Earnings top-up evaluation: effects on unemployed people
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Resaerch Division, Department for Work and Pensions Security, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 131
Part One: Surveys of Unemployed People
By Alison Smith and Richard Dorsett
Part Two: Econometric Analysis
By Abigail McKnight
Earnings Top-up (ETU) was an in-work benefit available to low paid workers without children. ETU was piloted from October 1996 to October 1999 in eight areas across Britain. This volume is part of seven final reports from the evaluation of the ETU pilot, conducted by researchers at the Policy Studies Institute (PSI), the Centre for Research in Social Policy (CRSP) at Loughborough University and the Institute for Employment Research (IER) at the University of Warwick. Part One considers unemployed people’s experiences of ETU, benefits, their income, contact with the labour market and labour market outcomes. Part Two assesses the overall impact of ETU on unemployment and the effect on individual groups of unemployed people.
The main findings include:
Survey of unemployed people
- ETU appeared to have no significant influence on movements into work. A serious obstacle was lack of awareness of ETU among this group.
- Those in pilot areas who found work since their 1998 interview were more likely to earn lower wages than those in control areas.
- Respondents with lower expected wages were more likely to find work, but wage expectations were not influenced by ETU.
Econometric analysis
- After the introduction of ETU, inflows to unemployment in the pilot areas fell relative to comparison areas. ETU led to an increase in net outflows from unemployment in the pilot areas.
- The impact of ETU on inflows and outflows was greater among single, unskilled benefit claimants in the younger (16-24 years) and the older (males 55+, females 45-54 years) age groups. ETU appears to have had a greater impact on single women than men, and on those living in rural areas.
- Some of the gains of the target population were at the expense of other groups (non-single claimants aged 35-44 with slightly higher levels of skill).
Part One – Surveys of unemployed people
Research Methods
The focus here is on one part of the evaluation: the surveys of unemployed people. The initial sample was selected in spring 1996, and interviewed in summer 1996 and summer 1997. This report discusses the later sample selected in spring 1998 and interviewed in summer 1998 and summer 1999. It comprised people without dependent children who had been claiming either Jobseeker’s Allowance (73 per cent) or Income Support for between 26 and 65 weeks. Their experiences of ETU, and particularly whether ETU played any role in helping them into work are explored. Comparisons are made between:
- The interviews carried out with the second sample in 1998 and in 1999.
- The 1998/9 survey and the earlier sample interviewed in 1996/7.
Characteristics of the 1998 unemployed survey
Gender and age
As in 1996, most of the unemployed sample were men (69 per cent). However, the age distribution of the 1998 sample was significantly different from the 1996 survey. Whereas in 1996 32 per cent of the sample were aged under 25, by 1998 this proportion was 19 per cent. There was a corresponding increase in the proportion of respondents aged 45 or over from 37 per cent in 1996 to 47 per cent in 1998 (Section 2.2).
Marital status, household type and housing tenure
Almost half of respondents were single (48 per cent), 23 per cent were widowed, separated or divorced and 29 per cent were married or cohabiting. In 1998, female respondents were far more likely to be living with a partner (40 per cent) than were men (27 per cent). The proportion of women with partners almost doubled from 22 per cent in 1996 to 40 per cent in 1998.
Thirty six per cent of respondents lived alone in 1998, compared with 27 per cent in 1996. Just under a quarter (24 per cent) lived with their parents in 1998, down from 36 per cent in 1996. Thirty per cent of respondents were living in accommodation where their parents paid the housing costs (compared with 42 per cent in 1996). Another nine per cent were living in a property they owned outright while 10 per cent were buying a property with a mortgage. More respondents were renting accommodation in the 1998 survey – 44 per cent compared with 29 per cent in 1996. These were important changes as ETU was most attractive to out-of-work people with low housing costs.
Educational qualifications
On average, respondents in the 1998 survey had fewer educational qualifications than did those in the 1996 survey. Almost two-thirds of respondents had no academic qualifications (65 per cent compared with 55 per cent in 1996) and just eight per cent had qualifications at A level or above. Women tended to be less well qualified than men. Vocational qualifications were held by only 37 per cent of respondents and almost half of the sample (47 per cent) had no recognised qualifications at all.
Health and caring responsibilities
Forty three per cent of the sample reported a long-standing illness or disability, an increase of seven percentage points from the 1996 sample. Sixteen per cent of respondents said they were in receipt of a disability benefit. More than half of women said they had a long-standing health problem (52 per cent compared with 36 per cent of men) and 21 per cent received a disability benefit. Ten per cent of respondents said they spent time caring for someone with a longstanding illness or disability.
