Benefit Abatement and Future Incomes

Lesley Davies

MA Economic Student, Massey University

Our work patterns and occupations are changing. We are more likely to be employed in service industries than any other category. We are more likely to be working with technology.

We are less likely to be working full time. We are less likely to stay in the same job all our working lives. Because of these two changes alone, tenure in paid work has become more insecure for a great deal of us. The amount of people wanting more working hours and wanting full time work has steadily increased over the last 13 years.

While this pattern is greater for all paid workers, workers at the bottom of the heap are more likely to be affected by these changes. This, of course, is hardly new information. It is linked to the theory of dual labour markets. In the core (primary) labour market are the jobs with good pay, good working conditions, security of tenure, fringe benefits, status and prestige. In the peripheral (secondary) labour market, there is average to poor wages, working conditions, little or no fringe benefits and not always a lot of status. Also, security of tenure is lacking. Employment in this labour market is insecure, seasonal, temporary.

The Poverty Trap and the Unemployment Trap

And there is also the group of people, largely reliant on government transfers, who cycle between the secondary labour market and governmental Income Support. Because the jobs open to them are often lowly paid and relatively insecure, these people can never quite earn enough to take themselves off government support and become the working poor.

As security of employment becomes as great a factor as the income that could be earned from employment, this third category of people get ever more caught in both the unemployment trap and the poverty trap. The unemployment trap occurs when the income support paid means the gap between being on the benefit and being in work is low enough to make working an unrealistic option. The rhetoric accompanying the 1991 benefit cuts was stressed to expand the gap, and thus provide an incentive to work.

The poverty trap, on the other hand, is concerned with incremental increases in earnings. In Aotearoa New Zealand, the benefit abatement system with its income threshold and high rate of clawback is largely responsible for the poverty trap. As an unemployed person starts a part time job, the income they would have received from supplementary benefits, and then the income they would have received from their main benefits is abated. What this means in reality, however, is that the beneficiary who works part time can often face a clawback rate of over 100% in some cases (secondary tax of 33% added to an abatement rate of 70%) making it impractical to work.

Faced with this marginal tax rate (the extra tax paid for each extra dollar earned), any incentive to undertake part time work can be lost. Partly, this system is a throw back to the concept that either a person works (and doesn’t require income support) or a person doesn’t work (and does require income support). As may be apparent, this was before the surge in temporary and part time work.

The two tables that follow indicate the growth in part time work in Aotearoa New Zealand between 1987 and 1999. As you can see, the share of part time work in the economy has increased for both men and women, and the share of full time work has steadily decreased.

	People Working Full and Part Time as a Percentage of All Employed People
Average for year ended March	Males		Females		Total
	Full Time % of Total	Part Time % of Total	Full Time % of Total	Part Time % of Total	Full Time % of Total	Part Time % of Total
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999	93.9 93.3 92.8 92.3 91.2 89.9 89.9 90.4 90.4 90.1 89.7 89.1 88.7	6.1 6.7 7.2 7.7 8.8 10.1 10.1 9.6 9.6 9.9 10.3 10.9 11.3	67.5 67.4 65.7 66.3 64.8 63.9 64.4 64.0 63.4 64.0 62.7 62.8 61.9	32.5 32.6 34.3 33.7 35.2 36.1 35.6 36.0 36.6 36.0 37.3 37.2 38.1	82.9 82.3 81.2 81.2 79.6 78.5 78.6 78.8 78.4 78.5 77.6 77.3 76.6	17.1 17.7 18.8 18.8 20.4 21.5 21.4 21.2 21.6 21.5 22.4 22.7 23.4
Source: Household Labour Force Survey. Dept of Statistics
	People Working Full and Part Time (in 000s)
Average for year ended March	Males		Females		Total
	Full Time	Part Time	Full Time	Part Time	Full Time	Part Time
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999	848.0 834.5 794.1 774.2 758.6 735.7 744.1 772.6 808.6 843.8 857.7 853.3 839.1	55.2 59.8 61.9 64.2 73.3 82.3 83.3 82.4 86.3 93.1 98.4 104.4 107.2	435.2 442.2 418.1 419.2 419.4 411.3 420.6 431.9 450.8 478.9 488.0 488.5 483.3	209.5 214.0 218.6 212.8 228.0 231.9 232.9 242.5 260.5 269.8 289.8 289.7 297.8	1283.2 1276.7 1212.2 1193.4 1178.0 1147.0 1164.7 1204.5 1259.4 1322.7 1345.8 1341.8 1322.4	264.7 273.8 280.5 276.9 301.3 314.2 316.2 324.9 346.7 362.9 388.2 394.1 405.0

Source: Household Labour Force Survey. Dept of Statistics.

