View from City Road: How employers are exploiting the poverty trap

The case for changing the way the social security and National Insurance systems impinge on low-paid and part-time workers is becoming a matter of urgency. Employers are increasingly taking on part-timers at wage rates so low that National Insurance contributions do not have to be paid, but at these rates the social security system discourages people from working harder.

Low-paid employees working less than 16 hours a week are entitled to Income Support, but if they decide to work an extra hour to earn more money this is entirely offset by a cut in their benefit. In other words, they face, in effect, a marginal tax rate of 100 per cent. As we reported yesterday, Department of Social Security figures show that the number of people facing this 'poverty trap' has risen by about 25,000 in the last year to 200,000.

High rates of withdrawal of benefits are inevitable if there is to be a generous social safety net, but such high rates are too extreme. Moreover, a survey published today by the Low Pay Network suggests that this problem is likely to worsen rather than improve. It reports that a new supermarket in Stirling advertised recently for 91 staff in its local JobCentre. Only seven of these jobs paid more than the pounds 56 a week above which employers and employees have to pay National Insurance contributions.

But by saving on National Insurance, the supermarket is confronting its workers with the disincentives of the Income Support system.

About 60 of the jobs offered less than 16 hours work a week for a wage of pounds 45 or less, so all the successful applicants would still be entitled to Income Support. Another 20 jobs offered less than 16 hours work a week but more than pounds 45, in which case Income Support entitlement would depend on the applicant's family circumstances.

If the Government is serious about its vision of 'labour market flexibility' - which can too easily be code for a low-wage, part-time economy - then it should stop the benefit system from extracting such severe penalties from those who want to work harder.

The National Insurance system also needs reform - by employing 91 part-timers instead of 28 full- timers the supermarket will save itself, and cost the Government, more than pounds 40,000 a year in contributions. If this catches on, it will not only be the low-paid who lose. So will the Exchequer.