Why the “working poor” makes for an inappropriate policy target

The publication by the CSO of the results from the Survey on Income and Living Conditions (SILC) always generates plenty of reaction.  One focus following the release of the 2017 results has been the “working poor” such as the headline of this piece.

The CSO provide income and poverty rates by principle economic status and the 2017 outcomes are summarised here:

As can be seen for the “at work” category the at-risk-of-poverty rate (equivalised disposable income below 60 per cent of the national median) is given as 5.4 per cent.  When we add in measures of deprivation, we find that 1.4 per cent of those with a principle economic status of “at work” live in households deemed to be in consistent poverty.  Given how low these levels are relative to other categories, the “at work” group seem a peculiar group to focus on.

Here we provide five reasons why targeting the at-work at-risk-of-poverty rate may be inappropriate.

1. Ireland already has the second-lowest AROP rate for employees in the EU15.
2. The measure is as much a function of household type, especially the presence of children, as it is labour market outcomes.
3. When it comes to labour market outcomes the most important factor is the amount of work with low AROP rates for households with high or very-high levels of work intensity.
4. The link between low pay at the level of the individual and low income at the level of the household is weak.
5. One-third of the “working poor” are self-employed who are excluded from most policy proposals.

1 Comparison across the EU15

Eurostat provide figures that allow us to compare the at-risk-of-poverty rates across the EU for people who are employed and one feature of this is how well Ireland does.  Here are the AROP rate for employees since 2009:

The 2017 figure for Ireland has not been provided to Eurostat yet but it seems likely that Ireland will have close to the second-lowest in-work at-risk-of-poverty rate for employees in the EU15.

2 The role of household type

The determination of whether of being at-risk-of-poverty is based on equivalised household income rather than than earnings of the employee on their own.  For example, you could have two employees both earning €30,000 – one could be deemed to be at-risk-of-poverty and one may not. How can that be if there are both earning the same amount? Type of households or, more particularly, children. 

If there are more people in the household then the available income has to be spread over more people thus reducing the equivalised, or per (weighted) person, income of the household. 

Here are the figures from Eurostat for the at-risk-of-poverty rates for people at work but living in two different types of households in Ireland:

• Household with two or more adults with dependent children
• Households with two or more adults without dependent children

It can be seen that, bar the peak crisis years of 2009 to 2011, the at-risk-of-poverty rates of workers in the households with children is about twice that of households without children.  It is not the labour market that drives in-work at-risk-of-poverty rates; it is household type.

3 The amount of work

This amount of work can be measured by household work-intensity: the amount of available time that someone is working.  If the working-age adults in a household have a high or very-high work intensity there is close to no chance of that household being at-risk-of poverty.

In-work, at-risk-of poverty rates are highest for those households with low work intensity.  These are households where members of working age worked between 20 per cent and 45 per cent of their total potential during the previous 12 months.  Households composed only of children, of students aged less then 25 and/or people aged 60 or more are completely excluded from the work-intensity indicator calculation.

Again, relative to the rest of the EU15, Irish households with low work intensity have at-risk-of-poverty rates well below those of other countries.

Over 60 per cent of Irish households who are classed as in-work and at-risk-of-poverty have either low or medium levels of work intensity.  It is not earnings that drives the in-work, at-risk-of-poverty rates; it is the amount of work.

Something, such as a refundable tax credit may have very little impact on at-risk-of-poverty households with children.  The at-risk-of-poverty threshold for a 2 adult plus 2 children household in 2017 was €29,000.  Even allowing for Child Benefit such a household close to that threshold which gets its income from work will have used almost all the available tax credits.  Making them refundable will make little difference to them.

The majority of households who are deemed be in-work and at-risk-of-poverty have low or medium work intensity.  Refundable tax credits in this instance would be a reflection of a low amount of work rather than low earnings.

4 Low pay and household income

The link between low pay and at-risk-of-poverty rates is weak.  Ireland has workers who are low paid but they are not in low-income households.

The chart would suggest that something around six per cent of low-pay employees (below a threshold of €12.20 a hour in the analysis shown) are in households who are at-risk-of-poverty. Or, in other words, 94 per cent of low-pay employees are in households who are not at-risk-of-poverty.  Indeed, over half of low-pay employees are in households in the top half of the income distribution.  There are almost as many low-pay employees in households in the top decile as there are in the bottom decile.

Policies, such as refundable tax credits, that target the low paid seem likely to make overall inequality and at-risk-of-poverty rates worse as very little of the benefit would accrue to those at the bottom of the income distribution.  It is likely that part-time second earners would appreciate it but in most cases these already come from middle- to high-income households.

It is also not clear how a refundable tax credit would work in the case of the self-employed. It was noted at the press briefing for the SILC publication that around one-third of those deemed to be in-work and at-risk-of-poverty are self-employed. Refundable personal and PAYE tax credits would mean that one-third of the target group is excluded. And a large share of the resources used would go to people outside the target group – the low-paid in high-income households.

Saying that the “working poor” should not be a policy target doesn’t mean we shouldn’t have policies that try to increase incomes. We should. But using the in-work at-risk-of-poverty rate as a benchmark for either the justification of certain policies or in judging the success of polices may not be appropriate.

We conclude with a comparison we have made before:

For all levels of household work intensity Ireland has at-risk-of-poverty rates that are lower than Sweden’s, and significantly so in some cases, e.g. medium and low. Yet, the overall at-risk-of-poverty rates of the countries are very similar.

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