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WORK INCENTIVES AND LABOUR MARKETBEHAVIOUR IN ONE PARENT FAMILIES
(first draft, please do not quote)
Lic. Soc.Sc. Katja Forssén M.Soc.Sc. Mia HakovirtaUniversity of Turku University of TurkuDepartment of Social Policy Department of Social Policy20014 Turku 20014 TurkuFinland FinlandTel. +358-02-3335897 Tel. +358-02-3335408Fax +358-02-3335093 Fax. +358-02-3335093Email:[email protected] Email: [email protected]
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ABSTRACT
The increased number of single parents living on social assistance has led in somequarters to questions about the effects of benefit systems on single parents’ incentivesto participate in the labour market, as well as on incentives for individuals to become orremain single parents. The problem of disincentives to work is very often localised tofamily policy. The main task of family policy is to provide benefits for families withchildren. However modern family policy has aims other than economic. In Scandinaviancountries family policy has to a great extent focused on enabling parents to combinecare of children and working life.
According to the thesis of dependence culture, the countries with high social benefitlevels should have a high amount of unemployed single parents or parents who aretaking care of their children at home. The aim of this paper is to study work incentivesand their implications for one parent families in Finland. In this study we will answer thefollowing questions: To what extent are high income taxes or high day care fees adisincentive to work? What are the effects of child benefits or transfer programmes forsingle parents? How do single parents actually behave in work disincentive situations?Do they act like homo economicus or like homo sociologicus? The study is based on themicrosimulation model and the Finnish Living Conditions Survey from the year 1994.
In our data only 14 % of employed single parents had the income level higher than whatthey would have got when unemployed. Most (86 %) of the employed single parents areworking despite that higher disposable income would be received from benefits. Thework disincentive hypothesis does not get strong support in our data. In short timeperspective one could say that single parents are behaving rather as homo sosiologicusthan homo economicus. In the long run perspective single parents are acting like homoeconomicus because for most of the single parents the labour force participationguarantees high social insurance for possible future social risks.___________________________________________________________________________
This paper will be presented in ‘2nd International Research Conference on SocialSecurity in Jerusalem (25-28.1.1998).
2
1. INTRODUCTION
In the past twenty years there has been a significant growth in the number of single
parent families in all OECD countries (Bradshaw et al 1993; Hantrais and Letablier
1996; Lewis 1997). The widening diversity of family life imposes greater pressure on
the capacity of families to provide incomes and social care. This development has been
associated with a shift in the composition of the low income population, and has posed
new challenges to systems of social security. At the same time as the number of single
parent families has increased, has transfers spending on this group also increased. This
has led in some quarters to questions about the effects of benefit system on single
parents’ incentives to participate in the labour market, as well as incentives for
individuals to become or stay single parents. Especially in the liberal welfare states
people hold strong views about the possible disincentive effects of taxes and transfers.
At the time of the latest recession in Europe the rethorics of work disincentives and
welfare dependency started to get support also in Scandinavian countries from some
politicians and citizens.
Very often single parent families has been taken as an example of the group which tend
to be depending on the state income support. This dependency of single parents on state
welfare is seen as pathological by those who defend the dependency culture thesis
(Hernnstein et al. 1994; Murray 1984). The dependency is required as a result of free
and deliberate choices of the claimants and, therefore, if somebody is to be blamed for
the situation it is just beneficiaries themselves. However, there can be found many
reasons for the economic problems of single parent families. Head of the single parent
family is often young, low educated and female, which makes the family more
vulnerably to the social risk. Low educated and young people have often a weak
position in labour market. Women’s incomes are lower than men’s. Changes in
employment patterns tend to widen the gap in incomes between dualearner, one-earner
and noearner households. The clearest link between family change and the development
of the new poverty lies in the circumstances of one parent families. Single parent
families run a very high risk of poverty (Burkhauser et al. 1988; Smeeding et al. 1988;
3
McLanahan et al. 1992; Forssén 1997a). Single parents can be viewed as a highly
disadvantaged group in terms of their resources, which include money, time and social
networks (Hobson 1994).
The problem of disincentives to work is very often localised to family policy. The main
task of family policy is to provide benefits for families with children. The modern family
policy has also aims other than just economic. In Scandinavian countries family policy
has to a great extent focused on enabling parents to combine care of children and
working life. (Kamerman et al. 1994; 1978; 1981.) This has been made possible by
offering day care services for children in need, home care support for parents with child
under 3 years old and child allowance for all children. Together with earning based
unemployment benefits the situations of single parent families can very easily be such
that the parent is economically better off when staying at home.
The aim of this article is to study work disincentives and their implications for single
parent families in Finland. In this study we will answer the following questions: Have
high income taxes or high day care fees been a disincentive to work? What are the
effects of child benefits or transfer programmes for single parent? Majority of previous
studies have been concentrated on hypothetical calculations. In addition to these
calculations we seek to answer how do the single parents really behave in work
disincentive situations? The outline of the paper is as follows. First we will make an
overview of theories dealing with work incentives. In chapter 3 we present our data. In
chapter 4 we will briefly describe the current family policy system in Finland. In the
empirical analysis by utilizing simulations technics and data from the Finnish Living
Conditions Survey (1994) we will answer above mentioned questions. Finally the
results are discussed.
