Switch from welfare to low-paying work ‘costs 5% of income’

A person moving from unemployment benefit to a low-paying job loses about 5% of his income, but the OECD and IMF make widely different proposals on how to tackle what they say as a disincentive to work.

However, even with changes, the possibility of finding a job for the 304,000 unemployed will be very difficult as Ireland’s GDP would need to grow at an average of 4% a year to get back to pre-crisis levels, the IMF has warned.

In its annual report on eurozone policies, the IMF said EU policy makers have not broken the link between sovereigns and banks. It urged the ECB to play a greater role to ease the crisis.

In relation to Ireland it says the Government must target social welfare in next year’s budget. It and the European Commission have long argued that welfare is too generous and is a disincentive to people taking up work.

It warns that the structure of social payments needs to be reviewed to avoid creating unemployment traps, especially for the long-term unemployed. Ireland has one of the highest percentages of long-term unemployed in the EU at close to 50% of the total being out of work for at least two years.

The OECD, in its report, also released yesterday, says that a person on social welfare in a single-earner family loses 5% in terms of income and benefits if they take up a relatively low-paying job.

While the troika recommends lowering the minimum wage or at least cutting the pay for such unskilled and semi skilled work, the Paris-based OECD recommends cutting the tax wedge in order to leave workers with more of their pay.

It suggests reducing employer social security contributions for employers, in-work tax credits that could be phased out as income rises, and lowering marginal tax rates for low-wage earners.

While both organisations recommend changing the children’s allowance with the IMF saying it should be means tested, the OECD says it should be replaced with higher benefits for mothers at work to make up for the low childcare subsidies.

While Ireland is forecast to have the second highest growth in the eurozone between 2012 and 2016 at an average of 2%, this will not be sufficient to generate the number of jobs needed to cut the dole queues. The IMF says growth needs to average 4% a year.