Escaping from the Poverty Trap

There is a timely article on the existence of the poverty trap here in the Financial Times. The article draws on some of the recent research by the Centre for Social Justice which has looked at the disincentives facing people who want to earn extra income either by leaving the unemployment register or by taking a second job or working some extra hours. There are hundreds of thousands of people whose ‘effective marginal tax rate’ is well in excess of sixty per cent.

As this article in the Times makes clear “Marginal tax rates actually refer to the extra tax you pay in proportion to every extra pound you earn as your income rises.:

And for others, the net gains from earning higher gross incomes are even smaller.

The poverty trap comes about because for every £10 of higher incomes many lower-income families

1: A loss of income from tax and national insurance 2: The withdrawal of means-tested social security (welfare) benefits

Add in the financial costs of child care, traveling to and from work and the deterrent to finding a job or accepting some extra hours can be tough to overcome.

Disincentives matter hugely in the labour market and benefit reforms are likely to figure prominently in the manifesto of the Conservative Party at the next general election. It seems at the moment that they are taking a lead in developing a more radical approach to labour market reform. The Centre for Social Justice appears to be influential in reshaping their strategies to get people off benefits and into work.