Using the tax system to deliver a living wage

In a previous post, I proposed a formula for calculating income tax that would provide for a  negative income tax. I did so because I believe a negative income tax system would be simpler, fairer, more humane, technically more feasible , and cheaper to develop than the current Universal Credit project being rolled out by Her Majesty’s government. A negative income tax would be administered by HMRC and have at its core the following formula for calculating income tax:

T(n) = m∑Y(n) – c∑H(n) – ∑T(n-1)

where

m is the single marginal tax rate;

c is the hourly value of the tax shield

∑Y(n) is the cumulative market income received by the end of period n

∑H(n) is the cumulative hours worked by the end of period n

∑T(n-1) is the cumulative income tax paid by the start of period n.

Comments

The proposed tax system has a single marginal tax rate. The choice of this rate is a political as well as a technical decision (i.e., achieving the desired behavioural effects) An individual’s hourly tax-free pay is given by the grossed-up tax shield (c / m).

In this post, I want to show how a negative income tax system can deliver what many describe as a “living wage”. The figure of £10 / hour has been mooted as a living wage. I shall hence assume this figure for the living wage  in my illustration.

Prologue

In this post, I will incorporate the UK’s national minimum wage (NMW), currently £6.50 per hour, into the model.

I will also use a marginal tax rate of 40%, a tax rate which is both comparable to and competitive with existing UK income tax rates (20%, 40%, and 45%). Hence m has been set to 40% or 0.4 in my illustrations.

I will assume a working week of 35 hours and an individual’s weekly hours will be capped at this level.

I will also show how the model can be used to generate a basic income. I will briefly set out my views on whether a basic income should be conditional or unconditional.

Calculating the tax shield

In this section, I will show how negative income tax can transform the minimum wage of £6.50 / hour into a living wage of £10.00 / hour.  To achieve this, the value of the tax shield (c) must be calculated with reference to the minimum wage and to the living wage of £10.00. The value of the tax shield (c) must be set so that the hourly negative tax payment makes up the difference of £3.50 

Ignoring the summations in the above f ormula (they are not necessary here), we have

T = m x (£6.50) – c = – £3.50

T= 0.4 x £6.50 – c = – £3.50

c = £6.10

The tax formula that transforms the hourly national minimum wage of £6.50 to an hourly living wage of £10 will thus be

T(n) = 0.4 x ∑Y(n) – £6.10 x ∑H(n) – ∑T(n-1)

or on a week 1 basis, the hourly tax charge will be:

T = 0.4 x £6.50 – £6.10

= – £3.50 (negative,  as required)

Illustration

Lenny earns the adult minimum wage. He works 35 hours per week. His pay slip will show:

Market income (35 hours x £6.50/hour)                                       £227.50

Negative income tax  (35 hours x £3.50)                                     £122.50

Take home pay (35 hours x £10 hour)                                         £350.00

 

Lenny now receives £10 per hour.

Incentives

The hourly post-tax income of someone whose market income is £10 would be transformed to £12.10.

T= 0.4 x (£10.00) – £6.10 = – £2.10 (negative)

Hence that individual would take home £10 – (- £2.10) = £12.10 for every hour worked at or below the 35 hour weekly cap on hours. So although the “differentials” between market incomes have narrowed the higher paid worker still receives more per hour than the minimum wage worker.

Tax free allowance

The break-even hourly income with an hourly tax shield of £6.10 and a marginal tax rate of 40% is £15.25. This means a worker with an hourly income of £15.25 will neither pay income tax nor receive a tax payment. This is equivalent to an annual tax free allowance of £27,755 (compared to the current allowance of £10,000 p.a.). Individuals with a a market income of above £15.25 per hour or £27,755 per annum would pay income tax of 40% on the excess.

Basic income

The parameters used in the formula produce an amount 0f £6.10 per hour for those who have no market income. This could be taken to be a basic income payable to anyone whose market income is zero.

T = 0.4 x £0.00 / hour – £6.10 / hour

= – £6.10 per hour (negative)

The issue is whether this fortunate by-product of negative income tax should be conditional or unconditional.

