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Benefits: Tax credit cuts wipe out minimum wage raises for poorest households

·Finance Reporter, Yahoo Finance UK
·3-min read
minimum wage A worker at the North Texas Foodbank loads a pallet of yogurt onto a truck in Dallas, Texas November 20, 2006. REUTERS/Jessica Rinaldi (United States)
The minimum wage now directly covers 2 million people. Photo: Jessica Rinaldi/Reuters

Big increases in the minimum wage have raised low earners' incomes, but cuts in tax credits have more than offset the gains, the Institute for Fiscal Studies (IFS) has revealed.

The IFS said a chronic lack of real wage growth has blighted the UK since the financial crisis of 2008 and that labour market inequalities show a need to boost wage growth of middle earners and low earners in non-traditional employment.

Many of the lowest-earning employees have been protected by the minimum wage. Between 2011 and 2019, the earnings of low-earning workers grew twice as fast as median earnings.

Read more: Sunak urged to rescue family finances as households face 10% inflation

But poorer households are at risk of poverty as a quarter of the lowest fifth of earners are now self-employed and therefore not covered by the minimum wage.

But even those working for the minimum wage may find themselves worse off now because of tax credits cuts.

“Since 2011, the earnings of low-income households have been growing more quickly than they grew between 1994 and 2011. Yet their income growth has slowed as benefits and tax credits have been cut back,” the report said.

Robert Joyce, deputy director at IFS, said: “Many of those on modest earnings have seen incomes hold up better than we might have expected. This is due to two policies which have essentially increased their incomes by brute force: first (mainly) tax credits, and then (mainly) higher minimum wages.

“Those policies succeeded in doing a lot of what was intended of them. But they cannot forever carry the can on their own.”

The IFS noted that over the last 40 years, the UK has seen a period of rising earnings inequality much greater than in most developed countries up to the global financial crisis. Compared at the same age, median earnings for those born in the 1980s are no higher than they were for those born in the 1960s.

Stephen Machin, professor of economics and director of the centre for economic performance at LSE, said: “Higher earnings inequality, with low real earnings growth, and a very different labour market from 40 years ago have placed the world of work in a much more unequal place.

Read more: Teachers to get less pay even after raise, warns think tank

“To halt or reverse this trend requires that significant attention be devoted to ways to restore and reinvigorate real earnings growth and to generate decent jobs with good career opportunities in an inclusive way.”

The IFS said the lack of tools for boosting earnings remains a problem.

Mark Franks, director of welfare at the Nuffield Foundation, said: “Policies such as the minimum wage and tax credits have helped many low earners, but they have not been sufficient to fully protect all low-paid workers, including those among the growing number of self-employed.

“This, in combination with sluggish pay growth and factors such as rising prices and a lack of access to stable housing, has left many individuals and families in vulnerable circumstances.”

The minimum wage now directly covers 2 million people, or 7% of all employee jobs, compared with 1.5 million in 2015, before the current national living wage was introduced.

Watch: How to save money on a low income