Did the working Families' Tax Credit Work? Analysing Programme Participation for In-Work Tax Credits

With micro-data from before and after a major reform in 1999 to the structure and form of in-work transfers in the UK, this paper uses a structural model of labour supply and programme participation to evaluate the labour market impact of Working Families' Tax Credit (WFTC). Estimates suggest that by 2002, WFTC had increased labour supply of lone mothers by around 5.11 percentage points, slightly reduced labour supply of mothers in couples by 0.57 percentage points, and increased the labour supply of fathers in couples by 0.75 percentage points, compared with the benefit that preceded it, called Family Credit. In aggregate, these changes are equivalent to a fall of 99,000 in the number of workless families with children, and a net increase in labour market participation of 81,000 workers. However, contemporaneous tax and benefit reforms acted to reduce the labour supply of parents, and so the overall impact of tax and benefit changes introduced since 1999 is lower than stated above. Participating in Family Credit, the UK's in-work programme before October 1999, conferred a utility loss as well as a utility gain from the extra income, but we find this utility cost of participation to be lower in the final year of WFTC than it was in the last year of Family Credit for lone mothers, and no different for individuals in couples: this in itself induced more lone mothers to work.