2. SOCIAL POLICY: AN INCENTIVE OR DISINCENTIVE ?
With some exaggeration and oversimplification, one can argue that there are two
competing theories about the association between work incentives and social benefits.
First, the work disincentive theorists have been concerned that too generous welfare
state benefits are threatening work ethic and causing moral hazard, because lavish
4
welfare provisions it does not pay to work: you are better off on living on social
welfare. Second, the so called work incentive approach suggest that welfare state
benefits encourage work. Extensive welfare provisions, not least social services and day
care possibilities, facilitate and encourages people to participate in paid work outside
home.
The work disincentive hypothesis assume that the higher the level of social provision
the lower the incentive for an individual to get employed. A common thread running
around this issue is the discussion of welfare dependency. Welfare dependent is a
corruption of welfare recipient, which assumes that recipients become dependent on the
government by obtaining welfare. However, the term dependency is nothing more than
a synonym for a long-term welfare use, but it often has a pejorative connotation. Those
who are dependent are inactive, ineffectual and even irresponsible in the eyes of the
many. (Bane and Ellwood 1994; Gans 1995.) Yet, Murray (1984) argues, that the
dependency on social security is due to the poor themselves. The dependency is a
deliberate choice probably enchanted by the very welfare state that somehow is an
incentive to fail.
There is a concern about the incentive effects of welfare programmes and initiatives
have been introduced to ensure that financial rewards from work are higher than the
levels of benefit that can be received outside of the labour market. Economic
dependence on public agencies is a political issue in most US and UK, but becoming in
other countries too. The welfare states are developing incentives for single parents to
take paid work as well as disincentives to stay on public support (Eardley et al. 1996;
O’Connor 1996). In UK the earning disregards for single parents have been increased
and also the criteria for benefits paid to those in work have been extended (Lewis
1997). In the Netherlands similar legislation has been accomplished and there are also
prescribed sanctions for non-compliance with work seeking (Eardley et al. 1996).
The work incentive hypothesis assume that existence of high welfare benefits do not
either necessarily mean work incentives to become negative. The welfare state was not
to meant to encourage exit from the labour market, on the contrary it was designed to
promote maximum labour market participation. Therefore, the role of the welfare state
as an incentive to labour supply is twofold. First, the welfare state has created working
possibilities especially for females. Second, subsidised child care services have enabled
5
women and single parents to enter into the labour market. (Esping-Andersen 1990).
Thus the incentive for single parents to enter to the labour market go hand in hand with
extensive public day care services and also with parental leave benefits linked to the
labour market activity (Lewis 1997).
The mechanism for delivering social welfare is also important factor affecting the labour
market behaviour of single parents. Earning-related welfare benefits encourage people
to work, because part of the welfare benefits is paid out in proportion to the recipients
prior earnings and people are motivated to work for qualify better benefits. Social
insurance benefits gives strong incentive for individuals to participate in the labour
market. Earning-related unemployment compensation as opposed to the means-tested
assistance may provide some incentive for individual to get a job again so that she or he
will be covered by social insurance also next time of unemployment (Atkinson and
Micklewright 1991; Aronsson and Walker 1997).
Predictions about the impact of policy choices differ dramatically depending on what the
origins of the problem seem to be. The liberal view emphasises the importance of the
economy and jobs and conservatives the disincentive of welfare system (Bane and
Ellwood 1994). So, if it is because of welfare benefits that single parents are not
working then by elimination of financial aid would increase their labour force
participation and eliminate dependency of social benefits. On the other hand, if a welfare
recipiency is a symptom of background disadvantages that lead to the poverty and
dependency, then reducing financial aid would not help much.
2.1. Human behaviour and social policy
Competing the reasons for single parents high amount among welfare recipient, the
different explanations have been emphasised. First, the extent to which welfare systems
shape the recipient’s willingness to leave welfare system because of availability of state
support. Second, the extent to which it is single parents values that are important factor
affecting people’s choices wheter to work or not. (Bane and Ellwood 1994; Lewis
1997.)
6
There is very little research done at microlevel about the factors which encourage
people to enter and/or remain in employment or discourage them for doing so, while
some commentators believe that policy can influence decisions about working.
Economic studies give the impression that an increase in tax relief or in the level of
benefit, does have measurable effect on decisions about labour market activity.
Sociologist are more cautious and rather explain behaviour as the possible outcomes of
the combination of factors, including the wider socio-cultural climate (Hantrais and
Letablier 1996).
When faced with the several courses of action, people usually do what they believe is
likely to have the best outcome (Elster 1989). This rational choice theory suggest
individuals examine the options they face, evaluate them according to their tastes and
preferences, and then select the option that brings them the greatest monetary utility. It
assumes that people are making decisions of their lives only by calculating benefits.