Unconditional basic income

An unconditional basic income would credit every citizen with 35 hours. The basic income would thus be received by every citizen of working age.  The basic income would amount to £213.50 (35 hours x £6.10 per hour).

Hourly income with unconditional basic income and living wage of £10/hour

Hourly income with unconditional basic income and living wage of £10/hour

Conditional basic income

A conditional basic income would credit some groups with 35 hours a week but not others. For example, the disabled, the infirm, and those with caring responsibilities could be credited.  This would automatically trigger a payment at HMRC of £213.50 to individuals falling in these groups. The unemployed would be credited with hours only to the extent of their hourly contributions to society via voluntary work and / or participation in counter hysteresis activities (such as internships, work placements, or work programmes).

Hourly income with a conditional basic income and a living wage of £10/hour

Hourly income with a conditional basic income and a living wage of £10/hour

Conditional or unconditional basic income?

My main concern is that every UK citizen should have access to honest and adequate income. For disadvantaged groups, income accessability, particularly with increased benefit conditionality, can often be an issue.

Provided plentiful opportunities for voluntary work and / or opportunities to engage in counter hysteresis activities are made available to physically and mentally capable individuals without a market income then basic income should be conditional along the lines described above. A reasonably generous income of £213.50 per week would accrue to such individuals if their engagement in these activities was for 35 hours a week. Lesser contributions would be rewarded proportionately.

Summary of the model

Basic income = £6.10 /hour. May be conditional or unconditional. Could replace unemployment benefit.

Minimum wage (statutory)  = £6.50 / hour.

Living wage (assumed) = £10.00 /hour.

Break-even wage = £15.25 /hour.

Marginal tax rate = 40%

Maximum hours of credit = 35

Some final points

The withdrawal rate for someone transiting from unemployment to minimum wage work is about 43% (0.4 x £6.50 / £6.10). This is substantially better than the proposed withdrawal rate of 65% planned for Universal Credit.

However, the withdrawal rate rises as the starting hourly wage rate rises. At a starting rate of £15.25 per hour the withdrawal rate is 100%. It is unlikely that such a high withdrawal rate would be a disincentive to accept work at this wage rate.

It seems likely that a negative income tax designed with the parameters outlined in this post would lead to a lower overall income tax take for the government. Some of this might  be due to a lower marginal tax rate of 40% for top earners compared to their current 45% and because the tax free allowance is more generous than the current £10,000 annual allowance. For this reason, it may be better to use income tax as a means of correcting the inequalities that arise from distortions in the labour market (eg directors effectively setting their own pay) rather than as a means of raising revenue.

Capping the corporation tax deductibility of market incomes to £27,779 per employee (the annual tax free allowance) may also help to mitigate reductions in the income tax take.

The redistribution of income arising from this variant of a negative income tax system is likely to have a stimulative effect on the economy. Poorer workers with a high propensity to consume relative to richer workers should increase demand and hence economic activity.

Self-employment and negative income tax

Introduction

Previously, in “Is Universal Credit the wrong approach?”, I proposed that a thoughtfully designed negative income tax system would be more effective in delivering UC’s stated aims. I believe UC is fundamentally flawed, primarily because it does not address the UK’s low and falling wages. The feasibility of designing incentives to make work pay into UC, in an environment with low and falling wages, may be logically flawed. This doubt exists in addition to the current uncertainty about UC’s technical feasibility. In this post, I set out how negative income tax (NIT), the proposed alternative to UC, would apply to the self-employed.

Recap of the negative income tax proposal

1. Income tax would be assessed on Comprehensive Realised Income (CRI).

2. An individual’s tax-free allowance would be calculated according to the number of hours worked. The value of each hour worked would be £20 and be capped at 40 hours per week (2,080 per year).

