Welfare versus work: Does it pay to take up a low-paid job?

The last thing Iris Swift wants to be is reliant on State hand-outs. But sometimes it feels like the barriers she faces in getting back to work are insurmountable.

“There are lots of advantages to staying on welfare,” says Swift (25), who is a mother of one child. “But I can’t stand having nothing to do all day. I’m well educated. I would rather go to work and pay for everything . . . the assistance is good, but it’s easy to get stuck in a rut.”

Here’s her problem: A job would costs her €200 a week in childcare fees. She would also lose her rent support worth hundreds of euro. Her eligibility to free health services is also likely to be downgraded. A low-paid job, she says, simply couldn’t compete with this.

She isn’t afraid of hard work. She’s worked in all sorts of cafes and retail jobs in the past. But she’s been unable to find the kind of paid work that could begin to make it affordable to rejoin the workforce.

With a degree and a master’s in art history, she has been trying to start her career by finding work even tenuously related to her qualifications. But all she’s found so far are poorly paid, or unpaid, internships.

“You have to accept that you won’t get paid to do the kind of work I’m looking for,” says Swift, who is working on a community employment scheme, which pays an extra €20 on top of her welfare. “Entry into the workforce should pay better. I know they’re just entry-level jobs, but people who’ve studied hard should be encouraged more.”

The issue of whether low-paid work can compete with welfare has crackled with controversy over recent times. A research paper published on the Economic and Social Research Institute’s website two years ago on the gap between welfare and work contained a bombshell: 44 per cent of people with young children would be better off on the dole than in employment.

The findings sparked a storm over the accuracy of the findings and whether our welfare system was overly generous and a disincentive to work.

Within days, the ESRI revised the report and, after correcting what it said were numerous miscalculations, concluded that fewer than 10 per cent of people with young children would be better off on the “dole” than in employment.

Prof Richard Tol, who was behind the original paper, insisted he stood over the methods used. In a departing broadside, the economist, who is now based at the University of Sussex, raised questions about the ESRI’s independence.

The troika also rode into the wider controversy, claiming that welfare payments were a disincentive to taking up paid work. It cited figures which indicated Ireland had one of Europe’s highest replacement rates – the percentage of a person’s salary replaced by social welfare if they lose their job.

Most experts pointed out, however, that Irish rates were ranked high only when rent and mortgage supplement were included, but these apply only to a small minority of welfare recipients.So, where does all this leave us? Well, latest available research suggests that getting a job pays more than staying on welfare for the most people even when costs such as childcare and travel are taken into account.

A new ESRI study published over the summer found six out of seven people would be financially better off in work than on welfare. But there was another surprising finding: some 70 per cent of people said they would choose work over welfare, even in situations where work pays less.

The findings have important implications for policy-makers as it suggests initiatives to improve the reward from work are worthwhile but will have only a limited impact on overall unemployment.

Most of those on the dole are single and do not have children. For these groups, the study found that work, even at the minimum wage, paid more than welfare. But for those with families, extra payments for dependent children meant the rewards of work were reduced. The cost of childcare, say most in the sector, remains the biggest obstacle for parents considering moving from welfare to work.

Childcare costs

Ireland has has some of the highest fees in the EU for early childhood education and care for children under three. In addition, Ireland is ranked one of the two most expensive countries in the world for childcare, according to the OECD, with the average family of two spending 40 per cent of the average wage on childcare costs.

For parents like Alice, the work she does to pay for childcare has ended up penalising her in unexpected ways. She’s 31 and a lone parent with an eight-year-old daughter. She’s is also highly qualified, with a degree and a master’s in translation.

A full-time job in her field isn’t sufficient to pay for full-time childcare. So she works part-time for a charity as an office manager on low pay.

When she recently received a modest pay increase bringing her earnings to about €1,000-a-month - she was told by her welfare office she was no longer entitled to rent allowance.

The benefit had been worth about €600. Suddenly it had disappeared. So, once the pay increase was factored in, she had lost €400 a month. “I was basically being penalised for progressing at work,’’ she says. “It didn’t make any sense to me. I spent two days trying to figure out how they came to that calculation, and I’m still not sure.”

Suddenly, it felt like she was balancing on a knife-edge, worrying if she could make ends meet.

“It’s scary,” she says. “When you’re in this situation on low pay, you have no wriggle room. My landlord could up the rent. I have no savings. I have no health insurance. If anything goes wrong, you’re screwed.”

One Family, which represents single parents, says it receives similar stories on a regular basis of families in low-paid employment, or no employment, struggling to stay afloat.

“The support they get from the State is continuing to decline in real terms, while the barriers to returning to the workplace remain insurmountable for so many,” says Stuart Duffin, One Family’s director of policy. If items such as food, social housing and childcare continue to become more expensive, these families’ overall incomes cannot keep up,” he says.

The organisation says the ongoing reduction of the income disregard – the amount a lone parent can earn without a reduction in supports as they transition into employment – from almost €150 to €60 per week is working against Government policy.

“It is no longer financially viable for many to work, which is the opposite of what the Government claimed to set out to do: support lone parents into employment,” says Duffin. “This isn’t just about balancing the high cost of housing, childcare and energy. It includes a family’s need to be part of society, by being able to participate in things many take for granted, such as buying a small birthday present or taking the children swimming on occasion. ”

Poverty traps

The Government insists it is addressing these issues through a new “return- to-work dividend”, likely to be announced in next month’s budget. It is aimed at improving incomes for families who move from welfare to work.

The social welfare system has long been criticised for so-called poverty traps, which result in families losing out if a parent takes up work. Under changes being drawn up by Minister for Social Protection Joan Burton, a parent who takes a low-paid job would be able to keep welfare payments – known as qualified child increases – worth up to €30 per child a week.

Those who qualify would be entitled to hold on to the payment for up to three years, although it would reduce gradually over this time.

“In order to make work pay, we know that the biggest difficulties are experienced by those with children,” Burton says. “This will provide a significant additional financial incentive for these families, particularly if a parent is heading into an entry-level job.”

Burton said details were still being worked on, but have the support of Fine Gael. "We haven't signed off completely on this, but it's a proposal that we're very confident about."

The “return-to-work” dividend would cost the exchequer in the short-term but policy makers say it should begin to pay for itself in time as people return to work.

The department has, in the meantime, a “ready reckoner” so individuals can calculate exactly what their income will be on work versus on welfare ( http://bow.welfare.ie/en ).

‘People who are contemplating a return to work can be genuinely nervous about what they’ll lose or what they’ll hold onto,” Burton says. “With this, people can see exactly how they’ll be affected.”

The move to target jobless families in particular follows research which shows outcomes for children from families where a parent is at work are significantly better than those in families dependent on welfare.

A number of disincentives to work remain, however, such as the rent supplement, paid to welfare recipients who cannot afford private rented accommodation.

Government officials say plans to replace the rent supplement with a new “housing assistance payment” are well advanced. This payment will taper off as a person returns to paid employment, and help avoid sharp drops in income associated with a return to work.

These are changes which most welcome and they can’t come soon enough for people like Swift.

She says policy-makers need to do much more to make work pay for those on low wages and help create opportunities for young people.

“I feel for my generation,” she says. “The world of work is so unstable. We started just as recession hit . . . For many people who went to college, they’re now thinking, ‘What was the point doing this degree in the first place?”