Tax credit cuts offset minimum wage increases for poorer households

The minimum wage now directly covers 2 million people. Photo: Jessica Rinaldi/Reuters

Big increases in the minimum wage boosted incomes for low-income people, but cuts in tax credits more than offset the gains, the Institute for Fiscal Studies (IFS) found.

The IFS said a chronic lack of real wage growth has blighted the UK since the 2008 financial crisis and labor market inequality points to the need to boost wage growth for middle-income earners and low income in non-traditional jobs.

Many of the lowest paid employees were protected by minimum wage. Between 2011 and 2019, the incomes of low-income workers grew twice as fast as median incomes.

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But the poorest households are at risk of poverty because a quarter of a fifth of the lowest earners are now self-employed and therefore not covered by the minimum wage.

But even those working for minimum wage may find themselves worse off because of tax credit cuts.

“Since 2011, the incomes of low-income households have grown faster than between 1994 and 2011. Yet their income growth has slowed as benefits and tax credits have been cut,” the report said.

Robert Joyce, deputy director of the IFS, said: “Many of those on modest incomes have seen their incomes hold up better than we expected. This is due to two policies which have essentially increased their incomes by brute force: first (mostly) tax credits, then (mostly) higher minimum wages.

“These policies managed to do a lot of what was intended for them. But they can’t always carry the canister on their own.

The IFS noted that over the past 40 years the UK has experienced a period of rising income inequality far greater than in most developed countries until the global financial crisis. Compared to the same age, the median earnings of people born in the 1980s are no higher than those of people born in the 1960s.

Stephen Machin, Professor of Economics and Director of the Center for Economic Performance at LSE, said: “Higher income inequality, with low real income growth and a very different labor market to 40 years ago have placed the world of work in a much more unequal situation.

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“To halt or reverse this trend, special attention needs to be paid to ways to restore and reinvigorate real income growth and create decent jobs with good career opportunities in an inclusive manner.”

The IFS said the lack of tools to increase profits remains a problem.

Mark Franks, director of wellbeing at the Nuffield Foundation, said: “Policies such as minimum wages and tax credits have helped many on low wages, but they have not been sufficient to fully protect all low-wage workers, including those among the growing number of self-employed.

“This, combined with weak wage growth and factors such as rising prices and lack of access to stable housing, has left many individuals and families in a vulnerable situation.”

The minimum wage now directly covers 2 million people, or 7% of all salaried jobs, compared to 1.5 million in 2015, before the implementation of the current national living wage.

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