3. A single rate of tax would be applied to comprehensive realised income, By way of example, and for philosophical reasons, the single tax rate has been set at 50%,

4. Carers, the disabled, and the infirm would be credited with 40 hours per week by HMRC. This would release  a payment of £800 per week (40 hours x £20/hour) to individuals falling in these categories. Any earnings would not disqualify recipients from this minimum income guarantee. However, earnings would be taxed at the marginal rate of 50%.

5.  Job seekers would be paid according to the hours they work part-time, voluntarily in the charitable sector, and in work placements. These hours would be notified to HMRC by the placement providers using HMRC’s Real Time Information reporting system. Payments would be accordingly triggered at HMRC. The placements would not be compulsory – job seekers would have choice as to the  number of hours and type of work they took on. The role of the DWP would be to find and arrange work placements in cases where the job seeker has been unable to do it for themselves.

6. The self-employed (sole-traders and partners), would be allowed a tax-free allowance equivalent to deemed hours of work. The imputed hours would be capped at 40 hours per week (or 2,080 per year), as for all other cases. The hours worked would be imputed by dividing the tax-adjusted earned profits by the standard value of an hour (£20) and multiplying the result by the marginal tax rate. This arrangement would be necessary since no third party could attest to the number of hours worked.

H(n) = m x Y(n)  ⁄ c

Where

H(n) are the imputed hours for the period (capped at 52 x 40 = 2,080)

Y(n)  is the tax adjusted profit in period n

m is the marginal tax rate (set to 50% in the examples)

c is the standard value of an hour worked (set to £20 in the examples)

Example 1

Stephen enters self-employment at the start of the tax year. His (tax-adjusted) profits for the year come to £10,000. He has no other sources of income.

His imputed hours for the year would be

H(n) = £10,000 x 50% / £20 = 250

Hence Stephen’s tax charge for the year would be 

T(n) = 0.5 x £10,000 – 250 x £20 = £0

Stephen’s disposable income is hence £10,000 because his tax charge is zero. He has used up 250 hours of his annual allowance of 2,080 hours. He could have used the unused allowance to do part-time work and/or voluntary work. His income would have been supplemented had he done this.

Had Stephen also sold his house at a capital gain of £40,000, his income tax computation would be:

 T(n) = 0.5 x £50,000 – 250 x £20 = £20,000

Hence his post-tax comprehensive realised income would be £30,000. He is charged no tax on earned income but is charged 50% on his capital gain (an unearned component of comprehensive realised income)

 

Example 2

Anita enters self-employment at the start of the tax year. Her (tax-adjusted) profit for the year comes to £100,000. She has no other sources of income. Her imputed hours of work in year n are calculated as thus.

 H(n) = £100,000 x 50% / £20 = 2,500

The hours must be capped to 52 weeks x 40 hours per week = 2,080.

Her tax for year n would be:

T(n) = 0.5 x £100,000 – 2,080 x £20 = £8,400

Anita’s disposable income (take home pay) is hence £91,600. Her tax rate is 8.4% on her earned income. 

Had Anita also received rental income (i.e., unearned income) of £10,000 in the same year then her income tax computation would be:

T(n) = 0.5 x £110,000 – 2,080 x £20 = £13,400

Note that the unearned components of comprehensive realised income have again been taxed at a straight 50%. This feature, whereby an individual’s tax-free allowance is calculated on hours worked, assists in aligning the tax system with the “making work pay” agenda that underpins the government’s welfare reforms and UC.

NB. The parameters used in these examples, i.e., a working week capped at 40 hours, a marginal tax rate of 50%. and a standard hour set to £20, produces a tax-free allowance of £83,600 on earned income. This produces low average tax rates on middle earnings and is very generous by current standards. It is intended to incentivise. Of course, the average rate will approach the marginal rate of 50% as incomes rise.

Is Universal Credit the wrong approach?

“Work doesn’t pay” is the oft cited justification for Universal Credit (UC). It’s not clear that rolling up six separate benefits into one single payment will address this  problem, aka the unemployment trap. Wages in the UK are at best static and may have been falling in real terms over the last decade. Coupled with declining real wages has been the almost complete elimination of affordable council housing. Wages nowadays are insufficient to meet private housing rental costs which have soared due to shortages. So yes, it may pay claimants to remain on benefits, particularly Housing Benefit.

