The Greater Happiness for the More Workers: Basic Income vs Job Guarantee Pt 2

The Greater Happiness for the More Workers: Basic Income vs Job Guarantee Pt 2

Thomas H. Davenport and Julia Kirby, the authors of Only Humans Need Apply, favor a job guarantee (JG) over a universal basic income (UBI). In a previous post, I critiqued their use of the claim that people who lack jobs tend to be less happy than those who have them (irrespective of income). Of course, we all aim to have successful careers which is often what drives employees in the financial sector to push on and start a firm of their own. Without a doubt, starting my own accounting firm wasn’t easy but I have zero regrets.

In this follow-up post, I take a different tack, and argue that we have reason to support UBI over a JG even if we grant that most people would be happier when employed than when not.

Two points will be key: a UBI does not prevent individuals from working; a UBI, but not a JG, would benefit the minority of individuals who do fare better outside of traditional employment.

1. A Basic Response

In their recently published book Only Humans Need Apply, Tom Davenport and Julia Kirby briefly dismiss a universal basic income (UBI) in favor of a job guarantee (JG).

I laid out their main argument in a previous post on Basic Income News. To recall: Davenport and Kirby’s primary claim is that a JG provides benefits to individuals that exceed those provided by a UBI–specifically, jobs. Central to their argument is the assumption that jobs “bring many benefits to people’s lives beyond the paycheck, among them the social community they provide through having coworkers, the satisfaction of setting and meeting challenging goals, even the predictable structure and rhythm they bring to the week” (p. 7).

In my previous post, I focused on their use of one particular type of data: studies that suggest that unemployed people tend to be less happy than employed people, even after controlling for monetary factors. I will now pursue a slightly different tack. Here I will argue that, even if it is true that jobs improve the happiness of most people, this does not necessarily favor a JG over UBI. (For the purpose of the argument, I will also assume–as do Davenport and Kirby–that sufficient jobs can continue to be created to support full employment, notwithstanding advances in automation.)

These are the crucial observations:

  1. A UBI does not compel individuals who already have jobs to leave them (obviously); thus, it would not hurt those people who already have jobs and value them. Similarly, a UBI does not prevent those without jobs from taking jobs (while also permitting them more time and flexibility to find, or retrain for, a job that is a good fit to their skills and interests).
  1. Even if most individuals are disposed to be happiest when employed in a stable, full-time job, there are some individuals who aren’t. Some individuals are disposed to be happiest–as well as most productive–when not traditionally employed. A UBI, but not JG, would allow those in this minority to flourish.

Combined, I believe that these two points provide strong reason to prefer UBI over JG. When we consider individuals who are happily employed, the choice appears to be a draw. Perhaps a JG could provide more security in a cherished job, but a UBI would not necessarily hamper it. Meanwhile, a UBI–but not JG–would immensely help those individuals who would better thrive outside of traditional jobs. (There is one important caveat here, which I will return in Part 3 of this article: a JG is likely to provide the greater benefit to some individuals who would prefer to be employed but are out-of-work.)

If the majority of individuals are happiest in jobs, as Davenport and Kirby assume, then a JG presumably would be for the good of the majority. A UBI, however, would be for the good of the majority and then some. A UBI would not cause anyone to be unemployed. However, a large enough UBI would enable individuals to abstain from employment temporarily or permanently–should they choose to do so. A UBI would support the majority and, unlike a JG, also the minority of individuals who are not happiest in jobs (as well as those who are happiest in jobs but need the flexibility to transition into a better job, as I’ll mention briefly in §3).

2. Liberation from Jobs

Most regular readers of Basic Income News have, no doubt, encountered the argument that basic income necessary to liberate individuals from overtaxing jobs, oppressive jobs, or meaningless “bullshit” jobs. Many, perhaps, were drawn to investigate basic income (as I was) precisely because it opens this possibility. Nonetheless, it’s worth rehearsing some points.

It is not hard to demonstrate that some individuals do not gain meaning, happiness, and self-worth from jobs. And, for the purposes of the above argument, this weak claim is all that is necessary (there’s certainly no need to argue that most individuals are so disposed). Some individuals would be much better able to gain meaning, happiness, and self-worth outside of a job–and, in the process, contribute more to society than they otherwise could.

