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Confusion and in-work benefits: Evidence from UK welfare reform

Research overview

This project will examine whether simplifications of the benefit system following the introduction of Universal Credit have helped benefit claimants make better labour supply choices. We will compare claimants following the introduction of Universal Credit in their region with claimants in similar regions in which Universal Credit had not been introduced. Those who were previously eligible for a more complex set of benefits should respond more to the introduction of Universal Credit than those previously facing a relatively simple effective tax schedule. Using administrative data on in‐work benefit claimants, our findings could provide evidence on whether Universal Credit had real effects on claimants' behaviour, and assess whether Universal Credit is achieving one of its main objectives.


Benefit

This study will provide an impartial assessment of Universal Credit, and whether the simplification has helped people make better decisions. This will be relevant to the Department of Work and Pensions (DWP) and policymakers in other areas where consumers face complexity, such as the energy market or financial services. It could be used to inform future reforms to taxes and benefits, and will add to our knowledge of behavioural public economics and how people respond to complexity.


Government departments

The project aims to use data from the Department for Work and Pensions and HM Revenue & Customs.


More about the project

In 2013, the UK government introduced Universal Credit (UC) to replace six existing means‐tested benefits and tax credits, motivated by a desire to “simplify the [welfare] system, making it easier for people to understand” (DWP 2015). This project will examine whether simplifications of the benefit system following the introduction of Universal Credit have helped benefit claimants make better labour supply choices.

This research will test whether benefit claimants have located closer to kink points in their tax schedule following the introduction of UC, by separating effects due to reduced confusion from other potential explanations.

To establish whether any responses to the introduction of UC are due to reduced confusion (rather than some other, unrelated feature of UC), the research will:

  • examine changes in claimants' gross income relative to kink points following the introduction of UC in their region
  • compare these changes with the behaviour of claimants in similar regions in which UC had not yet been introduced
  • study differences in responses between different claimant groups.

Under the hypothesis that this lack of bunching at kink points reflects confusion over the complex system UC has replaced, those who were previously eligible for a more complex set of benefits should respond more to the introduction of UC than those previously facing a relatively simple effective tax schedule. Examining differences in responses between these different groups of claimants will further distil the effects of reduced confusion from other effects.

Using administrative data on in‐work benefit claimants, the findings could provide evidence on whether UC had real effects on claimants' behaviour, and assess whether UC is achieving one of its main objectives.


Date Approved: April 2016


Lead researcher

Peter Spittal, University College London.


Page last updated: 17/05/2017