In the table below, it is clear that if employed, a person is likely to stay employed, and the same if a person is not in the labour force. Once unemployed, the likelihood of becoming employed is about 30%, suggesting that this 30% partly consists of part time and temporary workers, people who cycle in between welfare and work.

	Transition Probabilities between Employed (E), Unemployed (U) and Persons Not in the Labour Force (N), (%) by Quarter
Quarter	E® E	E à N	E à U	N à E	N à N	N à U	U à E	U à N	U à U
1991 Mar June Sept Dec 1992 Mar June Sept Dec 1993 Mar June Sept Dec 1994 Mar June Sept Dec 1995 Mar June Sept Dec 1996 Mar June Sept Dec 1997 Mar June Sept Dec 1998 Mar June Sept Dec 1999 Mar	0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.94 0.93 0.94 0.94 0.94 0.93 0.94 0.94 0.94 0.93 0.95 0.94 0.95 0.94 0.94 0.95 0.94 0.94 0.93 0.94 0.94 0.93 0.94 0.94 0.94 0.94	0.05 0.05 0.05 0.05 0.05 0.05 0.04 0.04 0.05 0.04 0.04 0.04 0.05 0.05 0.04 0.04 0.05 0.04 0.04 0.04 0.04 0.05 0.04 0.04 0.05 0.05 0.05 0.04 0.05 0.05 0.04 0.05 0.04	0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.02 0.02 0.02 0.02 0.02	0.07 0.06 0.06 0.07 0.07 0.06 0.06 0.07 0.07 0.06 0.07 0.07 0.07 0.06 0.07 0.08 0.07 0.07 0.07 0.08 0.08 0.08 0.07 0.07 0.07 0.08 0.07 0.07 0.08 0.07 0.07 0.08 0.08	0.88 0.90 0.89 0.88 0.89 0.90 0.90 0.88 0.88 0.90 0.90 0.88 0.88 0.90 0.90 0.88 0.89 0.90 0.90 0.88 0.88 0.89 0.89 0.89 0.89 0.89 0.89 0.89 0.88 0.89 0.89 0.88 0.89	0.05 0.04 0.04 0.05 0.05 0.04 0.04 0.04 0.05 0.04 0.03 0.05 0.05 0.04 0.03 0.04 0.04 0.03 0.03 0.04 0.03 0.03 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04	0.23 0.28 0.23 0.25 0.21 0.28 0.24 0.26 0.24 0.27 0.26 0.27 0.26 0.30 0.26 0.28 0.31 0.34 0.31 0.33 0.30 0.33 0.30 0.31 0.29 0.34 0.30 0.31 0.25 0.30 0.27 0.30 0.30	0.26 0.24 0.24 0.24 0.24 0.24 0.23 0.22 0.26 0.26 0.27 0.24 0.30 0.26 0.29 0.28 0.29 0.28 0.32 0.30 0.30 0.31 0.29 0.33 0.30 0.29 0.34 0.28 0.34 0.31 0.32 0.29 0.32	0.52 0.49 0.54 0.51 0.54 0.48 0.53 0.52 0.49 0.47 0.47 0.50 0.44 0.43 0.45 0.44 0.39 0.39 0.37 0.37 0.39 0.37 0.41 0.36 0.41 0.37 0.36 0.40 0.42 0.39 0.42 0.41 0.39

Source: Household Labour Force Survey. Dept of Statistics

This cycling of workers between work and welfare can be more clearly seen if the above table is shown as figures, rather than probabilities. The number of people going from Employed to Unemployed (E à U) and Unemployed to Employed (U à E) is roughly the same.

