1 The Effect of Recession in the UK on Family Employment Susan Harkness, University of Bath CCSR Seminar; 2 March 2010

2 Motivation The current recession has seen a rapid growth in unemployment: Since 2007 unemployment has risen by 2.6 ppt, to 7.9% in the 3 rd quarter of Male unemployment now stands at 9.0%. A key concern for policy is what affect this will have on the distribution of work across households. The 1991 recession was associated with associated with a sharp increase in the number of workless households as employment was increasingly polarised into work- rich and work-poor households. Part of the reason for this was that the design of the tax and benefit system provided poor incentives for women partnered to unemployed me to work, particularly if that work was part-time or low-paid. Since 1999 there have been substantial changes to the tax and the benefit system while the labour market position of women has improved. What impact will this have: for wives employment if their partner loses their job? the distribution of jobs, across households? we are particularly interested in the specific effect of recession.

3 Structure of the talk Background The policy context: policy change and work incentives since the 1990s Theory and evidence from past recessions Evidence on New Labours WFTC / WTC reforms New evidence from the Labour Force Survey Male (un)employment and wives work - cross-sectional evidence Employment transitions - evidence from panel data Implications for household employment Conclusion

4 The Policy Context A system of in-work support has been in place for those with dependent children since 1971, when Family Income Support (FIS) was introduced. The level of support has risen over time leading to a rising number of claims. The main features under the various regimes have been: Family Income Support (FIS) ( ): aimed at low-paid families working over 24 hours a week and with dependent children 70% taper on net income Family Credit (FC) ( ): as FIS bur more generous in 1992 hours criteria reduced to 16 in 1995 an additional credit was introduced for those working over 30 hours under both FIS and FC between 55 and 60% of claimants were couples

5 The Policy Context (continued) Working Families Tax Credit (WFTC) ( ): transitional arrangement with same structure as FC but considerably more generous taper on net income reduced to 55% more generous support for childcare around 46% of claimants were couples Working Tax Credit (WTC) and Child Tax Credit (CTC) ( ?): substantial overhaul of the earlier system WTC available to those with and without children working 16+ hours CTC available to all those with children (below a certain income) income taper reduced to 39% for those with incomes under £50k. 3.2 million couples claimed tax credits in 2009 with 883,000 claiming both WTC and CTC (compared with 694,000 WFTC claims in Feb 2003)

6 Total Claimants (In-Work Support)

7 The Reward to Working (Couples with 2 Children < 11) Assumptions: 1.All calculations are based on the assumption that the women earns the median female wage (of £9.68 in 2009; £6.87 in 2003; £5.15 in 1997 and £4,69 in 1993) and her partner is not employed. 2.Child benefit and, if eligible, partners contributory based JSA are not included in the calculations. Partners entitlement to non-contributory JSA would raise the reward to women working further. 3.Recipients are assumed to have no childcare costs and not to be in receipt of housing or council tax benefit. Returns to work are lower if families pay for childcare or are in receipt of housing or council tax benefit.

8 The Reward to Working: Couples without children Note: Assumptions as previous table.

9 Theory and evidence from past recessions Wives of unemployed men are much less likely to work than those with working partners: Layard et al. (1980) found wives of unemployed men to be 31 ppt less likely to be working than otherwise similar wives with working husbands. this has been a major contributor to the rise in workless households (Gregg and Wadsworth 1996) Reasons to expect partners employment to be correlated include: 1.characteristics affecting employability may be correlated (assortative mating) 2.the added worker effect (minimal – Lundberg 1971, Blundell and Walker 1986) 3.the discouraged worker effect (> AWE – Layard et al 1980, Bingley & Walker 2001) 4.the tax and benefit structure – disincentives were a major contributor to the low employment rates of wives of unemployed men in the 1980s, particularly as the benefits system moved increasingly towards means testing (ex Dilnot and Kell 1987; Bingley and Walker, 2001). The correlation between partners non-employment has increased with unemployment: In time series analysis it has been found in Britain [..] and the United States [..] that female participation typically falls when employment opportunities deteriorate (Layard et al 1980) Bingley and Walker (2001 find a 1-percent rise in unemployment to lead to a 0.8-percent fall in married workers participation.

10 But the effect of the current recession may be different because... Changes to the tax and benefit system to make work pay have radically changed the incentives for the employment of a single earner among couples, even for low paid, part-time work. {and women may also be better placed to take on the role of breadwinner as female employment has grown (from 65% in 1992 to 70% in 2008) and the pay gap has narrowed}.

