had the awful experience of losing their jobs and/or now work extremely intensively to look after their families.
ReplyDeleteArthur Elmes
I think that it is important that the government incentivises the population to work. If workers only face a marginal rise income for working, rather than claiming benefits, then they are unlikely to take that job. It is important to maximize an economy’s factors of production which includes labour, in order to increase productivity and economic growth.
ReplyDeleteHowever for those who are on benefits for reasons outside of their control, (such as those with health problems), then decreasing their incomes to lower that the rate of inflation is unfair. They do not have the opportunity to work, and should not have to face a lower standard of living because of it.
Georgina Davis