JOSEPH ROWNTREE FOUNDATION – WRITTEN EVIDENCE (EUC0017)

The economics of Universal Credit

Summary

1. Universal Credit (‘UC’) had two original core objectives: To ‘make work pay’ and simplify the social security system. Key tools to achieve these included improving financial work incentives, combining six benefits into one, and extending ‘conditionality’ and associated ‘sanctions’.
2. UC has improved financial work incentives on average, though they remain weak for groups such as parents and second earners. However, there is little empirical evidence that either this, or sanctions and in-work conditionality, is translating into improved labour market outcomes.
3. Furthermore, despite an economy with rising employment and earnings, more working families are being pulled into poverty, with cuts to UC and other benefits partly to blame. UC is not making work pay if millions of working people are struggling against the tide of poverty.   
4. Simplification has been partly achieved. But some design features of UC, such as monthly assessment and payment in arrears, do not fit well with the reality of many claimants’ lives. This is introducing new complexity for some claimants, potentially damaging work incentives.
5. UC is missing a crucial core objective: To be an anchor against the forces of poverty and destitution. Had this been an explicit goal, then some of UC’s problems may not have emerged.
6. Originally predicted to substantially reduce poverty, cuts to UC mean entitlements are now less generous than the benefits it replaces. But assumed higher take-up under UC (due to simplification) results in a system now broadly neutral on poverty overall. However, this masks millions of winners and losers. Some UC design features, like the minimum five-week wait for first payment, may also result in more debt and destitution.
7. UC needs a new guiding principle of preventing destitution and reducing poverty, as part of a wider strategy involving better quality jobs and more affordable homes. The Government must invest further in UC and work alongside claimants to improve its design, in order to help UC live up to its original objectives and potential to loosen the grip of poverty. Key priorities include investing further in work allowances, the taper rate and child element; improving childcare support; ending the five-week wait; and relinking housing support to local rent levels.

About the Joseph Rowntree Foundation (‘JRF’) and our research on UC

8. JRF is an independent social change organisation working to solve UK poverty. Through research, policy, collaboration and practical solutions, we aim to inspire action and change that will create a prosperous UK without poverty. We draw on our range of UC research, including research to be published in spring 2020 that we can update the Committee on in due course.[1]

The objectives of UC

9. UC has two core policy objectives.[2],[3] Firstly, to “ensure that work always pays”, primarily by improving financial work incentives so people can keep more of their benefits as earnings rise. Alongside this, UC also extended ‘conditionality’ to more people and made ‘sanctions’ harsher.
10. Secondly, to simplify the system, by combining six in-work and out-of-work benefits into one and making claims “digital first”. This was expected to further improve work incentives (due to administrative simplicity for claimants), and lead to higher take-up of benefits.

How well is UC achieving making work pay?

Financial work incentives – theoretically strengthened on average

11. UC improves financial work incentives by combining out-of-work and in-work benefits, removing working hours rules and applying a single unified ‘taper’ so that support is reduced at a consistent and transparent rate as earnings increase. It also allows some people to keep more of their earnings (through ‘work allowances’) before support starts to be withdrawn. This was originally expected to lead to 300,000 more people moving into work.[4]
12. Recent modelling shows UC does tend to improve financial work incentives overall compared to the legacy system.[5],[6],[7] It tends to allow people to keep more of their earnings when they move into work – seen in lower ‘Participation Tax Rates’ (‘PTR’s)[i] - and to keep more of their earnings as they increase hours - seen in lower ‘Marginal Effective Tax Rates’ (‘METR’s)[ii].
13. Significantly, UC reduces the number of families facing the highest METRs of over 80%. Under the legacy system, some workers keep just nine pence of any extra pound earned;[iii] claimants of out-of-work legacy benefits like JSA see benefit withdrawn pound for pound as earnings rise.
14. However, UC increases the number of families facing still high METRs of 60% to 80%. UC also increases PTRs for potential second earners, reducing their financial pay off from working.
15. Under both the legacy and UC systems, families with children are more likely to face weak financial work incentives compared to those without children. But families with children tend to benefit from bigger falls in METRs from moving to UC, while those without children face higher METRs after the move. Single parents tend to see significantly lower METRs and PTRs under UC, especially at lower hours.[8] The 2018 Budget increased work allowances, improving incentives further for many families with children, but not for those without children.
16. Despite this overall improvement in financial work incentives under UC, they remain weak. Most single parents still face METRs over 60% and have some of the weakest incentives compared to other family types, especially at 20+ hours per week. Hence, UC is relatively good at incentivising ‘mini-jobs’ but could incentivise some single parents to reduce hours below 16.[9]