	Transition between Employed, Unemployed and Persons not in the Labour Force (000s)
Quarter	E à E	E à N	E à U	N à E	N à N	N à U	U à E	U à N	U à U
1991 Mar June Sept Dec 1992 Mar June Sept Dec 1993 Mar June Sept Dec 1994 Mar June Sept Dec 1995 Mar June Sept Dec 1996 Mar June Sept Dec 1997 Mar June Sept Dec 1998 Mar June Sept Dec 1999 Mar	1009.4 1027.8 1045.2 1033.6 1017.9 1040.6 1059.7 1063.8 1036.5 1055.1 1100.8 923.2 919.7 932.2 970.9 1132.6 1134.1 1176.8 1175.8 1194.3 1153.9 1194.2 1225.7 1194.3 1176.7 1192.0 1165.5 1195.4 1201.1 1226.3 1177.7 1211.1 1027.3	55.5 53.2 53.4 50.7 50.7 53.2 50.8 47.8 52.3 50.3 50.1 41.0 45.8 45.2 44.8 53.3 62.3 52.8 54.1 50.3 54.9 57.5 52.3 56.5 60.9 64.3 58.5 55.3 62.0 59.0 56.1 60.6 46.4	25.4 23.9 25.8 23.6 25.7 22.5 24.7 24.7 22.3 21.6 20.1 16.7 19.3 15.6 16.1 14.6 16.9 14.7 17.1 14.3 17.4 13.7 17.6 17.2 18.1 19.4 15.6 17.3 22.9 23.2 19.7 21.2 20.6	48.7 44.5 43.1 48.6 48.9 45.6 44.2 55.0 50.1 45.6 50.0 47.9 45.3 40.8 45.3 57.3 52.5 51.8 49.1 58.3 58.6 55.1 51.2 48.8 51.5 56.7 50.9 54.2 57.1 52.9 53.5 59.0 49.7	591.8 627.9 639.3 630.3 624.5 642.6 674.5 662.3 636.8 660.8 679.7 575.6 538.3 569.8 572.9 650.8 632.6 666.9 670.4 652.8 628.4 652.7 650.2 630.2 621.0 652.5 650.6 661.4 650.1 676.0 669.1 690.0 571.4	30.7 28.3 32.0 34.3 32.0 27.5 28.4 32.0 34.2 29.5 25.2 29.6 30.0 22.4 21.8 30.2 27.5 25.1 24.6 30.1 23.6 25.6 28.2 26.0 28.9 26.8 28.0 27.3 29.7 29.4 27.7 34.1 24.5	20.3 30.0 25.4 30.0 24.4 33.6 27.0 29.8 28.3 30.4 29.4 24.0 23.0 29.0 22.1 24.6 26.6 27.0 21.5 23.2 21.4 26.4 22.2 23.13 20.2 28.3 23.2 24.7 19.9 28.1 24.0 27.3 22.9	23.0 25.9 26.4 29.1 28.0 29.2 25.4 24.9 30.8 29.6 30.4 21.5 27.0 25.3 24.3 24.5 24.6 22.2 22.8 20.8 21.5 25.0 21.4 24.8 21.3 24.1 26.5 22.6 27.3 28.6 28.4 26.1 24.7	46.5 52.7 60.3 60.8 62.0 59.1 58.3 58.4 57.7 53.8 53.5 44.6 39.6 41.3 33.7 39.1 33.4 30.9 26.1 25.7 27.7 29.6 29.8 27.1 29.2 30.9 28.4 32.1 33.6 36.8 37.2 37.5 30.0

Source: Household Labour Force Survey. Dept of Statistics

The numbers of people employed on temporary or seasonal contracts has increased as well. The ending of a contract, temporary or seasonal job is one of the two main reasons people become unemployed (the other is being laid off, dismissed or made redundant).

What does this mean for incomes?

As the level of part time and temporary work is tending to increase, it is possible that the beneficiary numbers will increasingly consist of people who DO, rather than don’t, work. Maybe they will not work all the time, but they will be an important constituent of those who do – and they are also likely to mainly work in the secondary labour market (mentioned earlier).

This increased cycling between benefit only, benefit and work income and work income only will become more noticeable as it begins to affect more of the population, and as the level of full time, well-paid jobs continues to decrease. In time, this may result in changes to our tax and benefit systems.

We may end up with a kind of ‘workfare’ by default. This may lead to dual benefit levels with a main benefit set at a level that requires extra income just to be liveable. The expectation, already formed, that people should work for their benefit will be reinforced by the reality that many beneficiaries already work (paid or unpaid). None of this, of course, affects the numbers of jobs available.

If this is the case, our present benefit abatement system will severely penalise the group of people who shift between benefit only, benefit and work income and work income only.

Changes in the Benefit Abatement System

What I have been researching is possible changes in the benefit abatement system we have in Aotearoa New Zealand, with the aim of reducing the likelihood that beneficiaries who do work in the paid workforce are affected by the Poverty Trap (mentioned earlier).

There are two main options:

1. Changing the threshold of earnings a beneficiary can earn before abatement happens (currently it stands at $80 before tax on the main benefit, and $0 on accommodation and supplementary benefits); or

2. Changing the rate at which abatement happens (currently 70 cents in the dollar for all income over $80 before tax on the main benefit, and 25 cents in the dollar for accommodation and supplementary benefits).

As well as these options, there are:

1. Changing the tax level (removing secondary tax from work-related earnings, but not from interest or dividends);

2. Abate after-tax earnings, rather than before-tax earnings. This seems fairer as the beneficiary is abated on what they actually receive.

3. Combine the total benefit entitlement and abate from the total, rather than at two different thresholds and two different rates. This would make the abatement system easier to administer, and make it easier for the beneficiary to calculate their total income and thus budget.

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