No evidence that tax credits surpress wages, says think tank

There is no evidence that tax credits hold down low wages, according to new research published today by independent think tank the Resolution Foundation. The analysis discredits the assumption that tax credits, available to low and middle income families, enable employers to pay lower wages.

Tax credits reach around six million families, providing substantial support for households on a low to middle income. Many assume they reduce wages by increasing the number of people willing to work for low pay and discouraging recipients from moving into higher paid roles.

The report Creditworthy, co-authored by leading academic Professor Paul Gregg, finds:

• wage growth is no lower in the part of the earnings distribution where people receive tax credits,
• no evidence that workers receiving tax credits have seen lower wage rises than those not eligible for the benefit on the same pay.

The authors also investigate the changing nature of child poverty, finding that a growing number of families with children living in poverty contain someone who is in work. While child poverty has been falling generally, there has been a sharp increase among male breadwinner families: even with the expansion of tax credits over the past decade, such families are not escaping poverty.

This change in the nature of poverty is the result of a shift in earnings patterns within families over the past decade. New research in the report shows that:

• wage growth among mothers has significantly outstripped that of fathers, in a far more pronounced way than between men and women more generally,
• the gender pay gap between parents in the lower part of the earnings distribution narrowed by around 25 percentage points between 1994-95 and 2007-08,
• however, the gender pay gap persists and for those working full-time it still stands at 10.5 per cent.

Looking forward, the report points towards a need to review the design of Universal Credit, emphasising that the expected negative impact of Universal Credit on incentives for (potential) second earners to enter work is troubling given the growing importance of mothers’ wages on the living standards of low to middle income households.

Paul Gregg, Professor of Economic and Social Policy at the University of Bath, said “This new research challenges the perception that tax credits have been holding down wages. We can now clearly say that they have had no negative wage effect whilst they have succeeded in reducing child poverty and helping make sure that work pays for low to middle income households.”

Matthew Whittaker, Senior Economist at the Resolution Foundation said “Mothers’ employment has been critical in raising living standards for low to middle income households over recent decades. As tax credits become integrated into the new Universal Credit the government must ensure that work pays for second earners.”

Notes to editors

The new report from the Resolution Foundation Creditworthy: Assessing the impact of tax credits in the last decade and considering what this means for Universal Credit, by Paul Gregg, Alex Hurrell & Matthew Whittaker – is available in advance from the Resolution Foundation press office and will be available to download on Wednesday 27 June from: www.resolutionfoundation.org

The authors will publish a second paper later in the summer that will build on the findings in this report to consider a range of approaches which potentially retain much that is good about tax credits but which fit into a broader attempt to reform the tax and benefit system in a way which recognises changes in the labour market and the long-term squeeze on living standards faced by low to middle income households.

The Resolution Foundation is a think tank which works to improve outcomes for those living on a low to middle income.

Paul Gregg is Professor of Economic and Social Policy at the University of Bath.

Matthew Whittaker is Senior Economist at the Resolution Foundation.

Alex Hurrell is Senior Analyst at the Resolution Foundation.