WORK INCENTIVES AND LABOUR MARKETBEHAVIOUR IN ONE PARENT FAMILIES

(first draft, please do not quote)

Lic. Soc.Sc. Katja Forssén M.Soc.Sc. Mia HakovirtaUniversity of Turku University of TurkuDepartment of Social Policy Department of Social Policy20014 Turku 20014 TurkuFinland FinlandTel. +358-02-3335897 Tel. +358-02-3335408Fax +358-02-3335093 Fax. +358-02-3335093Email:Katja.forssen@utu.fi Email: Miahak@utu.fi

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ABSTRACT

The increased number of single parents living on social assistance has led in somequarters to questions about the effects of benefit systems on single parents’ incentivesto participate in the labour market, as well as on incentives for individuals to become orremain single parents. The problem of disincentives to work is very often localised tofamily policy. The main task of family policy is to provide benefits for families withchildren. However modern family policy has aims other than economic. In Scandinaviancountries family policy has to a great extent focused on enabling parents to combinecare of children and working life.

According to the thesis of dependence culture, the countries with high social benefitlevels should have a high amount of unemployed single parents or parents who aretaking care of their children at home. The aim of this paper is to study work incentivesand their implications for one parent families in Finland. In this study we will answer thefollowing questions: To what extent are high income taxes or high day care fees adisincentive to work? What are the effects of child benefits or transfer programmes forsingle parents? How do single parents actually behave in work disincentive situations?Do they act like homo economicus or like homo sociologicus? The study is based on themicrosimulation model and the Finnish Living Conditions Survey from the year 1994.

In our data only 14 % of employed single parents had the income level higher than whatthey would have got when unemployed. Most (86 %) of the employed single parents areworking despite that higher disposable income would be received from benefits. Thework disincentive hypothesis does not get strong support in our data. In short timeperspective one could say that single parents are behaving rather as homo sosiologicusthan homo economicus. In the long run perspective single parents are acting like homoeconomicus because for most of the single parents the labour force participationguarantees high social insurance for possible future social risks.___________________________________________________________________________

This paper will be presented in ‘2nd International Research Conference on SocialSecurity in Jerusalem (25-28.1.1998).

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1. INTRODUCTION

In the past twenty years there has been a significant growth in the number of single

parent families in all OECD countries (Bradshaw et al 1993; Hantrais and Letablier

1996; Lewis 1997). The widening diversity of family life imposes greater pressure on

the capacity of families to provide incomes and social care. This development has been

associated with a shift in the composition of the low income population, and has posed

new challenges to systems of social security. At the same time as the number of single

parent families has increased, has transfers spending on this group also increased. This

has led in some quarters to questions about the effects of benefit system on single

parents’ incentives to participate in the labour market, as well as incentives for

individuals to become or stay single parents. Especially in the liberal welfare states

people hold strong views about the possible disincentive effects of taxes and transfers.

At the time of the latest recession in Europe the rethorics of work disincentives and

welfare dependency started to get support also in Scandinavian countries from some

politicians and citizens.

Very often single parent families has been taken as an example of the group which tend

to be depending on the state income support. This dependency of single parents on state

welfare is seen as pathological by those who defend the dependency culture thesis

(Hernnstein et al. 1994; Murray 1984). The dependency is required as a result of free

and deliberate choices of the claimants and, therefore, if somebody is to be blamed for

the situation it is just beneficiaries themselves. However, there can be found many

reasons for the economic problems of single parent families. Head of the single parent

family is often young, low educated and female, which makes the family more

vulnerably to the social risk. Low educated and young people have often a weak

position in labour market. Women’s incomes are lower than men’s. Changes in

employment patterns tend to widen the gap in incomes between dualearner, one-earner

and noearner households. The clearest link between family change and the development

of the new poverty lies in the circumstances of one parent families. Single parent

families run a very high risk of poverty (Burkhauser et al. 1988; Smeeding et al. 1988;

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McLanahan et al. 1992; Forssén 1997a). Single parents can be viewed as a highly

disadvantaged group in terms of their resources, which include money, time and social

networks (Hobson 1994).

The problem of disincentives to work is very often localised to family policy. The main

task of family policy is to provide benefits for families with children. The modern family

policy has also aims other than just economic. In Scandinavian countries family policy

has to a great extent focused on enabling parents to combine care of children and

working life. (Kamerman et al. 1994; 1978; 1981.) This has been made possible by

offering day care services for children in need, home care support for parents with child

under 3 years old and child allowance for all children. Together with earning based

unemployment benefits the situations of single parent families can very easily be such

that the parent is economically better off when staying at home.