Rational decision making can also be seen as a contrast between homo economicus and
homo sociologicus. Homo economicus is an instrumentally rational, the figure that
typically appears in neo-classical economic theory as a maximizer of utility. Homo
economicus as represented in the rational choice model calculates according to the
individual preferences. In contrast, homo sociologicus lives according to rules, roles and
relations and have been socialised into the appropriate norms of behaviour. (Heap et al.
1992).
Providing that rational choice theory of human behaviour is correct, we can expect to
find a low labour force participation of single parents because of the high quality of
benefits. The better the welfare benefits the lower the work participation rate. However,
work decision are affected by many considerations and perhaps amongst the most
important of these are non-economic. People work because their jobs are fulfilling in
their own right, providing social esteem and sense of social integration. (Jahoda 1992;
Gershuny 1994.) In many cases it is not possible to make clear difference between
work’s economical and social meanings.
7
3. RESEARCH QUESTIONS
This study focuses on work incentives and their implications for single parent families in
Finland. We will test the work disincentive hypothesis which assumes that the higher the
level of social provision the lower the incentive for an individual to get employed.
According to this hypothesis Finnish single parent families should be a good example
for a group which faces the disincentive problem because of universal and multiple
family policy system that will be described in the next section. We will study the effects
of child benefits and transfer programmes for single parents. First we locate possible
disincentive traps. Have high income taxes, income based housing benefits and high
daycare fees been a disincentive to work? Second, the main aim of the article is to study
how single parent families really behave in work disincentive situations. Do they act like
homo economicus or like homo sociologicus? Do they quit to work to live on the dole
if that is economically more rewarding? Or do work have some value as such so that the
claimants continue to work?
The study bases on the microsimulation model and the Finnish Living Conditions
Survey from the year 1994. The survey data used is Finnish Living Condition data
collected by the Central Statistical Office of Finland. The data was combined by
combining interviews and tax registers were also used mainly in respect of income data.
The sample size of the survey was 8650 Finns. By using Finnish Living Condition Data
we check how single parents’ have actually behaved in their real lives. To what extent
are they working or not? Single parents will be clustered in different groups by their
8
position in labour market and their disposable incomes. Thereafter we cross-check their
possible disposable incomes in alternative situations, e.g. what they would get in work
or if they were living in social benefits. To do this we use a special microsimulation
model (the so called KOTO-modelling).
Microsimulation offers an analytical tool for assessing the redistributive potential of
social security system. At the same time, simulation has its limits. First, it bases the
model family approach and therefore it has involved collection of information on a set
of hypotethical family circumstances. However, the information microsimulation gives is
used to compare the entitlements of families receiving benefits with the incomes of
families in paid work. Second, the results of microsimulation models can never explain
the human behaviour effects due to the welfare benefits. Therefore in this study we have
used both the microsumulation and Living Conditions Data to find out how social
security might have influenced to single parents’ labour market behaviour.
4. THE INSTITUTIONAL SETTING OF FAMILY POLICY
In order to provide the reader a basic understanding of the institutional context where
the single parents in Finland are acting and making their decisions, we give a cursory
account of the different benefit systems the parents can rely on.
By introducing the family systems during the twentieth century the state has in the
Western countries to an increasing extent, taken responsibility for the cost of children.
These family policy systems consist of three ingredients - family legislation, social
services and tax- and transfer benefits and each country has its own combination of cash
benefits, tax reliefs or services in kind which provide support for those families rearing
children. (see Bradshaw et al.1993; Wennemo 1994.) Family policy is concerned both
with the effects on the family of all types of activities and with the efforts to use family
well-being as an objective or as a source of goals and standards in developing public
policy. Family policy may be defined as a field in which certain objectives regarding the
family are established and various policies and measures are developed to achieve these
goals (Kamerman and Kahn 1978).
9
The family policy goal in the Nordic welfare state model is social integration, sought by
maintaining high-quality public services that are reasonably priced and available to all
who need them. Basic security is typically at a reasonable level, the state is in a central
role as a provider, and benefits are universal. All citizens are covered by the social
security programs. A reasonable level of benefits is determined by minimal security on
the one hand and income-relatedness on the other. The state is in a multi-faceted
regulating role in society; it is used as an instrument that creates equality and social
rights. In addition to the goal of making the cost of children equal across population
groups, the family policies are aimed at supporting the combination of work and family
responsibilities and making it possible for women to work.
Finland has established a policy to obtain gender equity and a better balance between
work and family life. Young-child policy is targeted overwhelmingly on children with
working parents. The policy package assumes employment, both as a source of
eligibility for a rich package of benefits and is the basic source of income, once children
are older than 3 years old. (Kamerman and Kahn 1994.) Single parents’ high labour
market participation rate is one result of above mentioned principles of family policy. In
Scandinavian countries social benefits have been quite important in lifting lone parents
from pre-transfer poverty and improving the economic well-being of those above the
poverty line (Smeeding et al. 1988; Danziger et al. 1995; Forssén 1997a), because
benefits supplement rather than replace earnings.