11 Evaluations of policy reform, all of which have taken place over a period of sustained economic growth, have found... The overall impact on the employment rate of partnered women with children has been negligible Incentives for second-earners to enter into work are poor But women partnered to non-employed men had a 3 ppt increase in the probability of working Incentives were concentrated around the extensive margin and had little effect on hours worked [Francesconi and van der Klauw 2009] But as the economy has entered recession, how have these reforms influenced wives decisions to remain in, or enter, work if their partner loses his job?

12 What impact has the recession had? We use cross-sectional data from the Quarterly Labour Force Survey from 2006 to 2009 we examine the effect of male unemployment on their spouses employment prospects and to assess whether this relationship has changed during the current recession. We then use the LFS 5-quarter panel to examine employment transitions of women when there partner exits work, again contrasting the pre and post-recessionary period. We also look at how hours of work have responded. {note we look at prime age workers only, those aged 25-54}

13 Women in Couples Employment Rate by Partners Employment Status (Prime Age Workers, )

14 Women in Couples Employment Rate by Partners Employment Status (Prime Age Workers, ) with children

15 Women in Couples Employment Rate by Partners Employment Status (Prime Age Workers, ) without children

16 Wives Employment by Husbands Employment Status: Families with Children (Prime Age Workers, ) Note: controls include housing tenure; education; a dummy variable for children in household and children under 5; 21 regional dummy variables and partners present/last occupation dummies and partner long- term unemployment.

17 Wives Employment by Husbands Employment Status: Families without Children (Prime Age Workers, ) Note: controls as above

18 Wives Hours of Work by Husbands Employment Status (Prime Age Workers, ) Note: Working women only. Controls as before plus occupation.

19 Evidence from the QLFS panel Cross-sectional data shows the effect of having a non-employed partner on wives employment is different in the recession. One reason for this may be that men who have left work were partnered to working women who were working. Data from the QLFS panel shows: among men who lost their job, two-thirds lived in families with working spouses and the majority of spouses stayed in work (89-percent) and increased their work hours (from 21 to 28 hours). the other-third came from male breadwinner families and were much more likely to become workless; just 9-percent of women whose partner lost their job entered work over the subsequent year. Note the very different impact of women losing their job on male employment percent of women who left work lived in families with working partners and 94-percent became male breadwinner families. More formal analysis of the effect of male non-employment on their partners employment show...

20 Panel data regression a) Couples with Children

21 Panel data regressions b) No Kids

22 Results from the panel data... Results from the panel suggest that the reduced effect of mens non- employment on their partners employment prospects has been driven by the growth in employment of wives who are now likely to hold on to their jobs, even if part-time or relatively low paid, if their partner exits work. But wives who were not working prior to their partner leaving work are no more likely to enter into work. These changing dynamics around job retention for partnered women has been important in driving the fall in the penalty to having a non-working spouse during the current recession.

23 What are the implications for the distribution of work across households.... Changes in Couples Employment ( )

24 Conclusions There has been a 2.5 ppt rise in the number of families with no male earner and women partnered to non-employed men are much less likely to work than those with working partners. Cross-sectional data shows: the employment gap between those with working and non-working partners has fallen since the economy entered recession and women with unemployed partners are also working longer hours Panel data shows: male non-employment is associated with a reduced chance of wives entering work (but only at under 30 hours); but has no influence on the probability of wives leaving work and leads to a rise in working wives hours. The overall affect of rising male non-employment has been to reduce the number of 2 earner families, with the share of no-earner and single female earner families rising by similar amounts. The distributional effects of the current recession on household employment may therefore be better than in 1991 leading to a smaller rise in the number of workless households

25 Lessons for Policy Evidence presented here suggests that welfare reform has substantially improved employment prospects for families during the current recession by incentivising work over non-employment, even where that work is part-time or low-paid. But more could be done to guard against rising worklessness among couples: While women are more likely to stay in their jobs if their partner exits work, if women are not already working prior to their partner exiting work they are unlikely to work. Policies which support women in the labour market, regardless of their partners employment position, could do much to guard against polarisation of work in the future. Current incentives for second-earners are weak: introducing a separate tax-credit allowance for second earners is one way in which their work incentives could be considerably improved, policies currently targeted at those on JSA which support second earners prepare and move into work could be extended to this group. Policies which promote employment would also help guard against future rises in the number of workless households and would also help meet the wider objectives of reducing child poverty which is increasingly associated with living in a couple with a single earner.