Housing subsidies and work incentives in Great Britain.

In Great Britain the move away from rented accommodation to owner occupation is leaving behind a large group of households with low incomes, wages and hours of work, and high housing costs, who are increasingly in receipt of welfare transfers. The disparity along all of these dimensions between renters and owner occupiers has continued to grow since the 1970’s. The relationship between housing costs, wages and transfer programmes is complex and yet plays an important part in determining the incentive to work for individuals in low income or high housing cost households. While it is true that many individuals who are in these categories are out of the labour force (retired, sick and disabled), there are many who are not and whose incentive to seek work, or to work harder if already in work, could be modified by directly changing the rent levels they face or indirectly via changes to the structure of programmes designed to subsidise housing for the poor. Here we estimate a static discrete choice labour supply model which allows for housing benefit programme participation. We use samples of 42491 married women and 13340 unmarried women drawn from Great Britain Family Resources Surveys 1994/5-97/8. We find that women are quite responsive to labour supply incentives, housing benefit income has similar incentive effects to earned income which suggests any "stigma" is small. Our analysis is complemented by simulating housing benefit and direct rent subsidy reforms. * This research was funded by the ESRC (grant R000233462), the Leverhulme Trust (grant F/368/F), the Department of Environment, Transport and the Regions, and the Keele Research Investment Scheme. Financial support from the ESRC for the Centre for the Microeconomic Analysis of Fiscal Policy at the Institute for Fiscal Studies, from the Danish Social Science Research Council and the Århus University Research Foundation for the Centre for Labour Market and Social Research at Århus University, and from the Danish Research Agency for the Centre for Research in Social Integration and Marginalization at Århus Business School, are gratefully acknowledged. We are also thankful to Raymond Kershaw of DETR for his comments on earlier work from which this paper derives. The data has been made available to us with the permission of the Controller of Her Majesty’s Stationary Office by the ESRC Data Archive. The usual disclaimer applies. Corresponding author: Ian Walker, Telephone +44 1203 523054, Email [email protected] 1. Motivation and Introduction In Great Britain over the past 25 years there has been large shift in housing tenure towards owner occupation: 51% of households in 1974 compared with 72% of households in 1998. This move away from rented accommodation is largely at the expense of social housing, which comprises Local Authority and Housing Association provision. Associated with this has been a growing disparity between the economic cicrumstances of owners and renters. The labour market participation rate for women living in owner occupied housing has remained around 65% since 1974, whereas the rate for social renters has fallen from 56% to 32%. For those who do work, there is also a growing wage rate disparity. Owner occupiers have experienced 86% real wage growth since 1974, compared with 49% for social renters. This divergence is partly explained by a composition effect whereby entry to social housing has been available to only the poorest households, and richer renters move into owner occupied accommodation. In particular the move was away from Local Authority housing under the "right to buy" policy of the 1990’s whereby tenants were offered generous discounts to buy their houses. Consequently social renters have become an increasingly impoverished group, accommodated in the lower quality social housing remaining. Furthermore, real rents have increased rapidly, and faster than housing costs for owner occupiers.Governmenthousing assistancepolicyhas moved fromsubsidising rentsdirectly towards income-related household subsidies. Housing Benefit (HB) is a UK means-tested transfer programme for low income households living in rented accommodation. Largely due to these rent increases, HB is now by far the most expensive income-related transfer programme, costing £9.8Bn in 1998 to support 4.5 million households. This compares with the other main UK income-related transfer programmes Income Support, Family Credit, Job Seekers Allowance and Council Tax Benefit which together cost £10.3Bn. There are very few studies of economic incentives in the UK housing benefit system. Wilson and Morgan (1998) describe the recent development of Central and Local Government housing finance, housing assistance and rent levels. Giles, Johnson and McCrae (1997) summarise the work in Giles, Johnson, McCrae and Taylor (1996) which provides the best and most detailed description of the HB system, its effects on the income distribution and the effective marginal tax rates faced by tenants in the social rented sector. However, no attempt is made to model bahaviour and estimate work incentives. 1 See Department of Social Security press releases for further details on programme-by-programme expenditures, caseloads and take-up http://www.dhs.gov.uk/hq/press/1999/oct99.