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Do tax credits really 'make work pay'?

Using benefits or tax credit schemes to top-up low wages is not necessarily a good way of promoting a work ethic among people in chronically low-paid work. This is the finding of new research recently undertaken from the London School of Economics and Political Science (LSE) and funded by the Economic and Social Research Council (ESRC).

MoneyThe research - which was led by Hartley Dean, professor of social policy at LSE - involved in-depth interviews with a diverse range of past and present recipients of the Working Tax Credit (WTC), a means-tested cash benefit paid to low-wage workers. WTC was introduced by the New Labour government in 2003, but will be replaced by the Coalition government in 2013 by the new Universal Credit scheme, which will also be used to top-up low wages. The assumption of policy makers - from all three main parties - is that using public funds to subsidise low wages is a way to 'make work pay' and give people an incentive to take low-paid work.  The research aimed to explore just how recipients feel about having their wages topped up in this way.

The 36 women and 16 men who were interviewed were drawn from across the whole of England. Although a high proportion had no or low-level qualifications, some had been educated to degree level. Their employment experiences reflected the extent to which so many jobs can now be low-paid and insecure. Characteristically, their working lives had involved a series of short term jobs, often interspersed with periods of full-time child care or unemployment.

There was clear popular support for the WTC. Despite this, there was confusion as to the purposes of the scheme. A lot of recipients failed to understand the distinction between WTC and the Child Tax Credit. Recipients generally understood that WTC provided an incentive for recipients to go to work, though by and large this was regarded as an incentive that applied not to them (they said they needed no incentive) but to 'other' people. Most recipients acknowledged that WTC functioned to lift people out of poverty, and however helpful this might be, there was, for some, an element of stigma associated with the benefit. None of the recipients properly understood how their entitlement was calculated and this could leave them feeling quite powerless.

The recipients' motivations to work were far more complex and varied than a simple response to a financial incentive. Recipients wanted by and large to work, and often felt good that they could, but sometimes the value they placed on work had little to do with money, or else the jobs they were doing failed to meet their aspirations or undermined their sense of self-worth.

Professor Dean said: "Although the WTC scheme was generally viewed positively and most of the people we talked to were grateful for the additional income, there were still some important undercurrents of resentment. WTC does not of itself compensate for the injustices or adverse effects of a precarious and inadequately paid work. Paradoxically, hardly any of the people who took part in this research explicitly recognised that schemes like WTC are in effect a subsidy to low paying employers, but a lot of them felt devalued at work or locked in to menial jobs.

"Our findings suggest that wage top-up schemes may not always be conducive to sustaining a morally meaningful work ethic among those workers who are systematically confined to the low-paid periphery of a polarised labour market. This suggests that while the proposed Universal Credit, like the WTC before it, might assist in accommodating workers to a flexible and competitive low-wage labour market there will still be circumstances in which workers may feel in various ways aggrieved. In some ways, because the Universal Credit will abolish the distinction between 'credits' for workers and 'benefits' for people out of work, we can foresee that some low paid workers may feel less good about having their wages topped up by the state."

Wage Top-ups and Work Incentives: the implications of the UK's Working Tax Credit scheme by Hartley Dean and Gerry Mitchell of LSE was funded by the ESRC.



For a copy of the report, contact Jess Winterstein, LSE Press Office, 020 7107 5025, email: j.winterstein@lse.ac.uk

To speak to Professor Hartley Dean, email h.dean@lse.ac.uk or call Jess on 020 7107 5025.


The Economic and Social Research Council (ESRC) is the UK's largest organisation for funding research on economic and social issues. It supports independent, high quality research which has an impact on business, the public sector and the third sector. The ESRC's total budget for 2011/12 is £203 million. At any one time the ESRC supports over 4,000 researchers and postgraduate students in academic institutions and independent research institutes. More at www.esrc.ac.uk

8 September 2011