Financial work incentives – questionable impact in practice

17. In practice, there is very little empirical evidence on whether UC’s improved financial work incentives translate into a real increase in labour supply. UC is still early in its rollout, but even more general evidence on labour market impacts of specific in-work credit designs is sparse.[10]
18. Early Department for Work and Pensions (‘DWP’) research found a small improvement in the proportion of UC claimants finding work within six months compared to legacy benefits.[11] However, this used a limited sample of very early UC claimants who were simple cases of single unemployed people with no dependents, whereas the final UC caseload will be dominated by parents, disabled people and carers. Job sustainability and quality was also not measured.
19. The difficulty of assessing UC’s success was summed up by the National Audit Office (‘NAO’) in 2018 when it concluded: “Both we, and the [DWP] doubt it will ever be possible for the [DWP] to measure whether the economic goal of increasing employment has been achieved.”[12]
20. Qualitative research with UC claimants can help us understand what is driving behaviour in reality.[13],[14],[15],[16] Many parents say they want to work more, regardless of the financial impacts of UC. But they are held back by factors such as a lack of routes to progress to higher paid jobs, low availability or high costs of training, and not enough local jobs of sufficient hours or quality. Caring responsibilities required part-time or flexible work that was in short supply, and they struggled against the cost, inflexibility or limited availability of transport and childcare.
21. Jobs that do allow the necessary balance of hours and proximity are overwhelmingly concentrated in the low-paid retail and hospitality sectors. These typically require more non-standard, evening and weekend work. As most formal childcare is unable to accommodate these working patterns, this is a high barrier to working parents, particularly single parents.[17]
22. Childcare costs have risen much faster than inflation over the past decade. UC provides more generous childcare support than legacy benefits for most claimants. However, under both systems, the maximum childcare support has not changed since 2005 and the average cost of a full-time nursery place now exceeds the limit in almost all local areas.[18] Support in UC is further undermined as childcare fees have to be paid upfront, which many are unable to afford to do.
23. Although these broader barriers are of primary importance, financial work incentives under UC are still felt to be weak, particularly for working parents. Some weigh up the extra costs of childcare, transport, loss of UC, etc. and the loss of time with their children and feel that the financial gains from increasing hours are not enough.[19] The design of UC is also not well understood, especially the taper, so does not act as an incentive. But even when explained, most claimants don’t feel the gains sufficiently outweigh the extra costs and barriers.
24. Removing those additional barriers is central to enabling parents to work more, but improvements to UC could also help. Claimants felt increasing the work allowance would have the greatest impact on lower earners’ incentive to increase hours. One suggested that setting the work allowance to reflect 16 hours per week at minimum wage would make the difference between “feeling like you’re earning, you’re not struggling”. They thought reducing the taper rate would help increase hours further, with 50% seen as a ‘fairer’ rate than currently.
25. Finally, other non-financial aspects of UC’s design, such as its dynamic monthly assessment structure, are creating complexity that may harm work incentives (see paragraph 34).

Extended conditionality is unlikely to be effective

26. UC extends ‘conditionality’ to a million more claimants than under the legacy system, including parents of very young children and families already in work.[20] UC can also result in harsher ‘sanctions’ than under legacy benefits. For example, multiple sanctions are applied consecutively rather than concurrently, so total sanction durations can be longer.
27. DWP’s trials on UC’s in-work conditionality suggest very limited earnings impacts, with sanctions having no discernible effect.[21] Broader evidence on the impact of sanctions on labour market outcomes is also mixed, with the Government yet to complete an evaluation of UC sanctions.[22],[23],[24],[25] However, the impact of sanctions on claimants’ wellbeing can be devastating and they are a key driver of destitution (see paragraph 45).[26]