More than three-quarters of those sampled as receiving Income Support (77 per cent) reported a long-standing illness or disability and 52 per cent said they were receiving disability benefits. In contrast, 30 per cent of those sampled as receiving Jobseeker’s Allowance had health problems and just three per cent said they were receiving disability benefits.
Area differences
The characteristics of respondents in the control areas should have matched the characteristics of respondents in ETU areas as closely as possible in order to assess the impact of ETU. Overall, there were few differences; the most noticeable deviation is that fewer respondents lived alone in control areas (29 per cent compared with 37 per cent in Scheme A and 42 per cent in Scheme B areas). Linked to this was the higher proportion of respondents with partners in control areas (36 per cent compared with 29 per cent in Scheme A and 30 per cent in Scheme B areas).
Income and benefits
Receipt of benefits
Few people reported receipt of ETU at either interview. At first interview, most people were receiving Jobseeker’s Allowance (49 per cent) or Income Support (31 per cent). More people in the 1998 survey were receiving Council Tax Benefit (35 per cent) and Housing Benefit (43 per cent) than in the 1996 survey (22 per cent and 27 per cent respectively). Almost all people in rented accommodation said they received Housing Benefit (91 per cent) and 43 per cent of people with a mortgage received help in the form of Income Support with their mortgage interest payments. Sixteen per cent of respondents were receiving a disability benefit and the most common type was Incapacity Benefit claimed by 57 per cent of these people. At first interview, the mean amount of benefits received per week was £62.24 (excluding Housing Benefit, Mortgage Interest premium and any disability benefits).
Housing costs
The average contribution made by respondents who lived in accommodation where their parents paid the housing costs was about £20 per week. Most tenants received Housing Benefit that met the full costs of their housing, an average of £42 per week. Average mortgage payments were similar at around £45 per week and Income Support assistance averaged £27 per week.
Material and financial well-being
Almost half the sample (48 per cent) said there were things they needed to buy at present that they did not have the money for. Nineteen per cent of respondents responsible for paying household bills said they were behind with their payments and almost eight out of ten respondents (78 per cent) said they had worried about money in the last few weeks. Fifty three per cent said they had trouble repaying debts over the previous two years. Seventeen per cent admitted to financial difficulties and 13 per cent thought they did not manage very well. Only 27 per cent of respondents had money saved and the median amount was only £100 (Section 3.5). Many relied on family and friends for support. They were more likely to borrow money from friends or relatives than more formal sources and more than a fifth of those living with parents felt they could not afford to move out even though they wanted to.
Contact with the labour market
Economic status at first interview in 1998
There was an average gap of 70 days between the 1998 sample being selected and respondents being interviewed. During that time 11 per cent of the sample had moved into paid work: seven per cent were working for 16 or more hours per week, three per cent were working less than 16 hours per week and one per cent were self-employed. Six per cent were undergoing some form of training or education and 63 per cent said they were unemployed and claiming benefit. One in ten people said they had been sick or disabled for more than six months at the time of first interview.
Economic status at second interview in 1999
Few people had moved into work in between first and second interviews (an average of 10 months). By 1999, still only 13 per cent were working 16 or more hours a week, three per cent were working less than 16 hours and two per cent were unemployed at second interview. Just under half said they were unemployed and claiming benefit (49 per cent) and 15 per cent said they had long-term ill health. Ten per cent were undertaking training or education.
At both interviews, young people and those with educational qualifications were more likely to have moved into work. By second interview, 26 per cent of respondents aged under 25 were working 16 or more hours a week as were 22 per cent of those with qualifications at A level or higher. Return-to-work wages were low at around £3.78 per hour for a 37 hour week. Although few people had moved into work, some of those who had were claiming ETU (13 per cent at first interview and 23 per cent at second).
Previous work experience
The 1998 sample of unemployed people did not have a great deal of recent work experience. Forty four per cent of the sample said they had not worked in the previous five years and another 14 per cent said they had never had a paid job. On average, respondents had spent 15 per cent of the previous five years in full-time work and over half (54 per cent) of the time unemployed and claiming benefit. Only one in eight respondents who had worked in the previous five years had work experience in a professional, managerial or technical occupation and the majority worked in personal sales and services, in craft occupations, clerical work or as plant operatives. More than one-fifth of respondents said they had left their previous job because of ill health.
