Making Work Pay Requires More Social Protection Expenditure

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What are we to make of the two headlines this morning?  First, from the Irish Times:

‘Work pays better than welfare for most unemployed, ESRI finds’

And then there’s this from the Irish Independent:

‘Why families are better off staying on social welfare’

Both stories refer to a study that will be launched today by ESRI researchers, using the institute’s Switch tax-benefit model that allows a detailed examination of households’ financial situation both in work and out of work.  I will be going into more detail once this report is published but in this post I want to address a broader narrative: namely, to ‘make work pay’ requires more social protection spending and more public intervention into key markets.

The Irish Times reports two findings:

  • Nearly six out of seven people would be financially better off in work than on welfare (or nearly 85 percent)
  • Among those people in employment or unemployed facing a situation where work pays less than welfare, more than 70 per cent chose work rather than welfare.  So much for ‘life-style’ choices.

The Irish Times report goes on to state that:

‘The finding appears to debunk the myth that Ireland’s relatively generous social welfare system gives no incentive for people to work.’

Of course, we don’t have a relatively generous social welfare system but that’s another story.

The Irish Independent, however, focuses on the small numbers who would be better off on social protection.  They report that 45,000 workers would not receive any benefit from taking up work, of which 22,000 would actually lose money.  However, even the Indo report admits that most people still take up work, regardless of the financial impact.

So to the degree that people are not better off taking up work, what is the reason?  It centres around three main issues, according to the newspaper reports: childcare, rent supplement and transport costs.  It should be pointed out (and hopefully the ESRI report will do this) that these issues impact not only on households who do not gain from taking up work; it also impacts on households in work, who are better off than being on social protection, but who are nonetheless being squeezed by high costs and low wages.

Let’s briefly canvas these three issues.

(a)          Childcare

The Independent reports that childcare costs take up 40 percent of the average wage.  Ireland has one of the highest childcare costs in the EU.  The reason is that in Ireland childcare is delivered on a market-model.  Costs have to be recouped through childcare fees.  In other EU countries, with much lower costs, childcare is delivered as a public service.  In other words, households are not expected to pay the full costs of the childcare.

To provide affordable childcare the state must become actively involved in the delivery of childcare at greatly subsidised rates.  This could be done through local authorities, in partnership with community and not-for-profit childcare groups.  But the key is to greatly reduce the costs to households.  This would be a huge windfall to families.  Imagine childcare costs falling from €800 a month to €250 a month.  This would be a social and economic boon.    But this can only be done through major public intervention (here is an example of how it would work).

(b)          Rent Supplement

Another major issue is the loss of rent supplement once the recipient works more than 30 hours.  This is a significant loss.  However, throwing more money into rent supplement – while providing a short-term gain to workers struggling on the breadline – is not the long-term solution. The long-term solution is the provision of affordable and quality rental accommodation to people both in and out of work.  History shows that the major advances in providing decent and affordable housing are state-driven – from Red Vienna to our public housing drives in the 1930s to 1950s.

This will require a major reconfiguration of how we provide housing, especially for low and average income groups.  This will require the state – through a public enterprise or a quasi-public corporation (the latter keeps expenditure off the state books) – to provide housing at affordable rents in both the public and private sectors.  Indeed, the key is to abolish the distinction between public and private rental housing.  This will require not only significant investment but a major change in policy focus.  In this new dispensation, a more rational subsidy regime could be introduced.

(c)           Transport

We will have to await the details of the ESRI report to assess exactly what transport costs are imposing a burden on low-average income households.  However, subsidies to urban public transport in Ireland are low compared to other EU cities.  For instance, the public subsidy to Dublin Bus is 29 percent of revenue; in Brussels it is 67 percent – more than double.   If our public transport were subsidised to the same extent as other EU cities, fares could fall.  Alongside an investment programme to improve routes and frequency, this would not only benefit public transport users, it would hopefully improve traffic flows which would benefit car users.  But the starting point is investment and subventions of Irish public transport at the same level as other EU cities.

* * *

We can add to this list:  an increase in the national minimum wage, strong wage floors under the reconstituted Joint Labour Committees, an end to zero-hour/low-hours contracts.

What does all this lead us to?  To make work pay requires a substantial extension of the welfare state, an increase in social protection:  affordable childcare, affordable housing, and lower public transport costs.  It requires a substantial intervention in key markets – notably in the housing and labour market.

The last thing we need, if we want work to pay, is tax cuts.  Tax cuts won’t address any of these issues. We need more social investment – one that would pay off as households see their living standards rise and provide them an opportunity to participate more fully in the economy.

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