The aim of this article is to study work disincentives and their implications for single

parent families in Finland. In this study we will answer the following questions: Have

high income taxes or high day care fees been a disincentive to work? What are the

effects of child benefits or transfer programmes for single parent? Majority of previous

studies have been concentrated on hypothetical calculations. In addition to these

calculations we seek to answer how do the single parents really behave in work

disincentive situations? The outline of the paper is as follows. First we will make an

overview of theories dealing with work incentives. In chapter 3 we present our data. In

chapter 4 we will briefly describe the current family policy system in Finland. In the

empirical analysis by utilizing simulations technics and data from the Finnish Living

Conditions Survey (1994) we will answer above mentioned questions. Finally the

results are discussed.

2. SOCIAL POLICY: AN INCENTIVE OR DISINCENTIVE ?

With some exaggeration and oversimplification, one can argue that there are two

competing theories about the association between work incentives and social benefits.

First, the work disincentive theorists have been concerned that too generous welfare

state benefits are threatening work ethic and causing moral hazard, because lavish

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welfare provisions it does not pay to work: you are better off on living on social

welfare. Second, the so called work incentive approach suggest that welfare state

benefits encourage work. Extensive welfare provisions, not least social services and day

care possibilities, facilitate and encourages people to participate in paid work outside

home.

The work disincentive hypothesis assume that the higher the level of social provision

the lower the incentive for an individual to get employed. A common thread running

around this issue is the discussion of welfare dependency. Welfare dependent is a

corruption of welfare recipient, which assumes that recipients become dependent on the

government by obtaining welfare. However, the term dependency is nothing more than

a synonym for a long-term welfare use, but it often has a pejorative connotation. Those

who are dependent are inactive, ineffectual and even irresponsible in the eyes of the

many. (Bane and Ellwood 1994; Gans 1995.) Yet, Murray (1984) argues, that the

dependency on social security is due to the poor themselves. The dependency is a

deliberate choice probably enchanted by the very welfare state that somehow is an

incentive to fail.

There is a concern about the incentive effects of welfare programmes and initiatives

have been introduced to ensure that financial rewards from work are higher than the

levels of benefit that can be received outside of the labour market. Economic

dependence on public agencies is a political issue in most US and UK, but becoming in

other countries too. The welfare states are developing incentives for single parents to

take paid work as well as disincentives to stay on public support (Eardley et al. 1996;

O’Connor 1996). In UK the earning disregards for single parents have been increased

and also the criteria for benefits paid to those in work have been extended (Lewis

1997). In the Netherlands similar legislation has been accomplished and there are also

prescribed sanctions for non-compliance with work seeking (Eardley et al. 1996).

The work incentive hypothesis assume that existence of high welfare benefits do not

either necessarily mean work incentives to become negative. The welfare state was not

to meant to encourage exit from the labour market, on the contrary it was designed to

promote maximum labour market participation. Therefore, the role of the welfare state

as an incentive to labour supply is twofold. First, the welfare state has created working

possibilities especially for females. Second, subsidised child care services have enabled

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women and single parents to enter into the labour market. (Esping-Andersen 1990).

Thus the incentive for single parents to enter to the labour market go hand in hand with

extensive public day care services and also with parental leave benefits linked to the

labour market activity (Lewis 1997).

The mechanism for delivering social welfare is also important factor affecting the labour

market behaviour of single parents. Earning-related welfare benefits encourage people

to work, because part of the welfare benefits is paid out in proportion to the recipients

prior earnings and people are motivated to work for qualify better benefits. Social

insurance benefits gives strong incentive for individuals to participate in the labour

market. Earning-related unemployment compensation as opposed to the means-tested

assistance may provide some incentive for individual to get a job again so that she or he

will be covered by social insurance also next time of unemployment (Atkinson and

Micklewright 1991; Aronsson and Walker 1997).

Predictions about the impact of policy choices differ dramatically depending on what the

origins of the problem seem to be. The liberal view emphasises the importance of the

economy and jobs and conservatives the disincentive of welfare system (Bane and

Ellwood 1994). So, if it is because of welfare benefits that single parents are not

working then by elimination of financial aid would increase their labour force

participation and eliminate dependency of social benefits. On the other hand, if a welfare

recipiency is a symptom of background disadvantages that lead to the poverty and

dependency, then reducing financial aid would not help much.

2.1. Human behaviour and social policy

Competing the reasons for single parents high amount among welfare recipient, the

different explanations have been emphasised. First, the extent to which welfare systems

shape the recipient’s willingness to leave welfare system because of availability of state

support. Second, the extent to which it is single parents values that are important factor

affecting people’s choices wheter to work or not. (Bane and Ellwood 1994; Lewis

1997.)

