Earnings top-up evaluation: synthesis report
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. 135
By Alan Marsh
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. The evaluation was conducted by 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. This report is one of seven final reports published from the ETU Evaluation and draws together the main results of the evaluation in one volume. The aim of the Synthesis Report is to provide a relatively short and non-technical overview of the evaluation’s conclusions drawn from all strands of the evaluation.
The evidence from the evaluation was mixed and there is no single verdict on the effects of ETU.
- The overall conclusion was that ETU had caused some marginal improvement in employment opportunities for the lowest-paid workers at the cost of small reductions in entry-level wages, especially for older workers. There may have been a very small additional cost in diminished employment for low-skilled (compared to the lowest-skilled) workers.
- ETU was well administered, and for those who received it, ETU met need and went some way to reducing hardship. It allowed some recipients to work shorter hours in their jobs and still do unwaged work such as caring.
- The take-up rate among eligible workers was low: 18 per cent in 1997, rising to 23 per cent in 1999. Five underlying causes of low take-up were identified:
- Geographical density – eligible workers were too sparsely scattered to support informal information networks which might prompt them to claim.
- Social isolation – eligible workers who failed to claim shared different social networks compared to ETU recipients.
- Low critical mass – geographical scatter and social isolation meant that the density of eligible people in most places was well below the critical mass needed to form an active customer base for a new in-work benefit.
- Poor Skills transfer – claiming ETU was both need-driven, and associated with prior experience of claiming income-tested benefits, especially Housing Benefit and Family Credit. Lack of such experience among eligible workers reduced claims.
- Lack of publicity - too few unemployed people and low-paid workers were aware of ETU.
- If it is set to accommodate the National Minimum Wage, an Earnings Tax Credit (ETC) will provide a large incentive to work, and it will overcome many of the problems associated with low take-up of ETU.
ETU and the Evaluation Programme
Earnings Top-up (ETU) was introduced in October 1996 as a three-year pilot scheme. It provided cash payments to low-paid people working at least 16 hours a week and who had no dependent children. ETU was the first new social security benefit to be piloted in this way and its aims were stated as follows:
"To improve the incentives for unemployed singles and couples without dependent children to take work of 16 hours or more each week, without worsening incentives for others.
To improve the incentives for those on low incomes to stay in work by raising their incomes relative to out-of-work support, without reducing their hours of work."
Two versions of ETU were piloted, Scheme A and Scheme B. Each provided typically £20-30 to single people and £35-45 to couples but differed in their range of qualifying incomes. Scheme B was available at higher incomes, ending for older single people at about £140 and for couples at £180 a week. Scheme A ended at about £130 and £170, respectively, but at just over £100 a week for single people under 25.
Schemes A and B were each piloted in a large urban area, a large town, a seaside town and a rural area. Four corresponding areas were selected as Control areas. For some areas, like Southend, Scheme A was set too far below local wage levels and few workers qualified.
The evaluation study focused on three main questions:
- What was the effectiveness of the benefit in terms of take-up among eligible workers and its effects on the people who claimed it?
- Did ETU improve employment for low-paid workers?
- Did this lower the wages paid to low-paid workers in these areas?
Consequently, the evaluation study was designed to measure:
- the speed of movement from unemployment into work;
- the numbers of claimant unemployment people;
- employment duration;
- employment volumes;
- the wages earned by the lowest paid workers its visibility and popularity among its intended customers;
- its ease of access and take-up rate among eligible workers;
- its effects on their incomes, especially if they were getting other benefits; and
- the effects of claiming or not claiming on opportunities and welfare, particularly among those who were eligible for ETU.
These measures were then compared:
- during the pilot period in the Scheme A and Scheme B areas, compared with Control areas; and
- during the pilot period compared with the period before the introduction of ETU.
Four approaches were taken to the evaluation of ETU:
- to study trends in administrative data;
- to carry out local labour market analyses.
- to carry out quantitative face-to-face, telephone and postal surveys with ETU recipients, potential recipients (in work and unemployed) and employers; and
- to carry out in-depth qualitative interviews with samples of recipients (including the self employed), ex-recipients, unsuccessful applicants, and employers; and discussion panels among staff.
These studies were carried out in 1996, before the introduction of ETU and, in varying combinations, in each succeeding year of the pilot.
Baseline studies of the local labour markets of the eight pilot and four control areas found no differences between them that would seriously bias subsequent comparisons between the two versions of ETU and the controls. No differences were found that would account for the very wide differences in the take-up of ETU that subsequently appeared.