Looking for work
Of the non-working respondents at first interview, 38 per cent had not looked for work in the previous four weeks. However, one-third of these said they would have liked a job if a suitable one were available. Sixty per cent of these said they were not currently looking for work because of health problems, 10 per cent had caring responsibilities, and 11 per cent were undertaking further training or education. The majority of people not looking for work were Income Support claimants when sampled as only 18 per cent of non-working respondents who had been in receipt of Jobseeker’s Allowance at sampling said they were not looking for work when interviewed.
Male respondents (72 per cent), single people (70 per cent) and those with educational qualifications (76 per cent of people with both academic and vocational qualifications) were more likely to be looking for work. In contrast, only 44 per cent of people living with a partner were looking for work as were 43 per cent of respondents aged 55 or over and 42 per cent of those who reported a long-standing illness or disability. The most commonly used jobsearch methods were looking at advertisements in newspapers (89 per cent) and in the Jobcentre (81 per cent).
Aspirations for the future
Most people looking for work at first interview were seeking employment (69 per cent) while 10 per cent particularly wanted self-employment and 21 per cent were prepared to consider either. One in ten people specifically wanted to work less than 16 hours per week. The minimum wages jobseekers were prepared to accept were £3.50 per hour on average and by second interview these had risen to £3.75 per hour. Women were prepared to accept lower wages as were those living with parents. Above average wages were sought by people with partners, respondents aged 55 or over, those with degree level qualifications, and those with mortgages. Few people expected to be much better off if they got a job paying their minimum acceptable wage (14 per cent), and a similar proportion expected to be worse off (13 per cent).
There was no difference between ETU Scheme areas and control areas overall, but respondents in some areas (for example, Sunderland at £3.16 per hour) gave lower minimum wages than those in other areas (such as Southend at £4.25 per hour). However, there was no strong indication that ETU had suppressed aspiration wages for unemployed people in the individual Scheme A and B areas compared with their control areas.
Just over half of respondents (54 per cent) thought they would be working more than 16 hours per week over the next few years and 77 per cent of these believed they would no longer be claiming benefit. Almost one in three thought they would remain unemployed (29 per cent). Respondents sampled as receiving JSA were more optimistic about working in the future (65 per cent) than those sampled as receiving Income Support (22 per cent). Single people (61 per cent) and younger respondents (81 per cent of those aged under 25) were also more likely to think that they would be working over the next couple of years.
Labour market outcomes
The main findings can be summarised as follows
- People living in an ETU pilot area were no more likely to enter work than those in the control areas.
- Those in the pilot areas who found work since their 1998 interview were more likely to earn lower wages than those in the control areas.
- Respondents with lower expected wages were more likely to find work, but expected wages were not influenced by ETU.
Therefore, people with lower wage expectations were more likely to find work. As ETU seemed ineffective in reducing expected wages, it was unsurprising to find that ETU was similarly ineffective in helping the unemployed back to work. However, the concept of expected wages is, to some extent, notional and the level of these expected wages may get revised during the jobsearch process, particularly if people become aware of in-work benefits while looking for work. One the other hand, the reservation wage (or minimum wage that someone will accept) exists as a fixed constraint at the point of job offer. As there may not be an exact match between expected and reservation wages, the result that ETU had no effect on expected wages should not be interpreted as evidence that it had no effect on reservation wages, particularly in the context of low overall awareness of ETU. The lower levels of wages among those who had found work in the pilot areas might indicate some effect of ETU on the reservation wage. However, this effect, if it existed at all, was not translating into an increased rate of job entry.
The experience of earnings top-up
Awareness of ETU
Almost two years after its introduction, awareness of ETU was low among this sample as only 29 per cent of respondents said that they had heard of the introduction of the benefit and just over half of these (16 per cent of all respondents) were able to name the benefit as ETU. People aged 25 to 34 had the highest level of recalled knowledge: 36 per cent said they had heard of the benefit and 21 per cent could correctly name it. Respondents with a partner were less likely than single people to recall ETU: 24 per cent said they had heard of the benefit and just ten per cent could name ETU.
Overall, there was little difference in awareness between Scheme A and Scheme B areas, but respondents in some individual areas had greater levels of awareness than others. Levels of awareness tended to follow the pattern of ETU awards, in that areas with the most ETU claimants (Sunderland, Newcastle, and Doncaster) also tended to be the areas where survey respondents had the best knowledge of the benefit. The lowest level of awareness was in Southend where 20 per cent of respondents said they had heard of the benefit and just seven per cent named ETU.