The leading characteristic of family policy in Finland has been a strong commitment to
improving and expanding the scope of care arrangements for young children. Children
under eleven months are typically taken care of by their own mother because there are
rather long maternity leave with earning related compensation in Finland. Maternity
cash benefits represent a compensation for cost arising from childbirth. Since 1985 the
period that system compensate about 80 % of income losses has been 263 days. Some
collective bargaining agreements require that employers continue to pay wages to
workers during part of the maternity leave. Altought both parents are eligible for such
benefits, the dominant part of days goes to mothers.
After maternity leave there are two alternative policy options available for families with
the children under three years old: a public day care system or home care allowance.
10
Publicly provided day care is organised and financed mainly by local authorities. Public
involvement in child care has increased steadily in Finland during last decades. The
modes within the public day care system are the day care centres and family day care.
The fees for public day care are income related and parents pay fees based on rates
decided upon the each municipality. In 1994 the daycare fees were granted into five
different cost brackets: 385, 550, 825, 1100 and 1430 Fmarks per one child/ a month1.
The child home care allowance is aimed at facilitating the arrangement of day care for a
child under three years of age. Child home care allowance is often paid to a mother who
stays at home to take care of child(ren). It is intended as an alternative to municipal day
care. Home care allowances consists of three different parts: basic payment, additional
means-tested payment and sibling supplement. The child home care allowance is taxable
income. Basic payment are available for all families and additional means-tested
payment is paid to families whose income falls below a specified level. When there are
two or more children under school age in the family the sibling supplement is received.
The other benefits for families with children are universal child allowance, maintenance
allowance and income tested housing benefits. Child allowances are paid for every
persons up to the age of 17. Its rate depends on the number of children eligible for child
allowance there are in the family. The allowance is increased for each child in a single-
parent families. The child allowances are not subjected to income tax. The maintenance
allowance, also paid by the government, ensures child support payments to single parent
in the absence of the other parent or other parents failure to fulfil maintenance
obligation. Housing benefits are income tested and are not subject to income tax The
housing benefits covers most of the housing cost when there is only one parent in a
family.
Beside these benefits which are targeted to families with children there are other
universal benefits for all citizens as unemployment benefits and social assistance.
Unemployment allowance is payable under two different schemes: the basic
1 The cost of childcare for families has increased a lot in the 1990’s. In 1990, municipalitie weredelegated the power to deciden on the income limits for different income brackets for all but so-calledzero payment bracket. At the same time, the determination criteria were changed to being based on thegross income rather than the net income. The consequence of this decentralization was that 99 % ofmunicipalities tightened their income brackets. (Forssén 1997b.)
11
unemployment allowance scheme and the earnings related unemployment allowance
scheme. Basic flat-rate unemployment benefits are designed to ensure a minimum
standard of living during unemployment. The earning related unemployment insurance
fund are run by trade unions and benefits are paid only to the fund members. This
unemployment insurance in Finland is voluntary for individual employees. The
calculation basis of the benefit is previous earnings and the replacement rate for average
paid worker is usually 60 per cent of gross earnings.
The person or family not receiving any kind of salary or social security benefits or only
very low compensation may apply for social assistance. According to the law, all
persons with a low income who cannot make ends meet in any other way are eligible for
social assistance. This is a means tested transfer, having its historical roots in the system
of poor relief. The typical recipient of social assistance is a young adult and single
mother. Taking into account all households in the country, single parent families
constituted the category which had the highest proportion of social assistance
recipients: third of all single parent households received social assistance in 1994. Time-
series studies show that the rate of unemployment strongly affects the rate of social
assistance recipiency. The social assistance also seems to act as a substitute for
unemployment insurance benefits. (Living allowance 1994).
For single parent families the Finnish social policy system offers several alternatives to
act depending on the age of children. The figure 1 shows us how the Finnish social
policy effects on single parents position in labour market. Almost half of the single
parents stays at home when their child is under 3 years old. Most of them receive home
care allowance and almost twenty percent is unemployed. When the child is 3-6 years
old 55 percent of parents are employed and 25 percent are unemployed. Those parents
that are solely taking care of their children at home have almost vanished. When the
child gets older most of the single parents are again back in the labour market.
Figure 1. Single parents’ position in labour market (single parent with one child, by the
age of the child), %.
12
Another way of looking at the situation is to study in which way single parents in
different phases of life cycle collect their income e. g. in which way their income
package is combined. The figure 2 shows how single parents’ income package differs
between families with children in different age. The disposable income and work
incomes are highest in families with child over six years and lowest in families with
under 3 years old child. Families with child under three years get social transfers
(housing benefits, home care benefits) more often than families with older child. These
social transfers targeted to families with child under 3 years old keep families above
poverty line and for that reason the role of social assistance is not significant. Families
with a child over six years seem to be much better off than other familytypes. Their
disposable income, work incomes and paid taxes are all higher than in other families.
The amount of social assistance is also lower than in other family types.
