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Does the 500+ child benefit scheme have a passive inclination?

, author:

Marcin Lipka

“Is the Family 500+ program encouraging less professional activity? Compared to last year, the employment of young women declined, despite the very good economic situation in the Polish economy. Is this a result of the passivity trap, which discourages people from taking up paid employment?” asks Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

At first glance, the Polish labour market is booming. In Q3, 2017, according to the latest Eurostat data, unemployment continued to decrease and employment increased both in relation to the previous quarter and to the publication from last year.

However, there is a group whose statistics have clearly worsened. This may be connected with the Family 500+ program. For some households, this program makes it practically impossible to get extra income for a second earner.

Professional passivity is increasing especially among young women

The unemployment rate for women aged 25-49 is constantly falling. Compared to last year, it is by 1.2 percentage points (over 60k people) lower and amounts to 4.5 percent (229k people). Unfortunately, at the same time, the employment rate has fallen. Now it points to 74.9%, which is by 0.3 percentage points (around 12k) below last year’s result.

This means that instead of going from unemployed to employed, young women have become professionally inactive, meaning, those who neither have a job nor look for one. In addition, some of the researched groups have gone from employed to professionally inactive.

Moreover, the Eurostat data confirms this. It proves that the percentage of women not having and not seeking paid employment increased from 20.4% in Q3 2016 to 21.6% in 2017.

The number of professionally inactive women aged 25-49 increased by 78k during the year and amounted to almost 1.4 million. It is also worth noting that this process is taking place at a time of strong economic growth.

The worsening of labour market parameters for the given group may be a result of high taxes for additional income for those who would like to turn inactivity into employment.

Hard work doesn't pay off. 84.84% tax

When looking for reasons for the decline in professional activity, we should mainly focus on the passivity trap issue, i.e. the absence of financial encouragement to find a job. It is particularly important when taking up employment does not translate into a noticeable increase in disposable income within the family, as it causes a loss of social claims and an increase in taxes.

This might be the current issue in Poland. Data from the European Commission shows that in the case of a family with children, where one of the spouses earns two thirds of the national average (more than 30% of Poles earns this or less) and the second spouse receives 40% of the national average (e.g. with part-time work), it is actually taxed on additional income at a rate as high as 84.84%.

The marginal effective tax rate (METR) around 85% is the highest in the EU as a whole. The average in the EU is 32%. Moreover, compared to 2015, it increased by more than 30 percentage points, which should be connected with the introduction of the Family 500+ child benefit scheme.

METR is also very high in the case of other household income combinations. With each spouse earning two thirds of the national average, METR amounts to 63% for a four-person family with two children. Taxation of additional income is also more than 60%, when in a household (2+2) one of the adults earns a national average income and the second returns to work and receives 40% of the average (e.g. part-time).

A long list of negative consequences

System professional deactivation has many negative consequences. Pushing people out of the labour market results in a much more difficult return to employment and a slow decline in qualifications. A lack of income from work is also a loss in taxes or social contributions and a lower pension.

The solution to this problem may be a gradual reduction of the Family 500+ child benefit scheme for the first child in case of exceeding the income criterion and not, as currently observed, its total loss. This would encourage people to take up employment without the fear of losing 500+.

Another solution could be to create a tax-free amount or a child allowance, which will compensate for the loss of 500+. Although each solution will probably generate additional budgetary burdens, in the long term, they will prove to be much less severe than systematically pushing more and more people into professional inactivity.

 

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