In my last post, for example, I mentioned entrepreneur Robin Chase’s informal studies of individuals’ “passion jobs”. Recall, for example, the couch-surfing, open-source programmer–an individual who is presumably not interested in monetizing his work, who is motivated just to engage in challenging projects and disseminate his work as widely as possible. (For bigger examples on similar lines, we might look to the communities of creators of Linux and Wikipedia.) Even if he could monetize his work as a programmer, this would only take time away from–and perhaps constrict–the socially valuable work that he is currently performing for no financial reward. But, of course, one must have capital (possibly in the form of friends with couches) in order to devote significant amounts of time to open-source programming or other unpaid work. Many would-be creators and innovators lack such capital, and thus remain trapped in jobs that might well be less valuable–to both themselves and society–than the unpaid work they could (and would) otherwise perform.

Brian Eno CC BY 2.0 Garry Knight

Brian Eno CC BY 2.0 Garry Knight

Musician Brian Eno supports basic income for quite similar reasons–that it would enable individuals to avoid jobs in order to engage in more creative work–as evident, for example, in remarks made at meet-up in London last December:

I often get asked to come and talk at art schools, and I rarely get asked back, because the first thing I always say is, ‘I’m here to persuade you not to have a job.’ … My first message to people is: try not to get to a job. That doesn’t mean try not to do anything. It means try to leave yourself in a position where you do the things you want to do with your time, and where you take maximal advantage of whatever your possibilities are. The obstacle is that most people aren’t in a position to do that. I want to do anything to work to a future where everybody’s in a position to do that. … [T]he concept [of basic income] is the closest thing I’ve heard to achieving the kind of future that I would like to live in.

Similarly, anthropologist David Graeber, known in part for his trenchant look at the proliferation of “bullshit jobs”, supports basic income as a means to unleash the innovative potential of people who might otherwise wasting their talents in unfulfilling jobs.

David Graeber (left) CC BY 2.0 Guido van Nispen

David Graeber (left) CC BY 2.0 Guido van Nispen

This has all seemed perfectly obvious to me: I’m among those who find traditional jobs confining and stifling, and who has no particular interest in monetizing and advertising the work that I do outside of traditional employment–including, of course, my writing and other work for BIEN and Basic Income News. If only could afford it, I would indeed prefer not to have to seek personal monetary gain from my work. And this preference is not limited to my work for the basic income movement. For instance, one of alternative plans has been to do more work as a “curriculum development consultant” for graduate teaching associates and adjunct faculty in my discipline. This would be interesting, challenging, and rewarding for me–as well as a valuable service for others. But, being familiar with the financial plight of most graduate TAs and adjuncts, I am rather appalled by the thought of charging money for any such services.

Chakay Artisan Roasts

Chakay Artisan Roasts: one product of an unpaid passion job

Prior to my recent personal experiences, my late mother stood out for me as someone who quite clearly found her meaning and purpose outside of paid employment. After spending years feeling stuck low-paying, dead-end service job, she only discovered her “passion job” after she was fired: developing and manufacturing a vegan meat-substitute. Despite the fact that their product was already being sold in restaurants the year before she passed away, my mother and her partner did not envision their invention as a (meatless) cash cow: their vision was that it would eventually provide a low-cost, sustainable solution to end global protein malnutrition. Maybe if they had invested then in restaurant pos systems such as the ones we have now in the market for retail operations, their restaurant business would have flourished even more.

Meanwhile, some people find traditional jobs constricting simply due to the norms and expectations of job culture. A recent blog post on Medium, which focused on neurodiversity, makes this point well:

Most people are unhappy with their jobs, and workplace stress is the biggest cause of workdays lost to ill health. There are many reasons for this, and some of them are directly linked to the reasons so many autistic people struggle to find or hold onto jobs. Noisy environments, interruptions, long work hours and lack of autonomy are stressful for everyone, but often downright intolerable for autistic people. Expectations of conformity hit neurodivergent people especially hard, but they can be stifling or even ruinous for people from other cultures, too, not to mention anyone who doesn’t fit neatly into the gender roles assigned them by society. [Embedded links in original]

Neurodivergent individuals, and others who do not fit neatly in the mold of society, can be stifled and inhibited by traditional work environments. Such individuals are better able to flourish personally–and, in turn, become more valuable contributors to society–if they are able to working outside of traditional jobs, or perhaps take the time to a job that is a better match.