Figure 2. Single parents’ income package in Finland in 1994 by the age of the youngest
child (Fmarks)
13
As mentioned earlier modern Scandinavian family policy has at the same time several,
often contradictory functions. Child support package have distinct and explicit
objectives. Some are clearly related to education, housing, health and child care policy.
Others are more generally related to a vision of family life or the role of women in
labour market. Because the functions are varied and sometimes contradictory
disincentive situations can be found when regarding the system as whole. Income based
benefits together with income-tested housing allowance, income based daycare fees and
homecare allowance can very easily lead to disincentive situation. This disincentive
problem occurs especially in single parent families.
When focusing on the situation of single parents with child over 3 years old it can be
said that Finnish policies are not decommodifying in the sense of providing market
independence. Instead, there have been promoted labour market participation and
earnings are the main component in the income package of single parents. The situation
in single parent families with child under 3 is different. Homecare allowances together
with housing benefits create a situation that is in many cases disincentive for labour
market participation. The average net income for unskilled female worker is about 87
000 Fmarks per year. All possible benefits for unemployed single parent with a child
under 3 are about 79 400 Fmarks a year. Daycare fees per one year can be as high as 15
730 Fmarks per year. Economically thinking there is not any incentive to work if the
above described family structure and income conditions are fulfilled.
14
5. DISINCENTIVE WORKING SITUATIONS IN ONE PARENT FAMILIES
In order to tackle the Finnish family policy specific country study is needed to unravel
the possible disincentive working situations built in the social security system. The
Finnish case is interesting in a sense that a country provides rather high welfare
provisions and can thus expected to exercise impact on lone parents’ choices of welfare
and work.
By using microsimulation we will inspect how the income tax and social security
contribution system might provide disincentives for single parents to participate in the
labour market. Incentives can be evaluated by comparing incomes in paid work and out
of paid work. We have compared incomes when earning from what single parents
would receive if they had no income on earning and were dependent benefits paid to
single parents outside the labour market or were dependent on social assistance. The
intervals where the marginal change of disposable income is negative or constant, family
might face work disincentive situation.
5.1. Disposable incomes
The level of incomes and benefits for single parents can be measured in a number of
ways. This analysis has looked at the disposable incomes of the Finnish one parent
families receiving benefits comparing them to the incomes of family in paid work.
Disposable incomes consist of total earnings and social transfers get deducted social
transfers paid.
The results can be illustrated an a number of figures. Figure 3 shows the disposable
incomes at different income levels of single parents with one child under three years of
age if the parent is living on benefits or have incomes from earnings.
Figure 3. Disposable incomes before and after day care payments in one parent family
with one child under three years of age
15
0
2000
4000
6000
8000
10000
12000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Gross income 1000 Fim/month
IN WORK BEFORE DAYCARE COSTS
IN WORK AFTER DAY CARECOSTS
HOME CARE ALLOWANCE
BASIC UNEMPLOYMENTALLOWANCE
EARNING RELATEDUNEMPLOYMENTALLOWANCEINCOME SUPPORT RATE
In the case of single parent with one child under three years old the disposable income
when getting an income related unemployment cash benefit, basic unemployment
benefits or home care allowance are even higher than the case of earnings. This trend
will last up to 5000 FIM/month in gross income and after that disposable income when
working start to increase slowly. After taking account the day-care fees paid as a
consequence of higher earnings the level where it is financially worth working increases.
If single parent at work has to pay for child care the social security system provides
disincentives to work even at very high incomes. After 12 000 FIM/month gross
incomes produce higher disposable incomes from earnings than from unemployment
benefit. If child is older and there are no child care cost then single parents incentive to
work is lower. Also it has to be remembered that costs of working increases the
reservation wage. A single parent with child under three years of age is often in poverty
trap even if the wage level is higher than average. The combined effects of extra taxes
paid and benefits lost as a result of an increase in income leads to the poverty trap.
Poverty trap arise not just from the income tested benefits, but also from the interaction
between the income test, other means-tested forms of assistance and the personal
income tax system.
Figure 4. Disposable income before and after day care payments in single parent
families with two children under three and seven years of age
16
0
2000
4000
6000
8000
10000
12000
14000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Gross income 1000 Fim/month
Dis
po
sab
le in
com
e F
im/m
on
th
IN WORK BEFORE DAYCARE COSTS
IN WORK AFTER DAY CARECOSTS
HOME CARE ALLOWANCE
BASIC UNEMPLOYMETALLOWANCE
EARNING RELATEDUNEMPLOYMENTALLOWANCESOCIAL ASSISTANCE
In the case of the single parent with two children under three and seven years old it is
not worth working even at the very high gross income. To get same disposable income
from earnings than from earning related unemployment benefit, the gross income have
to be more than 16 000 Fim/month if day care payments are taken account. Disposable
income from work starts to increase if single parent earns more than 17 000
FIM/month. In the lower level disposable incomes do not increase because loses of the
income deductible housing allowance and higher day care fees paid as a result of
increase in incomes. It seems that taking account the child care payments in income
brackets between 9000 FIM-15 000 FIM/month, disposable income will actually
decrease if the parent begins to work.