The performance of ETU
A target of 20,000 claims for ETU in payment was exceeded in the first year, peaking at 24,500 in the beginning of the third year and falling back after the introduction of the National Minimum Wage in April 1999.
Four out of ten recipients were single people aged 24 and under and almost half (46 per cent) were single people aged 25 and over; 14 per cent were couples.
Recipients divided evenly between those working 16-29 hours and those working 30 or more hours and receiving an additional bonus for doing so.
The pilot design aimed to have equal numbers in each version of the benefit, but Scheme B attracted more customers than Scheme A: 57 per cent compared with 43 per cent of the total caseload at the end of three years.
Take-up was much higher in the industrial North and North East compared with the seaside towns and rural areas. There were six times more recipients in Sunderland than in Southend, for example.
Eighteen per cent of recipients had claimed ETU directly from a spell on out-of-work benefits; usually Job Seeker’s Allowance (JSA). Most of the rest had had their jobs for some while.
Wages were spread well below the maximum qualifying levels and about four in 10 had wages low enough to attract a maximum award. ETU recipients averaged £2.90 an hour.
Surveys of ETU recipients showed that:
The men were often working in transport, warehouse work, or as messengers, labourers and gardeners, or they were mates and apprentices to craft trades.
The women were found more in cleaning, catering, shop work, hairdressing, routine cashier and data-entry work, and most especially in care work in the private care industry.
Recipients had few educational or other qualifications. Eight out of 10 left school at the minimum age. One in ten had problems with literacy or numeracy.
Half the ETU recipients had no formal housing costs, usually because they were living with their parents. A third were tenants and half these got Housing Benefit. This means that ETU rarely replaced entitlement to Housing Benefit.
ETU met need, though substantial numbers of recipients continued to experience financial difficulties. Otherwise, many recipients said that ETU allowed them to work shorter hours while releasing them to follow other pursuits, including caring for a relative or other socially useful activities. It helped many to cope with poor health that limited their employment or to recover from difficult times in their lives. The few self-employed recipients found ETU especially useful in getting a start in business or shoring up failing enterprises until prospects improved.
Recipients were not well informed about ETU and knew little of how it worked.
Surveys of the customer base for ETU – low-paid workers in work – showed they had much in common with recipients. They were predominantly young, female, in unskilled or basic service and clerical occupations. Only a minority of them had heard of ETU, falling from 34 to 29 per cent over the course of the pilot, and only a handful of them had ever claimed it.
Though unaware, many workers were eligible for ETU, which means that the take-up rate among eligible workers was low: just 18 per cent in 1997, rising to 23 per cent in 1999.
The take-up rate for Scheme B was much higher than for Scheme A: 30 per cent compared with 14 per cent.
Although they lived in the same areas and earned similar wages, ETU recipients and eligible non-claimants (ENCs) differed widely. The take-up rate among single people was four times higher than for couples (37 versus 10 per cent). Otherwise:
- recipients were young, lived in the North East, claimed other means-tested benefits from time to time, and had histories of unemployment; while
- eligible non-claimants were older couples, dual-earners, homeowners, sometimes living with a disabled partner, rarely claimed other benefits, were homeworkers, self-employed, lived in Scheme A areas, had remained in their low-paid jobs a long while and were used to coping on small incomes.
These differences revealed five underlying causes of low-take-up:
- Geography: eligible workers were too scattered to support networks that would prompt widespread claiming.
- Social isolation: ENCs were not members of the same social networks inhabited by claimants.
- Critical mass: geographical scatter and social isolation combined to reduce the density of eligible workers, in most places, well below the critical mass that would form an active customer base for the new benefit.
- Skill transfer: recipients were the very lowest-paid of eligible workers sensitised to news of a subsidy by the experience of hardship and by earlier or current contact with the benefit system.
- The lack of publicity: far too few unemployed people and low-paid workers were aware of ETU.
The Impact on Employment
Studies of local labour markets found no clear evidence for more favourable local labour market trajectories in ETU areas compared with Control areas that might be attributable to the operation of ETU. In particular, there were no differences in:
- total employment volumes or the percentage changes in these;
- the percentage change in low-paid employment;
- trends in job vacancies;
- overall volumes or rates of unemployment; or
- trends in the duration of unemployment.
Multivariate analysis of employment spells among the three surveys of workers, unemployed people and ETU recipients confirmed that there were no differences in these histories that were attributable to the operation of the ETU pilot.