Examples like the above easily could be multiplied, but these will suffice to make the point.

Now, then, what do Davenport and Kirby have to say about such individuals? The answer is not much. They do mention explicitly that proponents of UBI often claim that “the impulse to create value is innate in humans, and if anything is channeled into less socially valuable activities when the point must be to gain payment for one’s work” (p. 242). However, their only reply is quite hastily and uncritically dismissive:

Unfortunately, the data don’t bear that out. As Derek Thompson notes in his provocative Atlantic article “A World Without Work,” time studies suggest that people who don’t work tend to sleep more, watch more TV, and browse the Internet. So much for taking up painting.

There’s no need to say much more in reply to this hasty assertion. Certainly, it is not difficult to compile anecdotes of specific individuals who would (or do) thrive outside of paid work. And, for the purpose of the present argument, there is no need to demonstrate that all or even most individuals would engage in socially valuable activities outside of paid work. Plausibly, even with a UBI, most individuals would choose to remain in paid employment. To make the case for the advantage of a UBI to a JG, we need only to show that some individuals (and, in turn, society) would benefit tremendously if liberated from the need for work for money–as we’ve done.

It is worth pointing out, though, that the Thompson’s Atlantic article goes much farther than Davenport and Kirby’s comments would suggest–and it goes much farther, specifically, in exploring and describing a multitude of creative recreational activities performed by individuals outside of paid work. Indeed, Thompson states that one of his objectives in the article is to envision “how millions of people might find meaningful work without formal wages”. He accepts that it’s possible for people to “meaningful work without wages”. Moreover, he investigates what such meaningful work might be–visiting locations such as the Columbus Idea Foundry, a large “makerspace” (right next door to my own neighborhood, as it happens).

CC BY-NC 2.0 Stephen Wolfe

CC BY-NC 2.0 Stephen Wolfe

It’s worth reading more of Thompson’s own words:

The Internet and the cheap availability of artistic tools have already empowered millions of people to produce culture from their living rooms. People upload more than 400,000 hours of YouTube videos and 350 million new Facebook photos every day. The demise of the formal economy could free many would-be artists, writers, and craftspeople to dedicate their time to creative interests-to live as cultural producers. Such activities offer virtues that many organizational psychologists consider central to satisfaction at work: independence, the chance to develop mastery, and a sense of purpose.

After touring the [Columbus Idea Foundry], I sat at a long table with several members. … I asked them what they thought of their organization as a model for a future where automation reached further into the formal economy. A mixed-media artist named Kate Morgan said that most people she knew at the foundry would quit their jobs and use the foundry to start their own business if they could. Others spoke about the fundamental need to witness the outcome of one’s work, which was satisfied more deeply by craftsmanship than by other jobs they’d held.

Late in the conversation, we were joined by Terry Griner, an engineer who had built miniature steam engines in his garage before Bandar invited him to join the foundry. … “I’ve been working since I was 16. I’ve done food service, restaurant work, hospital work, and computer programming. I’ve done a lot of different jobs,” said Griner. … “But if we had a society that said, ‘We’ll cover your essentials, you can work in the shop,’ I think that would be utopia. That, to me, would be the best of all possible worlds.”

To echo Davenport and Kirby: So much for just sleeping, watching TV, and surfing the web.

3. UBI for Workers

I believe that the proponent of UBI can hardly underemphasize the need to liberate individuals from stifling, unengaging, and unnecessary jobs. At the same time, however, it’s important not to lose sight of the fact that the choice between JG and UBI is not a choice between “jobs and fewer jobs”. A UBI per se does not entail that individuals will stop working: it merely enables this possibility. A UBI does not harm those who are already happy in their jobs. Indeed, far from discouraging paid employment, UBI carries the advantage of avoiding the “welfare trap”: individuals do not lose the benefit when they assume a job or wage increase. (Indeed, this is a major reason that countries like Finland are seriously exploring the implementation of UBI.)