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There is very little research done at microlevel about the factors which encourage

people to enter and/or remain in employment or discourage them for doing so, while

some commentators believe that policy can influence decisions about working.

Economic studies give the impression that an increase in tax relief or in the level of

benefit, does have measurable effect on decisions about labour market activity.

Sociologist are more cautious and rather explain behaviour as the possible outcomes of

the combination of factors, including the wider socio-cultural climate (Hantrais and

Letablier 1996).

When faced with the several courses of action, people usually do what they believe is

likely to have the best outcome (Elster 1989). This rational choice theory suggest

individuals examine the options they face, evaluate them according to their tastes and

preferences, and then select the option that brings them the greatest monetary utility. It

assumes that people are making decisions of their lives only by calculating benefits.

Rational decision making can also be seen as a contrast between homo economicus and

homo sociologicus. Homo economicus is an instrumentally rational, the figure that

typically appears in neo-classical economic theory as a maximizer of utility. Homo

economicus as represented in the rational choice model calculates according to the

individual preferences. In contrast, homo sociologicus lives according to rules, roles and

relations and have been socialised into the appropriate norms of behaviour. (Heap et al.

1992).

Providing that rational choice theory of human behaviour is correct, we can expect to

find a low labour force participation of single parents because of the high quality of

benefits. The better the welfare benefits the lower the work participation rate. However,

work decision are affected by many considerations and perhaps amongst the most

important of these are non-economic. People work because their jobs are fulfilling in

their own right, providing social esteem and sense of social integration. (Jahoda 1992;

Gershuny 1994.) In many cases it is not possible to make clear difference between

work’s economical and social meanings.

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3. RESEARCH QUESTIONS

This study focuses on work incentives and their implications for single parent families in

Finland. We will test the work disincentive hypothesis which assumes that the higher the

level of social provision the lower the incentive for an individual to get employed.

According to this hypothesis Finnish single parent families should be a good example

for a group which faces the disincentive problem because of universal and multiple

family policy system that will be described in the next section. We will study the effects

of child benefits and transfer programmes for single parents. First we locate possible

disincentive traps. Have high income taxes, income based housing benefits and high

daycare fees been a disincentive to work? Second, the main aim of the article is to study

how single parent families really behave in work disincentive situations. Do they act like

homo economicus or like homo sociologicus? Do they quit to work to live on the dole

if that is economically more rewarding? Or do work have some value as such so that the

claimants continue to work?

The study bases on the microsimulation model and the Finnish Living Conditions

Survey from the year 1994. The survey data used is Finnish Living Condition data

collected by the Central Statistical Office of Finland. The data was combined by

combining interviews and tax registers were also used mainly in respect of income data.

The sample size of the survey was 8650 Finns. By using Finnish Living Condition Data

we check how single parents’ have actually behaved in their real lives. To what extent

are they working or not? Single parents will be clustered in different groups by their

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position in labour market and their disposable incomes. Thereafter we cross-check their

possible disposable incomes in alternative situations, e.g. what they would get in work

or if they were living in social benefits. To do this we use a special microsimulation

model (the so called KOTO-modelling).

Microsimulation offers an analytical tool for assessing the redistributive potential of

social security system. At the same time, simulation has its limits. First, it bases the

model family approach and therefore it has involved collection of information on a set

of hypotethical family circumstances. However, the information microsimulation gives is

used to compare the entitlements of families receiving benefits with the incomes of

families in paid work. Second, the results of microsimulation models can never explain

the human behaviour effects due to the welfare benefits. Therefore in this study we have

used both the microsumulation and Living Conditions Data to find out how social

security might have influenced to single parents’ labour market behaviour.

4. THE INSTITUTIONAL SETTING OF FAMILY POLICY

In order to provide the reader a basic understanding of the institutional context where

the single parents in Finland are acting and making their decisions, we give a cursory

account of the different benefit systems the parents can rely on.

By introducing the family systems during the twentieth century the state has in the

Western countries to an increasing extent, taken responsibility for the cost of children.

These family policy systems consist of three ingredients - family legislation, social

services and tax- and transfer benefits and each country has its own combination of cash

benefits, tax reliefs or services in kind which provide support for those families rearing

children. (see Bradshaw et al.1993; Wennemo 1994.) Family policy is concerned both

with the effects on the family of all types of activities and with the efforts to use family

well-being as an objective or as a source of goals and standards in developing public

policy. Family policy may be defined as a field in which certain objectives regarding the

family are established and various policies and measures are developed to achieve these

goals (Kamerman and Kahn 1978).