Respondents most commonly had heard of the benefit from official sources. Twenty per cent of people said it had been recommended at the Jobcentre or Employment Service office, 32 per cent said it had been mentioned there and nine per cent said they had seen a publicity display in the benefit office. Eighteen per cent said they had heard of ETU from friends, relatives or neighbours.
In 1999, awareness of ETU was slightly higher, though probably only as a result of the first interview in 1998.
Experiences of ETU
Few people were claiming ETU at either interview (24 respondents at first interview and 30 at second). Similar numbers had previously received ETU (32 at first interview and 34 at second) and 23 had applied for ETU and been turned down. The majority of people who were receiving, or had previously received, ETU said that working and claiming ETU was a better life for them than not working and claiming Income Support or Jobseeker’s Allowance.
Attitudes towards an Earnings Top-up benefit
Respondents were asked to imagine they were able to get earnings topped up with benefits while working 16 hours a week or more, and then asked whether they would consider a lower paid job than they wanted or hold out for a higher paid job. Overall, 59 per cent of respondents not in work said they would take a lower paid job and get an Earnings Top-up. Women were more likely to find an Earnings Top-up acceptable (63 per cent) as were those aged 25 to 34 (66 per cent). People with a partner tended to be more reluctant to accept a top-up (53 per cent) as were those who said they had a long-standing illness or disability (54 per cent). People in Scheme A areas were slightly more likely to say they would accept a top-up (62 per cent) than those living in Scheme B areas (57 per cent) or control areas (58 per cent).
People who were working at least 16 hours a week at interview were asked if they would apply for a similar benefit to ETU (that topped up their earnings) if one was available. Two-thirds of those currently working at least 16 hours per week (but not claiming ETU) said they would apply for such a benefit but 69 per cent of these said they would maintain their present working hours even if it meant they did not get a top-up. The majority of people who were working less than 16 hours per week said they would increase their working hours to get a top-up benefit. Views were unchanged a year later at second interview.
Conclusion
In the gap between selection and first interview, a minority of respondents had found work, most of it fairly low paid. A few of those in the pilot areas had also claimed ETU when entering work, but too few to be counted as an influence on people’s rate of return to work. Of the remainder, many respondents seemed likely to experience continued difficulties getting and keeping work. Typically they were poorly educated and often had only little recent previous work experience. Significant numbers reported health problems or caring responsibilities that restricted their participation in paid work. At first interview, the prospects for this sample seemed less encouraging even than those faced by a similar sample interviewed in 1996.
A crucial distinction lay between those paying or not paying for their accommodation. For people paying rent, working and claiming ETU usually incurred a substantial loss of Housing Benefit leaving them with little additional income as workers. In the 1998 sample, 44 per cent of respondents were tenants and another ten per cent had a mortgage to pay. This was much higher than in the corresponding 1996 survey and as a result, the minimum wages they said they would accept were higher, which tended to place more of them beyond the reach of ETU.
A serious obstacle to ETU helping this unemployed sample back into work was the lack of awareness of the benefit itself. At first interview, recalled knowledge was disappointingly low, considering the sample was comprised of people with recent experience of claiming benefit for at least six months and living in areas where ETU had been available for around two years. Furthermore, not everyone liked the idea of a top-up to potential wages in work even when such a scenario was put to them (41 per cent). Qualitative research on ETU indicates that some people felt that there should be no need for a benefit top-up as employers ought to pay a ‘decent wage’ in the first place (Vincent et al, 1999). The introduction of the National Minimum Wage can be seen, in part, as a reflection of this view and indeed was enough to move many people out of eligibility for ETU. Clearly, if some type of wage supplementation were to be introduced for workers without dependent children, it would need to allow for higher wages than the ETU pilot did.
Few respondents had moved into employment of 16 or more hours a week by the time of second interview (13 per cent) and ETU appeared to have had no significant influence on movements into work. However, it is important to remember that this sample was not representative of all unemployed people in the pilot areas at that time. It may be possible that ETU had a measurable effect on movements into work for people who had been unemployed for shorter periods of time. It is also possible that there were too few movements into work for us to be able to reliably capture any ETU effect unless it was particularly large. The aim of the evaluation was to compare the pilot areas with the control areas and to attribute any difference to ETU. But, for the size of the effect to be measurable there would need to be widespread knowledge of the benefit. The evidence from this survey is that awareness was poor and as advertising for ETU was stopped just six months after the benefit was introduced this is not surprising.