And we could add that there might be advantages of a UBI over a JG even when limiting our attention to those who do prefer to work in traditional jobs. A UBI would benefit anyone who feels trapped in a job that is a poor match for their personality, interests, and capabilities–even those would prefer to remain in full-time employment (but simply not in their current ill-fit jobs). With a guaranteed unconditional income, one could take away from full-time employment in order to retrain, further their education, start a private business, or pursue other such opportunities. A basic income provides a financial floor to enable individuals to switch jobs and careers–and even to execute the retraining that Davenport and Kirby recommend to cope with the age of automation!

A job guarantee provides jobs. A basic income, however, provides individuals with the financial security necessary to temporarily abstain from employment while retraining or searching for a job that is a good match to their interests and capabilities.

4. A Critical Caveat

There is, though, one caveat–which I’ll take up in my third and final installment. We must concede that there is something that UBI doesn’t guarantee that JG does: jobs.

Under a UBI, without a JG, there is no guarantee that sufficient jobs will even exist for all individuals–and even if there are sufficient jobs, a UBI alone does not enable individuals to access those jobs. A UBI does not provide social networks, cultural or linguistic capital, resumé-writing or interviewing skills, or self-marketing abilities. A UBI does not overturn implicit biases in hiring. A UBI does not guarantee that jobs are located where job-seekers live, or that job-seekers have the training and credentials needed to obtain a job. And so on.

A UBI program is likely to treat individuals as self-reliant–left to their own devices to find a job (or not)–in contrast to a JG program, which would bring along services to ensure that individuals are provided with jobs. Quite likely, one fear of Davenport and Kirby is that a UBI, but not JG, would result in many individuals who desire jobs but have difficulty in finding or obtaining them. While UBI might not prohibit individuals from taking up employment, it also does nothing to guarantee jobs to those who want them.

CC BY-NC-ND 2.0 New York City Department of Transportation

CC BY-NC-ND 2.0 New York City Department of Transportation

Perhaps, then, there is one category of individuals who stands to benefit more from a JG than from a UBI: those who are not employed, and who are looking for entry into a traditional job.

My hope, as broached in my last feature, is that UBI would usher in the attenuation of the job-culture. But it would not be immediate. At present, many (perhaps most) people have internalized the job-ethic. At present, unemployment does bear a stigma. And many people lack the training, motivation, or desire to start a small business or become independent artists, craftspersons, researchers, or software developers. Plausibly, there are many unemployed individuals who just want a job to provide their lives with purpose, dignity, structure, and a sense of social contribution. And we must not simply assume, without evidence, that such individuals would not be satisfied with the sort of “make-work” position created by a JG (which, after all, could be a truly important one, such as repairing our failing infrastructure).

It’s important that UBI advocates do not overlook this category of individuals: those who would prefer guaranteed employment (even in a government-created job) to guaranteed income.

But how many such individuals actually exist? And how would they fare under under a UBI? Is the solution a UBI plus a JG or other policy? Are other compromise positions available?

These are important concerns, which I plan to address in future work.

Davenport and Kirby: Full Bibliographical Entries

Thomas H. Davenport and Julia Kirby (2016) Only Humans Need Apply: Winners & Losers in the Age of Smart Machines, HarperCollins Publishers.

Tom Davenport and Julia Kirby (May 26, 2016) “What Governments Can Do When Robots Take Our Jobs“, Fortune Magazine (and reprinted in Yahoo Finance).


Reviewed by Tyler Prochazka

Featured Image CC BY-NC-ND 2.0 San Francisco Public Library

Thanks to Kate’s supporters on Patreon

Ursula Huws, “The way we work is changing, but the welfare state hasn’t kept pace”

Ursula Huws, “The way we work is changing, but the welfare state hasn’t kept pace”

Ursula Huws, Professor of Labour and Globalisation at University of Hertfordshire, calls for a guaranteed minimum income in a recent article in The Conversation:

[N]either 19th-century values nor 20th-century structures are fit for purpose in the fluid, just-in-time conditions of 21st-century labour markets and an unpredictable, digital, globalised economy.

