Link between in-work poverty and low pay is complex

There is no simple link between in-work poverty and low pay in European countries, finds a study funded by the European Commission. Tackling in-work poverty is therefore not as straightforward as simply raising minimum wages, it concludes.

The study looked at the variation in in-work poverty across European countries and over time, using data from EU-SILC.

Key findings

  • There is a 'complex relationship' between low pay and in-work poverty.
  • Trends in in-work poverty vary across countries: it is strongly associated not with low hourly pay as such, but rather with single-earnership and low work intensity at the household level.
  • Nonetheless, even if every single non-employed person could be found work, or if every household reached a level of full work intensity, this would not guarantee the elimination of poverty.
  • Minimum wages in some European countries help to keep single people out of poverty, and countries with non-existent or very low minimum wages should therefore contemplate introducing or increasing them. But even in countries where minimum wages are comparatively high, they do not suffice to keep sole-breadwinner households out of poverty, especially when there are dependent children.
  • For low-earning households, only direct household income supplements may offer a reasonable prospect of escaping poverty, especially when there are dependent children. Such ‘in-work benefits’ are now often associated with tax credits such as the UK's working tax credit.
  • Tax credits are strongly targeted, however, leading to mobility ‘traps’ and wage erosion. By contrast, less strongly targeted income supplements, such as universal child benefits, can have an immediate impact on poverty among those at high risk (that is, child-rich households) without adversely affecting work incentives. For such benefits to be effective across the board as an anti-poverty device they need to be high, and hence come with a significant budgetary cost.

Source: Ive Marx and Brian Nolan, In-Work Poverty, Discussion Paper 51, GINI Project (European Commission)
Link: Paper

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