The interaction effects of social security and taxation and also the fees of social services
in microlevel can lead that people are trapped to unemployment or recipiency of social
benefits. The effect of the amount of the day care fees might indicate a distinct role
producing poverty traps. This means that the day-care payments alone put middle
income families in a poverty trap where any additional post-tax income will go directly
to increased day-care payments. In many situations lack of co-ordination between
income transfers and service fees creates a ”perverse” situation, where an increase in
income cause at the end financial losses to the income earner.
17
Figures 3-4 reveal also that low income families get greatest utility from the home care
allowance. This imply that there exist a rather strong incentives to stay at home when
child under three years old, if the potential wage is low. However, home care allowance
is based on idea that mothers can choose whether to stay home and take care of their
children or return back to work after maternity leave. The income support level lies
below the income that can be received by working or in other non-working situations.
So, social assistance does not produce poverty traps to the lone parent families.
Earning-related unemployment cash benefit bring the strongest disincentive work
situations to the one parent families with child under three years old in the case of low
incomes. This is because of high compensation of housing allowances among single
parents. Housing subsidies are a significant component of the benefit package on
unemployed and for some lone parents a move from unemployment to work can bring a
sharp increase in the proportion of the rent which they have to pay and this can be a
disincentive to work.
Figure 5. Compensation of unemployment, single parent family with one child under 3
years old.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Gross income 1000/month
DAY CARE FEES
HOUSING ALLOWANCE
EARNING RELATEDUNEMPLOYMENTALLOWANCE
18
Figure 5 shows how earning-related unemployment benefit and housing allowance
compensate losses of earnings at the different income level. Earning-related
unemployment benefit increases according to the previous earnings. Housing allowance
compensate a huge amount of housing cost among single parent with one children under
three years of age. Compensation for unemployment is highest at the income level
above 16 000 Fim, because unemployed single parent does not have to pay for child
care.
5.2. Replacement ratios
Comparing single parents incomes when earning to the welfare benefits replacement
rate is a good indicator. Benefit replacement rates are usually calculated by comparing
the levels of out of work benefit income to some measure of income in work (Esping-
Andersen 1990; Eardley et al. 1996; Whiteford and Bradshaw 1994). Benefit
replacement rate show what percentage of earnings is replaced by benefits.
One measure used to detect potential incentive problem is the connection to the gross
replacement rate, i.e. the benefits received in relation to the income before tax when
working. The net replacement rate is a more realistic approach, because housing costs
and housing benefits are also included in the calculation. For the single parents with the
pre-school child, the in work net disposable income also takes account of child care
cost. The replacement rate close or to or above 100 per cent indicate incentive problem
e.g. living on social benefits give the same income level as work.
Replacement rate can be used as indicators of potential income effects of benefits
system. If a typical rent level is assumed, table 1 contains the gross and net replacement
rates for a single parent with one and two children when getting welfare benefits. These
replacement rates are calculated at the average income level (7833 mk/month). Gross
replacement rate is calculated by comparing gross earnings to the benefits which person
would receive on living on welfare. Net replacement rate take account the housing
benefits in different families and the replacement rate depend on the provision of
housing allowance. The calculations base on the simulations.
19
Table 1. Replacement ratios as percentages of gross and net income at average earnings
in 1994.
Gross income
replacement rate
Net income
replacement rate
1 ADULT AND 1 CHILD
Income support 40 76
Home care allowance 45 84
Basic unemployment benefit 38 78
Earning-related unemployment
benefit
66 95
1 ADULT AND 2 CHILDREN
Income support 56 82
Home care allowance 50 86
Basic unemployment benefit 41 81
Earning-related unemployment
benefit
68 95
For single parents gross income replacement rates are quite low, suggesting there are no
incentive problems. Net replacement rates are higher, because of compensation of
housing assistance of housing cost. At the average income level single parent has to pay
for child care and that increases the net replacement rate. These replacement ratios
show, how the benefits compensate the losses of earnings in most unemployed.
6. SINGLE PARENTS LABOUR MARKET BEHAVIOUR
In the previous chapter we have described the social security scheme and how it in
theory produce disincentive working situations for single parent families. The central
issue regarding the welfare benefits and the labour market behaviour is also an empirical
one. Benefits in theory have effects which are negative with regard to the income level
in labour market and evidence is needed to determine the effects to the labour market
behaviour of single parents. The question is does welfare state benefits effects the
labour market behaviour. The mere existence of the social provisions disincentive to
work is not itself a sufficient argument against the labour supply.
20
In this chapter we will test the work disincentive hypothesis. How do the Finnish single
parents really behave in the different work incentive /disincentive situations? Do high
level of social transfers decrease the work incentive behaviour? Or is it so that the most
of single parents act like homo sociologicus. We begin by showing how the social
transfers are targeted in different groups and in which groups the disincentive problems
are strongest. After that we will examine this group’s work behaviour and in this group
we will make comparison between different familytypes and between those who are
working and those who are unemployed.