We should go back to the drawing board and develop a system that provides basic security and dignity for all while still allowing for work to be organised flexibly. One possible solution is to give everybody a basic income. … This would raise the standard of living and reduce poverty among the most vulnerable, but would also allow workers to move flexibly in and out of paid work, education and care work without being subjected to the expensive, demeaning and dysfunctional inquisitorial procedures of the current benefits system that sees only the largely exclusionary categories of “work” and “claiming benefits”.

She acknowledges, though, that a basic income is not a panacea, and would have to be combined with other reforms.

Huws currently directs research projects which receive funding from the COST Association, the Foundation for European Progressive Studies and UNI-Europa (the European Service Workers Union), and she serves as editor of the international interdisciplinary journal Work Organisation Labour and Globalisation.

She is also a trustee of the Citizen’s Income Trust, a UK-based group that advocates for a basic income an occasionally contributes to Basic Income News.


Ursula Huws, “The way we work is changing, but the welfare state hasn’t kept pace with the times“, The Conversation, 23 June 2016.

AUDIO: New Work Order podcast featuring Scott Santens

AUDIO: New Work Order podcast featuring Scott Santens

The London-based New Work Order is a group for self-directed individuals building careers outside of the mainstream. In its own words, NWO is “a close-knit network of ambitious and proactive people who are building careers on our own terms.”

The NWO founders describe their journey as follows:

Our journey took us from Switzerland to London, where we met with hundreds of ambitious but frustrated people who felt trapped in a world of work where they didn’t belong.

They longed to be in control of their own destiny, to make an impact on the world in their own unique way and to experience life to the fullest, beyond the confines of a job that offered little meaning, fulfilment or freedom.

We were consistently inspired by the boldness and commitment that these people showed towards transforming their lives by doing work that mattered to them. But we also witnessed their struggles. …

NWO exists primarily to provide a support network for such individuals.

Around here, of course, many of us would say that a universal basic income is what we really need to empower all people to transform their lives through meaningful work — and thus immensely benefit members of a group like NWO.

This is why it’s fortunate that the New Work Order’s podcast recently broadcast an episode dedicated to basic income, featuring guest Scott Santens.

During the 35 minute interview, Santens describes what a basic income is, where the idea came from, how it would work in practice, and why it is necessary in our present societies. He also talks about what its like to live with a basic income, having achieved his own crowdfunded basic income in December 2015.

Stock picture of people working in coffee shop from Pexels.

GENEVA, SWITZERLAND: Unfurling of the world’s biggest poster reading, “What Would You Do if Your Income Were Taken Care of?” May 14, 2016

"The World's Biggest Question" under construction

“The World’s Biggest Question” under construction

Grundeinkommen has announced that it will unfurl the word’s largest poster with the biggest question in the world on the huge Plainpalais Promenade in Geneva, on May 14th, 2016. The question will ask:

“What Would You Do if Your Income Were Taken Care of?”

The margins of the poster will contain The Biggest Question in the World in over 60 different languages. The unfurling will happen a few weeks before Switzerland goes to the polls on June 4th, 2016 over whether to implement an unconditional basic income.

More than 1,200 people have crowdfunded about 200,000 Euros to have the biggest question in the world printed on the biggest poster in the world. The poster measures approximately 8,000 square meters and weighs about seven tons. These dimensions will exceed the current Guinness World Record for the largest poster to date, as exhibited by Iraqui pilot Fareed Lafta. Representatives from Guinness will be at the scene in Geneva to inspect Grundeinkommen’s bid for the new record.

Volunteers cut up freight truck tarpaulins in the Swiss village of Rüti/Glarus and fused them together to produce individual puzzle segments. In addition they underwent an enormous joint effort to apply the gold letters to a black tarp so that “The Biggest Question in the World” became the biggest poster in the world.

