Scottish Child Payment and the labour market

Executive Summary

1. Scottish Child Payment (SCP) is a successful anti-poverty policy providing a vital and regular income source to hundreds of thousands of low income families in Scotland each year.

2. SCP is a “top up” benefit, qualified through Universal Credit (UC) and other benefits administered in Scotland by the Department for Work and Pensions (DWP). Eligibility for UC is determined by earned income with awards tapered to zero in line with increases in earnings from employment. When someone’s earnings rise above a certain limit and they are no longer eligible for UC, or for any other reason they lose eligibility for UC, they are also no longer eligible for SCP. As with other means tested benefit payments, clients could have a financial incentive to not earn so much through paid work that eligibility is lost.

3. Stakeholders have discussed the interaction between SCP and work incentives in different forums and in January 2024 the Poverty and Inequality Commission recommended^[1] the Scottish Government publish analysis of any impact of SCP on labour market participation. This report explores what is known about how SCP interacts with the labour market in Scotland and theory and evidence of how clients’ labour market choices could be affected by SCP.

4. Identifying and measuring SCP’s overall effect on the labour market is challenging due to the limitations of available data to capture the labour market outcomes of SCP clients specifically and to identify causality between those outcomes and receipt of SCP. However, labour market economic theory and empirical evidence can inform how SCP interacts with labour market choices.

5. Marginal Effective Tax Rates (METRs) are used to reflect the overall net financial gain to labour market participants of their labour market choices. These reflect the proportion of an extra £1 of gross earnings that is lost due to tax rates, other deductions, and knock on effects to benefit income. SCP awards are not tapered, so for some SCP clients METRs can be very high when at the margin of losing underlying benefit eligibility (e.g. UC) and their full SCP award. It is likely this is a more significant issue for households with larger families and more children, who have the potential to lose more SCP income.

6. However, METRs are not the only influence on labour market decisions. For parents and carers with children, the opportunity cost of working (the foregone utility of the next most optimal use of that time) could also be a factor. When they have the choice, parents of children, particularly young children, may place importance on spending time with them rather than working. The UC conditionality and sanction regime also has an impact on labour market choices of parents, through work requirements in place to obtain UC awards, and penalties when those work requirements are not met.

7. The weekly rate of SCP (for children under 6) has increased by more than 150% since its introduction in February 2021 and at higher SCP rates METRs could increase further for households close to earning more than the earnings limit for UC/SCP. Employment rates of parents, particularly women, tend to be lower when dependent children are younger, especially before they reach school age. Combined with the costs of childcare, the high opportunity costs of working and high METRs, in theory, higher rates of SCP could provide further financial incentives for households with young children to limit their engagement with the labour market.

8. However, evaluation and survey evidence from SCP clients suggests if or how it affects labour market behaviour is highly dependent on individual client circumstances and can operate in different directions. For example, receiving SCP has enabled some clients to pay for travel to interviews, a new job or college. For others, it has been used to pay for childcare, enabling them to work full-time hours. For some SCP clients, it has enabled them to reduce working hours and spend more time with their children.

9. In addition to supply side considerations around METRs, labour market activity of SCP clients will also be influenced by demand side factors from employers – the economic cycle and the availability of suitable jobs in the labour market. This will be influenced by the extent jobs available in the labour market match the skills of SCP clients seeking work, wage rates offered by employers, and working hours and conditions of jobs.

10. Changes to SCP’s design could improve financial incentives to work for some recipients. For example, METRs could be reduced by tapering awards gradually rather than flat award rates based on UC and other reserved benefit receipt that are gained or lost entirely. However, a taper rate could be expensive and complex to implement and also increase METRs for a much larger number of households, even if additional households are brought into eligibility. The overall anticipated labour supply impact of a taper is unclear and would be highly dependent on design.

11. Analysis of economic data around the labour market, UC award data and employment likelihood of UC conditionality regimes suggests SCP is not currently negatively affecting labour market outcomes at scale in the economy.

• Analysis of UC planning for work conditionality clients in Scotland - the vast majority of whom should be receiving SCP - compared with the same client group in England where SCP is not available, suggests these clients are consistently more likely to be in employment in Scotland and their likelihood of being in employment has not been affected by SCP.
• If SCP has a significant effect on the employment earnings of UC clients eligible for SCP we might expect to see lower incentives to work reflected in rises in small UC award amounts in Scotland around the time of SCP milestones and compared with awards in England for similar households. However, trends in Scotland and England appear very similar to date, aside from small spikes in Scotland for low award amounts for new claims around the time of the eligibility extension in November 2022.

12. The most effective method to track how SCP interacts with labour market outcomes could be data linkage between SCP benefit receipt and employment data or a longitudinal survey of SCP clients, isolating the effect of SCP by controlling for other influencing factors (e.g. UC conditionality regime) and tracking how the labour market outcomes of people receiving SCP change as they receive the benefit. However, these would be costly and complex forms of research.

13. Scottish Government analysts will continue to assess the evidence base of how SCP is interacting with the labour market. A further evaluation of SCP is due to be published in 2025 and will include a survey of around 1500 recipients including questions about how and why SCP has affected their labour market activity. This will enhance current understanding of SCP’s role in influencing labour market outcomes of recipients.