An alternative to UC is to integrate the tax system with benefits. Low earners, instead of paying income tax, would instead receive a generous negative tax payment. The incomes of low earners would be enhanced to the extent that they would no longer need benefits just to survive; in short, integrating tax and benefits could give low earners independence. But how can this be achieved? One framework to achieve this is a system of cumulative hourly averaging combined with comprehensive realised income (CRI) subject to a single rate of tax

Cumulative Hourly Averaging – the advantages

  • It rewards work – those who work will pay less tax on their comprehensive realised incomes

  • It can integrate benefits with tax – a generous negative income tax is facilitated

  • It supports flexible labour markets – the incomes of zero hours contract workers will be enhanced and less variable. There should be no need of a minimum wage.

  • It restores or strengthens the contributory principle.

Comprehensive Realised Income – the advantages

  • It addresses inequalities in wealth distribution – wealth transfers and other windfall gains are taxed at the same rate as earned income

  • It overcomes equitable objections to Inheritance Tax – legacies would be taxed according to the recipient’s circumstances and at the same rate as earned income

  • It reduces incentives to avoid tax – a single rate of tax can be applied to all sources of income

Cumulative Hourly Averaging – the Generalised Model

 The tax charge in period n would be calculated with the following formula:

T(n) = m∑Y(n) – c∑H(n) – ∑T(n-1)

where

T(n) = tax charge in period n

∑Y(n) = Cumulative comprehensive realised income received by the end of period n

∑H(n) =Cumulative hours worked by the end of period n

∑T(n-1) = Cumulative tax paid at the start of period n, and so ∑T(n) = T(n) + ∑T(n-1)

m = the marginal tax rate. I have used a single marginal rate of 50% applied to all components of CRI  without preference

c = the value of an hour of work. I have set this to £20 so as to produce a generous negative tax component which encourages work

 The Mechanics

Before illustrating how the tax calculation works, I have set out some parameters which I have used in the examples below. These are:

  • The standard working week has been set to 40 hours per week

  • The standard wage rate (or the value of an hour of work) is £20. Note this is an administrative value and has nothing to do with a minimum wage.

  • There is no minimum wage

  • A flat rate income tax of 50% applies to all components of comprehensive realised income without preferment. This is a limiting rate, meaning no one in work will pay tax at this rate however high their income.

  • Tax free personal allowances depend on cumulative hours worked and are valued at £20 per hour worked.

  • Tax free personal allowances are carried over to succeeding years, unlike the current “use or lose” system

  • No individual’s personal allowance can exceed 48 hours in a week

  • HMRC operates RTI (Real Time Information) so that incomes and changes in circumstances are reported as and when they occur.

 

Example 1

Freda starts work for 30 hours per week at £7 per hour (£210 per week). She has no other sources of income.

T(1) = = 0.5 x £210 – £20 x 30 = – £495

Freda will pay no income tax and instead will receive £495 under the negative tax mechanism. Her disposable income will thus be £210 + £495 = £705.  Not bad for a week’s work !

In the second week, Freda’s tax calculation is as follows:

T(2) = 0.5 x £420 – £20 x 60 – (-£495) = -£495

So again, Freda’s disposable income (take home pay) will be £210 +£495 = £705. Enjoy yourself, Freda. you deserve it! And so it will continue until Freda’s circumstances change.

Example 2

George starts work as a director of a large company. His monthly remuneration package comes to £60,000. His monthly hours of work are restricted to 208. He has no other sources of income

T(1) = 0.5 x £60,000 – £20 x 208 = £25,840

So George’s disposable income will be £60,000 – £25,840 = £34,160.

T(2) = 0.5 x £120,000 – £20 x 416 – £25,840 = £25,840

So long as George’s circumstances don’t change his monthly disposable income will remain at £34,160.