Computer created preview of the poster

Computer created preview of the poster

The world record poster will not be scrapped after the presentation; instead, Grundeinkommen’s partner Swiss Mountain Händ Bägs will rework it into Question Bags, World Record Rucksacks, toiletries bags and other products. These products are now available at the crowdfunding platform Startnext and will later be available at Grundeinkommen’s own Onlineshop.


Date
: May 14th, 2016
Place: Geneva, Plaine de Plainpalais (English: Plainpalais Promenade)
Time:  Starting 11:00 AM: Installation of the poster; by around 12:00 noon the poster will be fully unfurled; the event concludes at around 4:00 PM.
Media Contact
– Marilola Wili, E: marilola.wili@grundeinkommen.ch, T: +41 76 201 96 98

For more information
Online
– startnext.com/groesstefrage
– grundeinkommen.ch/

Photos
– Flickr

Video
– Blick
– Tele Bärn
– Startnext

Media
– Schweiz am Sonntag
– Südostschweiz
– enorm
– n-tv

Grundeinkommen Volunteers

Grundeinkommen Volunteers

 

Simplifying childcare benefits

Simplifying childcare benefits

By Mark Wadsworth

The Citizen’s Income Trust has suggested replacing Child Tax Credits and Child Benefit with a higher flat rate Child Benefit and merging the income tax-free personal allowance, the National Insurance-free Lower Earnings Limit and Working Tax Credits into a Citizen’s Income.

These proposals have been criticised on the basis that Working Tax Credits include a Childcare Element to subsidise childcare costs (registered nursery or child minder), which are supposed to be targeted at lower earners. The Child Tax Credit is a vitally important tool that helps many parents survive. Whilst the source here suggests television may be undermining the safety of children, it is clear that further cuts to Child Tax Credits would compromise their safety and security in an even more detrimental way.

This article addresses those concerns (the Childcare Element of working tax credits is only four per cent of total Tax Credit payments[1], and only one-quarter of total government subsidies for childcare costs) and looks at how these overlapping subsidies could be merged into a single simplified and harmonised system. This would free parents up, allowing them to look more openly on Daycare Spots and the like for what they want out of a daycare or childcare company rather than relying on what is in place.

First let us look at the bigger picture.

How many children are affected?

According to the population pyramid, there are nearly 800,000 children in each year cohort 0 up to 5[2].

Table 1: The number of children receiving childcare [3],[4]

Age 3 and 4, registered nursery or child minder 859,000
Age 2, registered nursery or child minder 592,000
Sub-total ‘paid for’ childcare 1,451,000
Age 4, in a reception class at a state primary school 549,000
Total 2,000,000

The cost of children in a reception class forms part of the education budget and is largely outside the scope of this article, which focuses on the 1,451,000 receiving ‘paid for’ childcare.

Table 2: Average childcare costs before subsidies

Nursery or primary school Child minder
Child aged 0 or 1 £/week £/week
25 hours 115 104
50 hours 212 197
Child aged 2, 3 or 4
25 hours 110 103
50 hours n/a n/a
After school club 15 hours 48
After school pick up 64

The costs in London are 50% higher[5]

Table 3: Total government spending on the various schemes [6]

2014-15 Planned
£m/per year £m/per year
Free Early Education aged 3 and 4 2,400 2,400
Free Early Education aged 2 800 800
Working Tax Credits/Childcare Element 1,200 1,800
Employer Supported Childcare 800 400
Tax free Childcare 0 1,000
Total 5,200 6,400

Table 4: The number of children eligible to claim in each category

2014-15 Planned
Free Early Education aged 3 and 4 859,000 859,000
Free Early Education aged 2 250,000 250,000
Working Tax Credits/Childcare Element 745,000 745,000
Employer Supported Childcare vouchers 860,000 430,000
Tax free Childcare 0 500.000
Total 2,714,000 2,784,000

This compares with 2,000,000 children from Table 1. The bulk of the overlapping claims relate to Free Early Education.

The simple average planned cost/value per child is the total annual cost of £6.4 billion from Table 3 divided by 1,451,000 children in ‘paid for’ childcare from Table 1, which is £85 per child per week. The changes will help bring education to more children which will improve their cognitive development far more in their early years. Non-profits like Defending the Early Years are campaigning to get just, equitable, and quality early childhood education for every child so these childcare benefits would be extremely beneficial.

