Financial incentives to work: the size of the margin between benefit and in-work incomes

Abstract

Financial incentives to work are an important consideration for policy makers in the realm of welfare and tax policy. Dominating one corner of the classic ‘iron triangle’ used by policy advisors to illuminate trade-offs between incentives to work, income adequacy and fiscal cost, poor financial disincentives to work can contribute to ‘trapping’ people in poverty. Further, as modern welfare systems have become increasingly ‘active’, with a strong focus on work and increased independence from the state, positive financial incentives have increasingly come to be seen as an important precondition for the effective operation of the welfare safety net.