 

Example 3

Mark Anthony is a notorious playboy who has never done a day’s work in his life. His very rich father bequeaths Mark Anthony £500,000 in his  will. Mark’s tax liability will be:

T(1) = 0.5 x £500,000 – £20 x 0 = £250,000

In the second  period, Mark Anthony decides to do some voluntary work. He registers 30 hours with HMRC.

T(2) = 0.5 x £500,000 – £20 x 30 – £250,000 = – £600

Mark Anthony is rewarded for his voluntary work to the tune of £600 via the negative income tax mechanism. Work pays! Even unpaid work.

 

Example 4

Lois has a severe disability that limits the amount of work she can do in a week to 10 hours. She is paid £3 per hour (there is no minimum wage). HMRC credits Lois with 30 additional hours per week to compensate her for the hours she is unable to work through no fault of her own. She has no other sources of income. In week 1 her tax will be calculated thus:

T(1) = 0.5 x £30 – £20 x 40 = – 785

So Lois’s disposable income in week 1 will be £30 + £785 = £815. This is an example of how institutions can be used to compensate disadvantage.

In week 2, Lois receives a pay rise of £2 per hour to £5 per hour. Her tax calculation in week 2 will be

T(2) = 0.5 x £80 – £20 x 80 – (-785) = -£775

Lois’s disposable income in week 2 has risen to £50 + £775 = £825.  A pay rise of £20 per week has resulted in Lois’s disposable income increasing by £10 and the state subsidy falling by an equivalent amount.

Example 5

Tony is a homeless alcoholic, without work or income. He is offered 40 hourly work credits per week which will trigger weekly payments of £800 via the negative income tax mechanism provided he undergoes treatment for his alcoholism at a residential clinic. In Tony’s case, the  weekly payments are paid directly to the clinic instead of to Tony, Tony will need to price himself into employment when his treatment is completed, a task made easier absent a minimum wage.

Information requirements

HMRC will need to keep an up-to-date record of every taxpayer/claimant and changes in their circumstances. This is not as onerous or as intrusive as might at first appear; RTI, which requires employers to submit details of employee  hours and pay in “real time”,  has already been introduced. The road has already been dug.

 Here is a logical record of the information and processing that HMRC would need to collect and process for an employee. The particular employee shown in the record has had a particularly turbulent time, starting as a highly paid director, becoming unemployed, suffering disability, inheriting a sizeable estate, etc, all in six weeks!. The record is not intended to be of a typical employee but is illustrative of how income tax would work under cumulative hourly averaging with CRI .

Table of events

Conclusion

One thing writing this post has taught me is how difficult it is to design a safety net which both protects and incentivises.  A safety net  which is too generous removes incentives to return to, or to get into, work. A safety net built around stick and no carrot is cruel and damaging to individuals. I fear that Universal Credit, with its vicious sanctions regime and its heartless treatment of the sick and disabled, falls into this latter category. I venture to suggest that the negative income system outlined above, albeit with its fault lines, would be more effective than the proposed UC project should the latter ever go live. The system outlined above is certainly kinder than UC. Having said this, it may be that the proponents of Unconditional Basic Income win the day – UBI sidesteps the tension between incentive and protection. Perhaps this is the way to go.

Acknowledgement

It would be remiss of me not to acknowledge the brilliant work of Douglas Bamford in the field of taxation and philosophy. Douglas very kindly gave me sight of his then forthcoming book in advance of its publication. His ideas on cumulative hourly averaging have very obviously informed this piece, as has his idea of using comprehensive income as a tax base. His book is entitled Rethinking Taxation – An Introduction to Hourly Averaging. ISBN 9781907720918.

Any errors or sub-standard work contained in this piece are mine, and mine alone.

Addendum 2 September 2014

1. Quite rightly, it has been pointed out to me that the negative tax proposal outlined above does not say much about unemployment support. To answer this, I suggest work placements should be available for all jobless people, which they can choose to take up. There should be no compulsion as to participation or as to the type of placement. If a jobless person can arrange a placement of their choice, say in a museum, then so be it. The only requirement would be the readiness and agreement  for the placement provider to submit the hours worked to the HMRC as registered hours. The registration of hours worked each week under RTI reporting would then trigger a payment via the negative income tax mechanism to the worker in the same way as for other employees.