Table 2 shows us groups to which social transfers are mostly targeted. The mean of
amount of social transfers out of child households’ disposable income is about 29. The
groups that have most social transfers out of disposable income are families with
children under 3, young parents and single parent families. This indicates that the work
disincentive problems occurs easily in these groups.
Table 2. Correlation of Number of children, Age of the youngest child, Familytype, Ageof parent and Vocational training with percent of social transfers out of households´disposable incomes (Multiple Classification Analysis).
N Eta Unadjusteddeviations
Beta Adjusteddeviations
Grand mean 28.88 28.88NUMBER OF CHILDREN***
12
3 or more
12441221 584
.07-1.38-1.826.73
.02-.61-.462.26
AGE OF THE YOUNGESTCHILD***
0 - 2 -years3 - 6 -years
Over 6 years
8087261515
.29
22.09-3.78-9.97
.29
22.04-3.29-10.18
FAMILYTYPE***Two parent family
Single parent family2797252
.06-.9010.00
.09-1.2213.53
AGE OF PARENT*15-24 years25-44 years
Over 44 years
662309674
.1746.521.05-8.14
.0822.86-1.111.57
VOCATIONAL TRAINING***Vocational school
Vocational collegeUniversity
No vocational training
1118685441805
.132.88-.57-13.894.10
.132.37-1.28-13.355.12
Multiple R2 .113
21
A positive deviation from the grand mean indicates increasing amount of social transfers out ofhouseholds’ disposable incomes. Asterisks indicate the statistical significance of the differences. *p <0.05; **p < 0.01; ***p < 0.001.
It is obvious that single parents with a child under 3 are behaving differently in labour
market than single parents with children over 3 years because of the home care
allowance. The majority of single parents with children under 3 years of age (46 %) are
at home, 20 % are economically active and 26 % are unemployed. This can be
explained by the principle tasks of our family policy. The one of the main principle of
family policy is to make it possible for parents to choose between employment and
caring the child by themselves. The result is that almost half of the single parents choose
the alternative to stay at home. This indicate the attractiveness of home care allowance.
The popularity of home care allowance implies that married as well as single mothers
tend to stay at home when children are under three years of age. This trend can be seen
also in labour force statistic. In the case of women aged 20-39 the labour force
participation rates have dropped and the number of women engaged in household duties
has increased (Ilmakunnas 1997).
In figure 6 we have compared single parents’ and two parents families’ unemployment
rates. Unemployment rate for single parents with at least one child between 3-6 years
old is three times higher than unemployment rate of two parents families. The
unemployment rate for two parents families is almost the same in spite of the age of the
youngest child, whereas the unemployment rate for single parents is first very low, when
the child is 3-6 years olds the rate increases and when the child starts the school the
unemployment rate decreases remarkably.
Figure 6. Unemployment of single parents and two parent families
22
0 - 2 years 3 - 6 years 7 - 17 years
Lone parent Two parent families
Single parents’ three times higher unemployment rate when the youngest child is 3 - 6
years old can indicate that this group is behaving as work disincentive hypothesis
assumes. The families with children over three years of age are not anymore eligible to
the home care allowance and parents have to make decisions whether they return to the
labour market. There are other explanations too. High unemployment rate of single
parents with children over three years of age indicates that at the time of the high
unemployment there was not working possibilities available to the low educated single
parents. Single parents had to be registrated to the job searchers, but working
opportunities were minimal. The other explanation is that single parents go on dole
because it is economically better solution than going to work and paying high daycare
fees.
According to calculations based on KOTO-modelling single parents are very often in
work disincentive situations. Single parents wages are lower than the average because
of their young age and low education level. This economic disincentive situation
maintain until the gross incomes get higher than 12.000 - 15.000 Fmarks per month.
This sum is depending on the number and age of children in a family. In our data only
14 % of employed single parents had the income level higher than what they would have
got when unemployed. This means that most (86 %) of the employed single parents are
working despite that higher disposable income would be received from benefits. One
could say that these persons are behaving irrationally from the homo economicus’ point
of view. On the other hand they might be behaving as homo economicus if we evaluate
their behaviour in long run. As the work incentive hypothesis assumes earning-related
23
welfare benefits encourage people to work and people are motivated to work for qualify
better benefits.
But what explains greater unemployment rate for single parents with children between 3
and 6 years old. We might find some evidence on work disincentive hypothesis when we
compare this group to unemployed single parents with school age children and to
employed single parents with the children same age.
Table 3. Comparison between unemployed and employed single parents and twoparents families (with unemployed mother) by some background variables.
