Welfare Trap - Examples

Examples

An example of how the welfare trap works: a person on welfare finds a part time job that will pay the minimum wage of $5 per hour, 8 hours per week. Half of the $40 earned per week, or $20, will be deducted from welfare payments leaving $20 net gain. The government will also levy a tax on their $40, say 15% ($6). There may also be extra child-care and commuting costs, now that the person is no longer able to remain at home all day, and the loss of domestic productivity. Therefore, despite performing eight hours of work productive to society (and, theoretically, themselves), the person is now worse off than before they acquired employment.

A welfare trap is an example of the perverse incentive: the welfare recipient has an incentive to avoid raising his own productivity because the resulting income gain is not enough to compensate for the (increased) work effort.

An incentive to get out of the welfare trap is that the return to the labour market gives a person chances of moving up the career ladder, improving old and acquiring new job skills, etc., thus eventually improving their standard of living. Policies which allow for the continued receipt of benefit payments for a period of time after entering work or up to a specific earnings ceiling may also eliminate the welfare trap. For example, for UK claimants of Incapacity Benefit or Employment Support Allowance, "permitted work" arrangements allow for paid work up to 16 hours or £95 per week without the withdrawal of the disability benefit payments, leading to a net overall increase in income. However, any earnings over £20 may be taxed, and additional earnings may affect receipt of Housing Benefit and Council Tax Benefit, which is an example of the welfare trap potentially in effect.