2. People who have caring responsibilities, either for children or for aged parents, should receive hourly credits equal to the standard working week  (40 hours according to the parameters used in my examples).

3. Profits on the sale of houses, even if a house in question is a Principal Private Residence (PPR), should be brought into the Taxable Comprehensive Realised Income calculation. Currently, the gain on sale of a PPR is exempt from taxation.

Regional variability in the application of JSA sanctions

Variability of JSA Sanctions between JCP Districts

An investigation into the level and appropriateness of JCP’s use of benefit sanctions, including differences of approach between JCP Districts

Submitted to the House of Commons Select Committee to examine the role of Jobcentre Plus in the reformed welfare system.

By TheUxbridgeGraduate

An independent analyst

Prepared in April 2013

Specific Terms of Reference

To comment on JCP’s role in relation to the rights and responsibilities of benefit claimants, including: the effectiveness of benefit conditionality, particularly job-seeking conditionality and the mandatory “work-focused interview”; and the level and appropriateness of JCP’s use of benefit sanctions, including differences of approach between JCP Districts.

Section 1   Executive Summary

 My submission focuses on the final sentence in the Specific Terms of Reference, namely,“the level and appropriateness of JCP’s use of benefit sanctions, including differences of approach between JCP Districts”.

  1. In March 2013, I conducted a brief statistical study to ascertain whether JSA sanction rates varied significantly across England. This was in response to concerns that targets were driving JSA sanctions. The study was undertaken on the belief that if a single, over-arching target was in operation across the UK then variation between regions would be found to be random and statistically insignificant. That is, sanctions rates would be essentially uniform across the UK.
  2. My study found statistically significant variation in sanctions rates between the eight English areas selected for the study.  In particular, sanctions regimes appeared statistically significantly harsher in London and the West Midlands than in Tyne and Wear, Merseyside, and the other northern metropolitan counties.
  3. A conclusion from that study was that a single national target did not seem to be in operation. However, the conclusion was tentative because of the imperfect data used in the study.
  4. I have since undertaken a fuller and better designed statistical study on the same eight areas. This second study forms the platform upon which this submission is based. I believe the results from the second study are reliable.
  5. The latter study confirms the first study’s conclusion, i.e., that a single national target is not in operation, that Tyne & Wear and Merseyside have the lowest sanctions rates, that London and the West Midlands have higher than expected sanctions rates.
  6. Both studies suggest that sanctions rates are a policy variable under the control of managers at regional, district or job centre level. Hence arbitrary and aggressive sanctions decisions may be the product of delegated sanctions policies, resulting in a post code lottery for claimants.
  7. The Select Committee is urged to seek an explanation from DWP for why sanctions policies are more aggressive in London and West Midlands. The Select Committee is also urged to consider whether aggressive sanctions policies are compatible with the social security system, a large part of which is administered by DWP.

Section 2   Background

  1. There have been several disturbing recent accounts of JSA claimants being sanctioned for seemingly trivial reasons. A sanction is usually a very serious penalty to impose on an individual for whom JSA may be the sole source of income. Liberal application of sanctions runs counter to the notion of social security which ostensibly is to provide a safety net to people in need. Removing an individual’s benefit can realistically propel that individual into destitution. One would therefore hope that a sanction would be applied only as a last resort when all other measures have failed.
  2. Some commentators have suggested that aggressive sanctioning of claimants has arisen because targets have been set, either at the centre, or by autonomous regional or district managers, or even by individual job centre managers themselves. Some compelling anecdotal and written evidence has recently emerged that may confirm the existence of regional or district targets.

