Work, Welfare, Taxes and Unemployment Traps

Posted on February 03, 2015 by Micheál Collins

QEF indicator 5.6

As the economic recovery takes root, there are welcome improvements in the levels of employment and continued decreases in unemployment. Looking across 2015, the latest NERI projections (December 2014) suggest employment growth of 2.1% this year with unemployment falling to 10.4%.

As policy pursues the Government’s target of reaching full-employment (around 4-5% unemployment) by 2018, there are a number of significant challenges for activating/re-activating those who are currently unemployed. First, there is a need to address the skill deficits that many long-term unemployed possess – through targeted training programmes and policy mechanisms that recognise the challenges associated with assisting many of those who have drifted further and further from the labour market in recent years. Second, there is a need to focus on any structural impediments which block the unemployed from taking up work – so called unemployment traps.

Indicator 5.6 in the latest edition of the NERI's Quarterly Economic Facts focuses on the latter of these challenges and presents data on the ‘participation tax rate’. It attempts to measure the collective impact of pay gains, welfare losses and income taxes for an individual as they transition from unemployment to employment.

Using data from the OECD, the indicator looks at six family types and finds that rates vary from a low of 15% (New Zealand two earner married couple) to 93% (Slovenia two-earner married couple). From country to country these rates differ given differences in the interaction of the welfare and taxation systems.

The Republic of Ireland possesses the eight lowest replacement rate for single unemployed people with no children within the OECD (56%). Of the six household types examined by the OECD (see table and chart in the indicator) five ROI types record replacement rates below the OECD and EU median values.

Overall, the data shows clear net income gains from returning to work. However, the indicator does not capture many of the other costs incurred as individuals, and particularly those with dependent children, return to work. Previous NERI research on the cost of work, alongside the cost data sitting behind the estimation the living wage (, have highlighted the role of factors such as accommodation costs, transport costs and childcare costs as the main drivers of challenges for households with children who wish to enter employment. If anything this research highlights the importance of policies to moderate housing costs, improve housing supply and radically transform the cost and provision of childcare. Although not direct labour market issues, addressing them will play a key role in the achievement of full-employment.

The latest edition of the NERI's Quarterly Economic Facts is available here.

Posted in: GenderIncomeJobsLabour costsLiving wageTaxationWages

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