Unemployedsingleparents witha child 3 to6 years old(N=24)
Unemployedsingleparents witha child over6 years old(N=29)
Unemployedtwo parentfamily witha child 3 to 6years old(N=32)
Employedsingleparents witha child 3 to 6years old(N=38)
AGEbelow 35
35 or over54,245,8
24,1*75,9
59,440,6
65,834,2
CHILDRENone
two or more37,562,5
82,8***17,2
28,171,9
44,755,3
VOCATIONAL TRAININGno
yes41,758,3
37,962,1
34,465,6
28,971,1
TYPE OF HOUSINGowns a house or an apartment
lives in rented flat16,783,3
44,8*55,2
81,3***18,8
36,863,2
LIFE SATISFACTIONDissatisfied with life
There has been negative life eventsLack of money to buy food
12,554,295,8
24,127,6*67,9*
12,531,368,8
13,239,563,2*
EFFECTS OFUNEMPLOYMENT
Increased economical problemsIncreased relationship problems
Increased fear of loosing workskills
70,830,429,2
72,444,858,6*
68,821,943,3
24
Increased time to enjoy hobbies 34,8 41,4 37,5Asterisks indicate the statistical significance of the differences. *p < 0.05; **p < 0.01; ***p < 0.001.
If these groups differ from each others we may get some answers to the work
disincentive hypothesis. We compare these groups by gender, amount of children,
vocational training, type of housing, effects of unemployment and life satisfaction.
Table 3 shows that there is just few variations which are statistically significant. Most of
the statistical significant differences are found in comparisons between unemployed
single parents with under 7 and over 6 years old children. Single parents with school
age children are naturally older than single parents with younger child. They also have
more often just one child and they are economically better off than single parents with
child under school age. Differences between two parent families (mother unemployed)
and families with children 3 to 6 years old are minimal. The only significant difference is
connected to type of housing. Most of the two parents families owns their apartment.
The most interesting finding is that there is just one statistically significant difference
between unemployed and employed single parent families. This difference is connected
to unemployed single parents families’ everyday life’ s problem to make their ends meet.
Unemployed single parents have had more problems to make ends meet than employed
single parents. It seems that unemployment has some negative effects on families’
economic situation although comparisons based on disposable income do not show it.
It seems that the higher unemployment risk for single parents with children 3 to 6 years
old can’t be explained by main background variables of the group. Perhaps the higher
unemployment risk is connected more generally to problems of life cycle together with
problems of the lack of the other parent in a family. It is said that single parents with
young children are discriminated by employees because their risk to be absent (because
of children’s sickness) is greater than two parent families’ and because they are not able
to be flexible in working hours.
All in all it seems that according to our results the work disincentive hypothesis does
not get strong support. Our inspection detached some cases where there are some
25
incentive problems in the Finnish social security system. Moreover there seems to be a
portion of persons in such situations that are living on social benefits. But the majority
does not act as predicted by the Homo economics hypothesis. Unemployment has not
been targeted to any special group within the single parents. Those single parents which
are unemployed don’t differ from other single parents. In short time perspective we
could say that single parents are behaving rather as homo sosiologicus than homo
economicus. In the long run perspective they are acting like homo economicus because
for most of single parents labour force participation guarantees high social insurance for
possible future risks.
7. DISCUSSION
Two contradictory theories have been presented on the impacts of welfare state
programs to work. The work disincentive theory maintains that if state assumes
responsibility for the economic well-being of the one-parent families, parents will
assume less responsibility. Increasing incomes through welfare state benefits will reduce
the incentive of parent to work and increase their reliance on public welfare. In the
economic theory it is mainly the economic incentives to work that are considered. The
work incentive theory assumes, that social policy is not constructed to violate the work
ethic, on the contrary, it was designed to promote labour market participation.
In this study, we have compared the financial incentives facing single parents which may
have an influence on their decisions to work. It has shown that the relationship between
the structure of benefits system facing single parents and their individual behaviour is
clearly not straightforward. These results suggest that the pattern of the financial
incentives is not the sufficient explanation for variations in the employment of single
parents. Despite of the high welfare benefits in Finland, single parents are working and
even if they would receive higher disposable incomes by benefits. Taken these factors
together it is probably that many low wage earners will have only marginal income
26
benefit in work. In other words, many single parents work with only small financial
benefit, especially is this true for many single parent families with day care payments.
Therefore it seem that people are driven by high work ethics. Instead of pursuing the
economic advantage, people hold societal norms in the highest regard, e.g. people are
behaving more like homo sociolocigus than homo economicus.
These findings are in contrast to the widely held popular opinion that welfare state has
seriously damaged work incentives. In contrast, this study support the work incentive
hypothesis.
However, income from employment is only part of the story. Despite of the high labour
force participation of single parents in Finland, single parents are dependent on social
transfers to met criteria for well-being. Therefore reducing social expenditure from this
group it would weaken their situation. In other words, reducing welfare benefits
targeted to the single parents, would decrease their incentive to work.. Looking at the
previous studies (Kahn and Kaherman 1983; Bradshaw et. al 1993; Sainsbury 1996;
Lewis 1997), it seems that single parents are likely to do best where benefits for single
parent families and children are generally generous. Single parents welfare is also
greatest where they are allowed to package income, that is where there is income from
employment and from social transfers.
27
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