 Section 3    Scope of my study

  1. Initially, the purpose of my investigation was to ascertain whether sanctions were being applied to meet targets. By establishing whether significant variation existed between regions, I hoped to conclude one way or another whether targets were guiding sanctions use.
  2. Because of data and possible methodological limitations, I have now confined my analysis to simply ascertaining whether significant regional variation exists in sanctions rates or whether sanctions rates are uniform across the regions.
  3. Confirmation of uniform sanctions rates across regions admits of one of the following conclusions set out in points 4 and 5:
  4. A nationally set target exists and hence uniform sanctions rates arise through individual job centres complying with instructions received from the centre in pursuit of the target.
  5. Uniform sanctions rates arise solely because claimant job-seeking behaviour is uniform across regions. In this case sanctions solely reflect appropriate responses by job centre staff/decision makers.
  6. Confirmation of differential (non-uniform) sanctions rates between regions admits of one of the following conclusions, set out in points 7 and 8
  7. Claimant job-seeking behaviour varies from region to region and the application of differential sanctions rates    reflects appropriate responses by job centre staff/decision makers.
  8. Sanctions policy is being determined at regional or district level, or even by individual job centre managers. If true, then a    post-code lottery is faced by claimants who may be subject to an arbitrary and aggressive sanctions policy in one region or to a more nuanced policy in another.
  9. My main purpose is to provide numerical and statistical evidence to the Select Committee on this topic. I also set out the values which I hope will guide the Select Committee in its deliberations.
  10. All data used in the study have been set out in tables in later sections with the sources (ONS and DWP) acknowledged.

Section 4   Methodology

  1. The study rests on the assumption that the number of sanctions issued will be proportional to the number of claimants on a region’s books, i.e., higher claimant counts will result in higher sanction counts.
  2. The six English metropolitan counties, plus Inner and Outer London, were selected for the study on the ground of homogeneity. The number of regions was restricted to eight to make the data collection and processing more manageable. Including more areas would not add much additional information to confirming whether sanctions rates are uniform or not.
  3. The claimant counts for each of the eight regions for the period 10 May 2011 to 10 April 2012 were collected from the ONS website. The average monthly claimant count for each of the eight regions was computed. These average monthly claimant counts were used to weight and distribute the actual sanction count over the regions to obtain an expected sanctions count under the hypothesis that sanction rates are uniform.
  4. The actual sanctions counts compiled by DWP for the period 1 April 2011 to 21 October 2012 for each of the eight regions were compared to the expected sanctions count.  The sanctions data supplied by DWP were not broken down into months and so a time-series analysis was not possible.
  5. The actual and expected sanctions counts for each region are shown in the following table, together with the average monthly claimant counts used to calculate the expected counts. A visual plot of actual versus expected sanctions counts also follows.

Region

Period 11 May 2011 to 10 April 2012

Period 1 April 2011 to 31 March 2012

Monthly claimant count on average

Sanctions count

Count (ONS)

%

(Calculated)

Actual

(DWP)

Expected

(Calculated)

Tyne and Wear

39,186

6.20%

9,770

12,202

Merseyside

50,983

8.07%

14,030

15,876

South Yorkshire

43,363

6.86%

13,330

13,503

Greater Manchester

82,450

13.05%

25,600

25,675

West Yorkshire

70,267

11.12%

22,010

21,881

Inner London

111,548

17.66%

35,870

34,736

West Midlands

111,925

17.72%

36,150

34,853

Outer London

121,944

19.31%

39,940

37,973

Total

631,666

100.00%

196,700

196,700

Sanctions for report good version

6.   Under the hypothesis of uniform sanction rates across the regions a test statistic was computed and compared to the critical values of the Chi-squared distribution with seven degrees of freedom.

7.  The value of the test statistic is 889.89, which is a very high and emphatically confirms that sanction rates are not uniform across regions. For interested readers, here are the workings for the computation of the test statistic.