However, these three groups had different work histories. ETU recipients had suffered disrupted work histories since 1990, spending less time in work in the previous few years than had the low-paid workers who did not claim ETU. Their record was similar instead to the medium-term unemployed. Nothing in this analysis directly implicated ETU in changing the course of people’s job histories. Rather, people with ‘scarring’ experiences of early unemployment were more likely to be open to wage subsidy. Those staying in low-paid work would have been more insulated from news of the introduction of ETU.
The ETU workers showed signs of maintaining this recovery, with rates of labour market participation on a par with existing workers and few returns to JSA. This was unlike the continuing problems of the unemployed sample. For those who claimed it, ETU may have helped to combat the effects of ‘scarring’ of earlier unemployment.
In the ETU areas, flows into claimant unemployment slowed and, allowing for these, flows out of unemployment increased, compared with the controls. ETU therefore caused a small but significant improvement in labour market participation.
These marginal employment gains from ETU were greater among the unskilled, though they may have been offset a little by losses among the low skilled workers just above them in occupational ranking.
The JUVOS data also suggested that the more generous Scheme B terms allowed workers to take jobs at lower wages and then to keep them longer without, as so common among the very lowest paid workers, lapsing back into unemployment.
The JUVOS data included all unemployment spells. It was also hoped that ETU would assist the medium-term unemployed – people who had had trouble finding work but who had not stopped looking. Surveys of medium-term (6-18 months duration) unemployed people showed that:
- Barriers to work, such as low human capital and poor health, were considerable among medium-term unemployed people in these areas.
- These barriers intensified among the unemployed people who failed to benefit from a rising market in the three years of the ETU pilot. As a result, few found work.
- There was no evidence that medium-term unemployed people moved into work faster in the ETU areas compared to the controls. This was true in the surveys in 1996-to-97 and in 1998-to-99, and for both versions of ETU.
- The role of ETU was difficult to assess because so few medium-term unemployed people seemed aware of it. This was a serious obstacle to the effectiveness of the new benefit. Their job-search activity was anyway low and many of those still looking were holding out for a better job, beyond the scope of ETU.
- There were small signs of an indirect effect via changes in wage expectations, which were forced upward by the higher number of rent-paying tenants among the later unemployed sample.
ETU would be equally effective if it helped workers remain in jobs. Comparing the surveys of workers in ETU pilot and control areas:
- There was no evidence overall that ETU significantly improved workers’ chances of staying in work, either by working in an ETU area or by directly claiming the new benefit.
- Workers over 40 interviewed in ETU areas may have remained in work longer, on average, compared to equivalent older workers in Control areas, though this was not due directly to their claiming ETU.
- Recipients, though, said they found ETU helpful in getting the type of work they wanted and keeping in work in difficult circumstances. This was especially true among the minority of self-employed ETU recipients.
- There was a high deadweight cost. The later surveys confirmed the earlier findings. There was little in the data to oppose the view that most of the expenditure on ETU went to people who would anyway have carried on doing the jobs they did, or who took the jobs they would have taken, working the hours they would have worked for the wages they would have otherwise accepted.
There was little evidence from employers that they had modified their recruitment practices in response to ETU.
- Few employers were aware of ETU or its rules.
- Employers generally had not engaged with ETU as a contribution to recruitment practice, though a few had.
- There was no overall impact of ETU on recruitment or retention.
- There were some signs that ETU was encouraging employers in recruitment to shorter hours working among low-paid workers.
Did ETU lower wages?
ETU recipients experienced no wage growth prior to the National Minimum Wage. Wage offers to new recruits grew significantly more slowly in both ETU areas compared to Controls. The main points were:
- Employers said they evolved no conscious strategy to use ETU in wage setting.
- There was mixed evidence in trends in low-paid employment reported by employers, some favouring an ETU effect, others not.
- Scheme B did seem to reduce wage offers made to new low-paid recruits, especially among employers who were aware of ETU.
There was some evidence from the surveys of unemployed people, based on small numbers, that older unemployed people in ETU areas, especially those who had been unemployed a long while took up work at lower entry wages. This was not due directly to their having received ETU but it ties in with the finding above that older workers may have remained in work longer in ETU compared with control areas.
If ETU had had a large effect on the wages of the lowest-paid workers, Family Credit recipients in the same areas would have felt its effects, as their wages came under pressure from ETU workers. But the analysis of administrative data showed that ETU had no influence on the wages received by Family Credit recipients.