ETU also appeared to have no influence on the wage expectations of those who remained unemployed. However, the concept of expected wages is, to some extent, notional and the level of expected wages may get revised during the jobsearch process, particularly if people become aware of in-work benefits while looking for work. In contrast, the reservation wage is the minimum wage that someone will accept at the point of job offer. In the context of low levels of awareness of ETU, the result that ETU had no effect on expected wages should not be interpreted as evidence that it did not, or could not, have lowered reservation wages.
Part Two – econometric analysis
In this paper an analysis of unemployment benefit claims before and after the introduction of Earnings Top-up in a number of pilot areas has been conducted. The results indicate the after the introduction of ETU, inflows to unemployment in the pilot areas relative to comparison areas fell. There also appears to be an increase in outflows as a share of inflows after the introduction of ETU in the pilot areas. It has been shown, with the aid of a skill classification of unemployment benefit claimants, that the period during the ETU pilot was associated with falls in inflows into unemployment in the pilot areas relative to the comparison areas for unskilled claimants in the younger and older age groups. Unskilled unemployment benefit claimants also appear to have benefited in terms of an increase in outflows relative to inflows. However, some of these benefits may have been at the expense of the low skilled group, couples and those aged 35-44. ETU appears to have had a greater impact among single women than men and individuals living in rural areas where low pay is prevalent.
An analysis of transitions between unemployment benefit and claims for ETU supports these findings. A larger proportion of women than men completing spells of unemployment moved into a job supported by ETU. These transitions are greater in the ETU Scheme B areas (where the more generous version of ETU was being piloted) and for lower skilled benefit claimants. ETU claimants moving from unemployment go on to make a larger number of subsequent claims compared with all ETU claimants. The large number of subsequent claims may explain why the introduction of ETU has led to a reduction in flows into unemployment as well as flows out of unemployment. Overall the results suggest that an in-work benefit for single people and couples without dependent children can not only raise incomes of low paid workers but also reduce the harmful churning at the lower end of the labour market. Recent research (Gregg, 2000) has shown that the experience of unemployment early in an individual’s career (even after controlling for individual specific characteristics) is associated with poorer outcomes in later life. The benefits of ETU to the younger age group (16-24 years) suggest that any future employment tax credit could benefit this group in the short and longer term.
Publication details
Smith, A., Dorsett, R. and McKnight, A., (2001) “Earnings Top-up Evaluation: Effects on Unemployed People”, Department of Social Security Research Report No. 131, CDS: Leeds (£38.00)
Relevant publications
Marsh, A., (2001) “Earnings Top-up Evaluation: The Synthesis Report”, Department of Social Security Research Report No. 135, CDS: Leeds.
Marsh, A., Stephenson, A., Dorsett, R and Elias, P., (2001) “Earnings Top-up Evaluation: Effects on Low Paid Workers” Department of Social Security Research Report No. 134, CDS: Leeds
Heaver, C. Roberts, S. Stafford, B. and Vincent, J. (2001) “Earnings Top-up Evaluation: Qualitative Evidence”, Department of Social Security Research Report No. 133, CDS: Leeds
Lissenburgh, S., Hasluck, C. and Green, A. (2001) “Earnings Top-up Evaluation: Employers’ Reactions,” Department of Social Security Research Report No. 132 CDS: Leeds
Vincent J., Heaver, C., Roberts, S. and Stafford, B., (2001) “Earnings Top-up Evaluation: Staff Views”, Department of Social Security In-house Report No. 74, London
Green, A. (2001) “Earnings Top-up Evaluation: Labour Market Conditions”, Department of Social Security In-house Report No. 75, London
Marsh, A., Callender, C., Finlayson, L., Ford, R., Green, A and White, M., (1999) “Low Paid Work in Britain”, Department of Social Security Research Report No. 95) CDS: Leeds
Finlayson, L., Ford, R., Marsh, A., Smith, A., and White, M., (2000) “The First Effects of Earnings Top-up”, Department of Social Security Research Report No.112) CDS: Leeds
Vincent, J., Abbott, D., Heaver, C., Maguire, S., Miles, A., Stafford, D., (2000) “Piloting Change”, Department of Social Security Research Report No. 113 CDS: Leeds