Inadequate incomes for working families means work increasingly does not pay

28. In-work poverty has become the problem of our times, with 56% of people in poverty now in a working family, compared with 39% 20 years ago.[27] In recent years, this has been driven by increasing risk of poverty for working parents, with 70% of children in poverty now in a working family. Working single parents have seen the fastest rise in poverty rate with full-time workers facing steeply increasing poverty rates as well as those in part-time work.
29. Despite recent employment and earnings growth, high housing costs and cuts to both UC and legacy benefits have pulled more working families into poverty. UC (and legacy benefits) are therefore failing to ensure work provides a route out of poverty for millions of people.
30. However, compared to the legacy system, UC will result in 300,000 fewer people in working families in poverty. Cuts to UC mean fewer people gain from the move to UC than originally intended, but 3.9 million people in poverty in working families will still gain. This is welcome, but 1.7 million people in poverty in working families will be pulled deeper into poverty by the move. It will also result in 200,000 more people in out-of-work families in poverty overall.[28]

How well is UC achieving simplification of the benefits system?

31. Some simplification has been achieved, for example becoming administratively simpler for those moving between unemployment and work, where they would previously have had to apply for new benefits with each move. UC also gives access to a range of previously separate streams of support (e.g. for housing or child-related costs) via one claim.
32. However, some of UC’s design features do not fit with the reality of claimants’ lives, adding new complexity for many. UC’s monthly assessment and payment in arrears structure is partly based on the idea of matching how most people in work get paid. But most workers on UC don’t get regular monthly wages, even if the majority of workers overall do.[29] Hence this design is founded on a misunderstanding of the bottom end of the labour market. It can cause budgeting and cash flow problems for claimants used to receiving more frequent wages. It also results in the problematic five-week wait for the first payment (see paragraph 46).
33. Growth in insecure work with varying hours has added to the problem. UC was designed to respond dynamically to changes in earnings, with awards assessed and automatically adjusted based on the prior month’s earnings using data from employers. But claimants tell us that this design may be in one sense too responsive and in another not responsive enough.[30],[31],[32],[33]
34. Firstly, the monthly reassessment can result in constantly changing UC payments which claimants find hard to predict. This is particularly the case for those with fluctuating hours, such as zero-hours contracts. But it also affects those in regular non-monthly wage cycles. For example, those paid weekly will receive five weeks of pay in some UC assessment periods and four weeks of pay in others. This means that in some months they appear to be earning much more than usual and in others less, leading to artificial fluctuations in their UC award.
35. Secondly, the rigid monthly in arrears structure means that payments are received with a lag after people’s earnings have changed. One claimant commented that a ‘good month’ on a zero-hours contract could result in significant reductions to the next month’s UC payment, which could then coincide with a month of severely reduced hours and earnings.[34] Claimants value predictability of payments extremely highly, but UC’s uncertainty can make budgeting difficult and add complexity and anxiety to people’s lives, even disincentivising moves into work.
36. UC’s “digital first” nature also makes it harder for some claimants to apply and manage their claims.[35] It is particularly inappropriate for claimants experiencing digital exclusion due to cost, access, connectivity, health or digital skills issues.
37. A core benefit of UC’s planned greater simplicity was expected to be increased take-up, but there are no published take-up figures on UC yet. Evidence that UC remains complex to interact with, along with the possibility that in-work conditionality could depress take-up, is concerning.

The missing objective: protecting people from poverty and destitution

38. As a country that believes in compassion and justice, one of the core goals of our social security system should be to act as an anchor against the currents that can pull us into poverty or destitution. UC has the potential to be a poverty-fighting system, but the omission of such a core objective has allowed policy decisions to occur that have the opposite effect.