Conclusions
The overall conclusion was that ETU had caused some marginal improvement in employment opportunities for the lowest-paid workers at the cost of small reductions in entry-level wages, especially for older workers. There may have been a very small additional cost in diminished employment for low-skilled (compared to the lowest-skilled) workers.
ETU offered a number of advantages:
- ETU raised workers’ incomes.
- The benefit was well targeted on very low paid workers; four out of ten were paid so little they qualified for the maximum award.
- Few claimed other income-tested benefit to the extent of forfeiting existing income against new entitlement to ETU. Where this did happen, however, it was a problem and it severely reduced incentives.
- The additional income met need and reduced hardship. It allowed some workers more choice in distributing their time between working for money and working for voluntary and personal caring responsibilities. It lessened pressure to face more demanding work among people recovering from personal crises or who had chronic health problems. Others were able to stop working very long hours or doing two jobs. If ETU maintained or increased the supply of unwaged work that might otherwise have been supported from public resources, it represents a hidden benefit to be placed against its cost.
- Some need and hardship remained and few young ETU recipients could maintain their own households. Compared with the support now available under Working Families Tax Credit, a question of equity now arises for low-paid workers without children.
- Over time, the small improvement in employment should grow larger as take-up improves.
There were some disadvantages too:
- The deadweight cost, expected at the beginning of the pilot period, did not appear to diminish over the following three years. This, again, might well be offset to some extent by the value of unwaged work allowed by the 16-hour rule for ETU.
- There were small secondary effects that reduced employment opportunities among other workers.
- Where they were observed, the impact on entry-wages was large and statistically significant, but the evidence was based on perilously small sample numbers. And if ETU is to work by increasing flows into the lowest-paid work, a reduction in entry-wages is inevitable. Or at least it was until the National Minimum Wage. The most likely effect now is to turn the National Minimum Wage into the maximum wage for unskilled job entrants.
If a modernised version of ETU, called Earnings Tax Credit (ETC) is to be set alongside WFTC, the lessons for future policy are clear and helpful:
- Welfare: If ETU met need then ETC will meet a lot more of it. Younger workers, for example, will start to command a net income in work that will allow many more of them to leave their parents’ homes and start living more independently. One drawback to this development would be the re-introduction of the problem of a clash with Housing Benefit. More rent-paying tenants among ETC recipients will mean more duplicated entitlements and, consequently, reduced incentives.
- Incentives: ETC will provide unmistakably large incentives to work, as ETU in a smaller way provided significant positive cash incentives for most low-paid workers. But ETU remained invisible to the majority of them. In addition, the low take-up rate for ETU was largely a function of the low density of eligible workers in most of the selected areas. In some areas not enough people qualified because of the rules. In others, more qualified but they lived too far apart and occupied thin social and occupational networks that did not connect. In contrast, ETC will have many advantages that will overcome these problems.
- Take-up: the very low take-up rates for ETU have little predictive value for the take-up of ETC and should not discourage its use. The following factors are the most important:
- “Density”: The qualifying rules for ETU thinned out eligible workers to a point where, especially in Scheme A and the geographically more scattered Scheme B areas, they vanished from common view and conversation. Workers who qualify for ETC will be far thicker on the ground than they were under ETU. They will be set up alongside all the families with children who qualify for the same ETC plus their Child Credit and Child Benefit. Wage supplementation for low-paid or relatively low-paid workers will become universally visible and universally expected.
- “Publicity”: The clear lesson of ETU was that media publicity is indispensable first to kick-start and then to maintain take-up of an in-work income-tested benefit or tax credit. A national publicity campaign for the new integrated system would succeed, as the campaigns promoting Family Credit have succeeded in the past.
- “Employment”: The small signs of gains in low-paid employment under ETU should grow stronger under ETC.
- “Wages”: The impact on wages may also grow but will remain small. But if it remains in proportion to the effects of ETU it will be confined to a reduction in entry-wages and will anyway be underwritten by the National Minimum Wage. Most of the new money will stay with the workers.
Publication details
Marsh, A., (2001) “Earnings Top-up Evaluation: The Synthesis Report”, Department of Social Security Research Report No. 135, CDS: Leeds. (£27.50)
Relevant publications
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
Green, A. (2001) “Earnings Top-up Evaluation: Labour Market Conditions”, Department of Social Security In-house Research Report No. 75, London
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
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
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
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
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
Vincent J., Heaver, C., Roberts, S. and Stafford, B., (2001) “Earnings Top-up Evaluation: Staff Views”, Department of Social Security In-house Research Report No. 74, London