Welfare trap

From Academic Kids

The welfare trap is a name for the phenomenon by which taxation and welfare systems jointly contribute to keep people on social insurance. This is also known as the unemployment trap or poverty trap in the UK.

An example of how the welfare trap works is as follows: A person on welfare finds a part time job that will pay her a minimum wage of five dollars per hour, eight hours per week. The forty dollars she earns will be deducted from her welfare payments leaving her with no net gain. Frequently, there is a net loss as the government will tax her forty dollars, leaving her worse off. There may also be extra child-care and commuting costs. Despite performing eight hours of work productive to society she is now worse off than she was before. Since entering the work force often begins with jobs such as the one in this example, the welfare trap contributes to permanently excluding a section of the population from the work force.

In the UK, there is a distinction between two concepts:

  • the unemployment trap occurs when the net income difference between low-paid work and worklessness benefits is less than work related costs, discouraging movement into work;
  • the poverty trap refers the position when in-work income-tested benefit payments are reduced as income rises, combined with income tax and other deductions, with the effect of discouraging higher paid work whether that involves working longer hours or acquiring skills.

There have been a number of solutions proposed to this problem. Typically, they involve lowering taxes on the poor, and/or not deducting small wages from welfare checks, thus allowing a person on welfare who finds a part-time minimum wage job to make a net gain.

More radical solutions have also been proposed. Some people advocate dramatically cutting welfare payments or eliminating them entirely, but this would leave the very poor no protection from starvation and death, therefore it arguably creates a bigger problem than it solves. However, others argue that lower welfare benefits from the government provides added incentive to work. Other schemes are the guaranteed minimum income and a negative income tax.

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