Eligibility flowchart

As mentioned, there are many children for whom parents claim Free Early Education as well as one of the other subsidies. The three main other subsidies are largely mutually exclusive. This can be represented as a flowchart:

Childcare flowchart

Please note: the figure of £15,000 for household earnings is very approximate. The exact cut-off point for any individual household will depend on that household’s composition and parents’ working hours.

The various schemes in more detail and their average costs per child per week

Free Early Education –average cost/value

Each child is nominally entitled to 15 hours per week free care for 38 weeks a year @ £5.49 per hour[7], an average of £60 per child per week.

Free Early Education – children aged 3 and 4

This is a non-means tested, non-contributory, non-taxable and largely non-conditional benefit. It has the largest caseload and the highest cost. It has been criticised for simply pushing up childcare costs because of barriers to entry, meaning that childcare providers simply charge higher fees[8], but this can be said of all such schemes apart from a free place in a reception class at a state primary school.

In practice what happens is that local council pays registered providers a total of £3,129 per child per year, which the provider deducts from their charges. Where the hourly rate is less than £5.49, the provider simply credits the surplus against the charge for hours in excess of 15 per week. Where the hourly rate is more than £5.49, the parent has to pay the difference.

Free Early Education – children aged 2

This is a conditional benefit[9].

A two-year-old will be eligible for the same funding (15 hours @ £5.49 per week for 39 weeks a year) if their parent(s) claims any one of the following:

  • Income Support/Income-based Jobseekers Allowance
  • Income-related Employment and Support Allowance
  • Child Tax Credits or Working Tax Credits and have an annual gross household income of no more than £16,190

Working Tax Credits/Childcare Element

The average cost/value per child per week is £28 as explained below.

This can be claimed by single parents who work at least 16 hours a week or couples who both work at least 16 hours a week and who spend money on registered or approved childcare[10].

The official upper limits of £175 for a household with one child or £300 for two or more children are nigh meaningless. The eligible amount for which a parent can claim is actual nursery costs minus Free Early Education payments minus Employer Supported Childcare vouchers multiplied by 70%. The actual claim is then abated by 41p for every £1 of gross wages over the threshold of £6,420.

Official statistics show that 93% of household claims are for total weekly costs of £160 or less and the official average amount paid out is £29 per child[11].

Table 5: Typical eligible amount: single parent with both children in full time childcare @ £180 per week for 48 weeks a year

£
Actual costs (2 x £180 x 48 weeks) 17,280
Less Early Years Education payments (2 x 15 x £5.49 x 38 weeks) -6,423
Net actual costs 10,857
Multiplied by 70% = eligible amount 7,600

Table 6: Typical actual benefit after Working Tax Credits withdrawal

Gross wages Income over threshold Amount withdrawn Net payment per child per week Per child per week
A = gross wages B = A – £6,420 C = B x 41% D = £7,264 minus C E = D ¸52 ¸2
12,000 5,580 2,288 5,312 51
15,000 8,580 3,518 4,082 39
18,000 11,580 4,748 2,852 27
21,000 14,580 5,978 1,622 16
24,000 17,580 7,208 392 4
Simple average 27

Please note: this article assumes that Child Tax Credits and Child Benefit are replaced with a much higher Child Benefit of around £56 per child per week and thus that Working Tax Credits withdrawal applies only to the Working Tax Credits/Childcare Element

Employer Supported Childcare vouchers

The average cost/value per child per week is £19.

Under a scheme introduced circa 2003, any employee could receive vouchers with a face value of £55 per week (regardless of the number of children) tax free by waiving £55 taxable salary (a salary sacrifice). The employee’s gross pay goes down by £55 per week, saving £18 per week in PAYE (income tax and Employee’s NIC at 32%).