The impact of UC on poverty

39. UC was originally designed to be more generous than the legacy system, with many more families seeing entitlements rise than fall. DWP predicted that UC would reduce the number of people in poverty by 900,000 (excluding dynamic effects of more people moving into work).[36]
40. Successive cuts to UC made it far less generous than originally intended, but recent reversals mean UC is once again expected to be more generous than the legacy system. Crucially though, if the higher take-up assumption proves wrong then UC is still the less generous system.[37]
41. Our analysis, assuming improved take-up, suggests that UC will now result in around 100,000 fewer people in poverty overall than under the legacy system.[38] But this masks a huge number of gainers and losers, mostly in working families. 5.5 million people in poverty will see their incomes increase, whereas 3 million people in poverty will see them fall.
42. Amongst working families, groups at the highest risk of poverty – parents, renters and those who work fewer hours - are the most likely to gain from the switch to UC. For out-of-work families, single parents and adults without children are most likely to see reduced incomes.
43. It’s particularly concerning that some of the largest losses are concentrated amongst disabled people.[39] It’s simply wrong that being disabled should put you at a higher risk of poverty. Yet 31% of disabled people live in poverty, compared to 20% of the non-disabled population. Nearly half of people in poverty are either disabled themselves or live with a disabled person.[40]
44. UC has also suffered from cuts applied equally to the legacy system. Although these reductions occur in both systems, they make it harder for UC to do its job and live up to its potential to act as an anchor against poverty. The single largest policy driver of recent rises in poverty has been the freeze in benefits at 2015 values, affecting both working and non-working claimants. This will have pulled 400,000 people into poverty by the time it is unfrozen in April 2020.[41] Help with the cost of rent in the private rental sector via Local Housing Allowance (‘LHA’) was also delinked from rent levels in 2013 before being frozen, so no longer keeps up with rental costs.

The impact of UC on destitution

45. Delays or gaps in benefit payments, sanctions, and unaffordable debt repayments are key drivers of destitution.[42] More sanctions under UC could therefore lead to more destitution, but UC could increase destitution in at least two other ways (JRF’s destitution update report due later in 2020 should provide more insight into the relationship between UC and destitution).
46. Firstly, UC’s monthly payment in arrears means that, by design, new claimants must wait a minimum of five weeks for their first payment. Without enough money to get through this period, people can be tipped into destitution.
47. Secondly, this long wait can force people into debt, again increasing the risk of destitution. The Government encourages people to take out a loan (called an ‘advance payment’) to tide them through. But this puts them into debt from the start of their claim and repaying this can leave them without enough to afford essentials over the following year.
48. Around two in five families (2 million) due to move onto UC by the time it is fully rolled out will be unable to meet basic living costs during the five-week wait.[43] Of these, around 700,000 will continue to face a shortfall as they repay their advance payment over the following year.
49. These concerns are mirrored in evidence of the relationship between UC and increasing food bank use,[44],[45],[46] higher prevalence of severe problem debt amongst UC claimants,[47] and increases in rent arrears following the introduction of UC in an area.[48]

Recommendations

50. More investment in UC and improvements to its design are needed to help it live up to its original objectives and its potential to loosen the grip of poverty. Underlying this must be a new guiding principle that UC should prevent destitution and help reduce poverty, as part of a wider strategy involving better quality jobs and more affordable, secure homes.
51. The Government must also commit to working closely with claimants on any changes to UC to help ensure that UC reflects the reality of people’s lives. Priorities for change in UC include:
52. Increasing work allowances and reducing the taper rate would strengthen work incentives and help protect families on low earnings from poverty. New work allowances for second earners or single parents could be particularly effective. Raising existing work allowances by £1,500 per year would help 300,000 people out of poverty and cost £2.9 billion per year.[49]
53. Working parents can be further supported by reducing childcare barriers. UC should pay childcare costs upfront, with limits raised to at least £240 a week per child.
54. Increasing the value of UC’s child element would also be particularly effective at reducing poverty in working and non-working families with children. Increasing it by £10 per week would help 400,000 people out of poverty at a cost of £2.8 billion.[50]
55. Although benefit levels will soon start to rise with inflation again, support for housing costs will remain detached from rents. LHA should be relinked to the 30th percentile of local rents.
56. The Government must end the minimum five-week wait for the first UC payment:[51]

a)    Ultimately, fortnightly payments should be made available to all from the start of a claim, meaning the first payment would come after two weeks. A range of options exist for doing this, but one would be to make the initial payment halfway through the first month based on an estimated entitlement, which is reconciled at the end of the month.

b)    We welcome the two-week ‘run-ons’ of some legacy benefits for claimants who move to UC from July 2020. These should be extended to child tax credits to help families with children, which would cost £430 million over the four remaining years of the rollout.

c)     Upfront non-repayable grants should be targeted at those most in need. This would cost between £300 million and £1.3 billion over four years, depending on the level of targeting.

57. Finally, DWP should start publishing UC take-up estimates in order to assess how successful UC has been in achieving the increased take-up assumed to flow from simplification.

28 February 2020

References

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