Sanctions

Diff

Diff squared

Diff squared / E

Actual

Expected

Tyne and Wear

9,770

12,202

-2,432

5,916,443

484.86

Merseyside

14,030

15,876

-1,846

3,408,286

214.68

South Yorkshire

13,330

13,503

-173

30,022

2.22

Greater Manchester

25,600

25,675

-75

5,613

0.22

West Yorkshire

22,010

21,881

129

16,637

0.76

Inner London

35,870

34,736

1,134

1,286,301

37.03

West Midlands

36,150

34,853

1,297

1,681,708

48.25

Outer London

39,940

37,973

1,967

3,868,189

101.87

Total

196,700

196,700

0

Test statistic

889.89


Section 5    Discussion of results

  1. Inspecting the above table enables us to see which regions are contributing to the very high test statistic of 889.89.  It is clear that Tyne & Wear, Merseyside, Inner London, West Midlands, and Outer London account for 99% of the test statistic’s value. The remaining three regions account for just 1% between them.  It is the five “high value” regions which should, because they are exceptional, attract attention.
  2. The study indicates that claimants in the two London areas and in the West Midlands are significantly more likely to be sanctioned than their peers in the other areas. Why this is the case may be worthy of further investigation. Either the extra sanctions arise because claimants in these areas are less diligent in their job searches, or managers of these areas are pursuing aggressive sanctions policies. Are area managers authorised to determine their own sanctions policy?  An aggressive sanctions policy might well cause aggrieved claimants to believe they have been sanctioned because targets are the driving force.
  3. In contrast, claimants in Tyne & Wear and in Merseyside are less likely to be sanctioned than their peers in the other areas. Again, further investigation may be needed to explain this variability. Have the managers in these areas been told to “go easy” on claimants by the centre? Or has the more relaxed sanctions policy been set at regional level?

Section 6     Conclusions, summary and recommendations

  1. The statistics show overwhelmingly that the likelihood of a sanction being applied depends on region. The most likely explanation for this is that sanctions policies are being determined locally.
  2. This may raise issues of equity and fairness. For example, is it fair that a claimant should face a greater risk of a sanction simply by virtue of their area? Is it fair that a claimant’s technical or minor breach of a job seeker agreement is punished with a sanction in one area but is forgiven in another? Should not all claimants be subject to the same disciplinary regime irrespective of their region? I urge the Select Committee to consider this matter in its deliberations.
  3. Delegated sanctions policy may also bring forth an issue of accountability. The legislation empowers sanctions to be applied in pursuit of a specific purpose. Aggressive sanctions policies give the impression that some regions may be using sanctions for purposes other than authorised by law. For example, if area managers have taken it on themselves to use sanctions as a deficit reduction tool then arguably this is unlawful. Similarly, if these same managers have set targets for their regions then this is likely to be arbitrary and again unlawful. I suggest the issue of accountability and lawfulness may be relevant considerations for the Select Committee.
  4. Further to the issue of accountability, it seems unlikely that DWP can be unaware of the differential (non-uniform) sanctions rates across the regions. My guess is that DWP must be monitoring how sanctions are applied across areas, perhaps using methodologies similar to the one outlined in this submission. If so, then DWP should be in a position to explain and justify the differential sanction rates across regions I urge the Select Committee to seek such an explanation and justification from DWP.
  5. If DWP does not have systems to monitor how sanctions are being applied across regions then I would suggest its management control systems are remiss. I urge the Select Committee to explore this matter with DWP when its representatives appear.
  6. I also ask the Select Committee to bear in mind the purpose of social security when it considers sanctions in relation to job seekers.  An aggressive sanctions policy, where it exists, runs counter to the idea underpinning social security. I suggest it is incongruous to punish job seekers with further impoverishment, if not destitution, with sanctions imposed by a major component of the social security system. 

Section 7   Regional claimant counts (sourced from ONS)  (Redacted in on-line version) 

Section 8    About Me

I am a freelance, independent analyst. I trained as a Management Accountant and have received post-graduate training in industrial statistical methodology from a reputable British university. I am not in receipt of out-of-work benefits or under sanction.

My first study can be found via this link:

https://theuxbridgegraduate.wordpress.com/2013/03/23/are-uk-unemployment-benefits-being-unlawfully-withheld-from-claimants/