This benefit is conditional on being in work and since 2011 is quasi-means tested. Parents/employees paying higher or top-rate tax had their allowance adjusted so all taxpayers have roughly the same maximum tax saving. The limits are:

  • Basic-rate (20%) taxpayer: £55/week voucher, max annual tax/NI saving £930.
  • Higher-rate (40%) taxpayer: £28/week voucher, max annual tax/NI saving £630.
  • Top-rate (45%) taxpayer: £25/week voucher, max annual tax/NI saving £590.[12]

In theory, a parent claiming Working Tax Credits/Childcare Element can also receive these vouchers, but it is a very marginal calculation. The PAYE saving is £18 per week but the eligible amount is reduced by £55 x 70% = £38. In turn, the amount of the abatement goes down by 41% x 55 = £23, so the net gain is £18 – £38 + £23 = £3. In some cases, parents claiming both can suffer a small net loss.

The scheme has been modified several times since inception and was closed to new entrants since the introduction of Tax Free Childcare in Autumn 2015.

Tax free childcare

This supersedes Employer Supported Childcare vouchers[13], although existing Employer Supported Childcare voucher recipients will be able to continue to receive them in the run off period.

To qualify, a single parent or both parents in a couple have to be in work, earning just over an average of £100 each a week and not more than £100,000 each per year[14]. Tax Free Childcare cannot be claimed if the household is also claiming Working Tax Credits. Vouchers with a face value of up to £10,000 per child can be acquired for 80% of the face value and used to pay for childcare costs.

The maximum saving per child per week is £38. In most cases this will be a larger saving than the superseded scheme Employer Supported Childcare vouchers, unless only one parent in a couple is in work (saving £930 a year as against nothing) or a couple are both in work, pay basic rate tax and pay less than £194 per week (net of Early Years Funding) for childcare for one child.

Summary

Around two-thirds of 4 year olds are in reception class at a state primary for free. I assume that the other one-third do not attend because there is no reception place available for them or because their working parents require care until later in the afternoon/evening and send them to a nursery or child minder for which they claim the Free Early Education payments.

The value of Free Early Education vouchers is £60 per child per week.

The cost/value of the three mutually exclusive schemes in the bottom row of the flowchart per child per week is as follows:

Working Tax Credits/Childcare Element – maximum £51, average £28.

Tax Free Childcare – maximum £38, average unknown but less than £38.

Employer Supported Childcare – maximum £36, average £19.

So the average total claim per child per week is between £79 and £98.

Proposal

Would it not make sense to harmonise the rates and increase the Free Early Education vouchers to £85 per week x 48 weeks a year for all 2, 3 and 4 years olds?

The total number of children in ‘paid for’ childcare is 1,451,000 (from Table 1). If each receives £85 per week in vouchers for 48 weeks a year, the total cost/value would be £5.9 billion. This represents a saving of £0.5 billion over the £6.4 billion expenditure forecast the House of Lords Select Committee from Table 3.

Winners will not just be those who would receive more per child per week, but all parents whose lives have been made much simpler and can now plan ahead and budget more sensibly.

Clearly, some would receive less in benefits than under the current schemes:

  • Single parents on the minimum wage who would lose up to £26 per child per week in Working Tax Credits/Childcare Element,
  • Parents with children in a reception class who receive claim for after school care,
  • Parents in London, where childcare costs are 50% higher than the rest of the country, and
  • Parents of children aged under 2 who currently claim for childcare costs.

I estimate that half a million children would be affected and the average shortfall is £20 per child per week, so the saving of £0.5 billion could be paid out as a transitional benefit of £20 per child per week for existing claimants until their children reach normal school age.

A slightly more radical proposal would be to spend the £6.4 billion on providing nursery classes at state primary schools for children aged 2 to 4. This will take time to implement but simplifies things for parents and does not have the unintended consequence of pushing up childcare costs.

Original article can be found at Citizen’s Income Trust.

[1] Fullfact

[2] Office for National Statistics

[3] House of Lords Select Committee

[4] National Audit Office

[5] Family and Childcare Trust

[6] Total from House of Lords Select Committee, individual items adjusted for other sources to reconcile with their sub-totals.

[7] Surrey County Council

[8] Institute for Economic Affairs

[9] Netmums

[10] HMRC leaflet

[11] HMRC, 2013-14

[12] Money Saving Expert

[13] HM Treasury

[14] Government News