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The family policy goal in the Nordic welfare state model is social integration, sought by

maintaining high-quality public services that are reasonably priced and available to all

who need them. Basic security is typically at a reasonable level, the state is in a central

role as a provider, and benefits are universal. All citizens are covered by the social

security programs. A reasonable level of benefits is determined by minimal security on

the one hand and income-relatedness on the other. The state is in a multi-faceted

regulating role in society; it is used as an instrument that creates equality and social

rights. In addition to the goal of making the cost of children equal across population

groups, the family policies are aimed at supporting the combination of work and family

responsibilities and making it possible for women to work.

Finland has established a policy to obtain gender equity and a better balance between

work and family life. Young-child policy is targeted overwhelmingly on children with

working parents. The policy package assumes employment, both as a source of

eligibility for a rich package of benefits and is the basic source of income, once children

are older than 3 years old. (Kamerman and Kahn 1994.) Single parents’ high labour

market participation rate is one result of above mentioned principles of family policy. In

Scandinavian countries social benefits have been quite important in lifting lone parents

from pre-transfer poverty and improving the economic well-being of those above the

poverty line (Smeeding et al. 1988; Danziger et al. 1995; Forssén 1997a), because

benefits supplement rather than replace earnings.

The leading characteristic of family policy in Finland has been a strong commitment to

improving and expanding the scope of care arrangements for young children. Children

under eleven months are typically taken care of by their own mother because there are

rather long maternity leave with earning related compensation in Finland. Maternity

cash benefits represent a compensation for cost arising from childbirth. Since 1985 the

period that system compensate about 80 % of income losses has been 263 days. Some

collective bargaining agreements require that employers continue to pay wages to

workers during part of the maternity leave. Altought both parents are eligible for such

benefits, the dominant part of days goes to mothers.

After maternity leave there are two alternative policy options available for families with

the children under three years old: a public day care system or home care allowance.

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Publicly provided day care is organised and financed mainly by local authorities. Public

involvement in child care has increased steadily in Finland during last decades. The

modes within the public day care system are the day care centres and family day care.

The fees for public day care are income related and parents pay fees based on rates

decided upon the each municipality. In 1994 the daycare fees were granted into five

different cost brackets: 385, 550, 825, 1100 and 1430 Fmarks per one child/ a month1.

The child home care allowance is aimed at facilitating the arrangement of day care for a

child under three years of age. Child home care allowance is often paid to a mother who

stays at home to take care of child(ren). It is intended as an alternative to municipal day

care. Home care allowances consists of three different parts: basic payment, additional

means-tested payment and sibling supplement. The child home care allowance is taxable

income. Basic payment are available for all families and additional means-tested

payment is paid to families whose income falls below a specified level. When there are

two or more children under school age in the family the sibling supplement is received.

The other benefits for families with children are universal child allowance, maintenance

allowance and income tested housing benefits. Child allowances are paid for every

persons up to the age of 17. Its rate depends on the number of children eligible for child

allowance there are in the family. The allowance is increased for each child in a single-

parent families. The child allowances are not subjected to income tax. The maintenance

allowance, also paid by the government, ensures child support payments to single parent

in the absence of the other parent or other parents failure to fulfil maintenance

obligation. Housing benefits are income tested and are not subject to income tax The

housing benefits covers most of the housing cost when there is only one parent in a

family.

Beside these benefits which are targeted to families with children there are other

universal benefits for all citizens as unemployment benefits and social assistance.

Unemployment allowance is payable under two different schemes: the basic

1 The cost of childcare for families has increased a lot in the 1990’s. In 1990, municipalitie weredelegated the power to deciden on the income limits for different income brackets for all but so-calledzero payment bracket. At the same time, the determination criteria were changed to being based on thegross income rather than the net income. The consequence of this decentralization was that 99 % ofmunicipalities tightened their income brackets. (Forssén 1997b.)

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unemployment allowance scheme and the earnings related unemployment allowance

scheme. Basic flat-rate unemployment benefits are designed to ensure a minimum

standard of living during unemployment. The earning related unemployment insurance

fund are run by trade unions and benefits are paid only to the fund members. This

unemployment insurance in Finland is voluntary for individual employees. The

calculation basis of the benefit is previous earnings and the replacement rate for average

paid worker is usually 60 per cent of gross earnings.

The person or family not receiving any kind of salary or social security benefits or only

very low compensation may apply for social assistance. According to the law, all

persons with a low income who cannot make ends meet in any other way are eligible for

social assistance. This is a means tested transfer, having its historical roots in the system

of poor relief. The typical recipient of social assistance is a young adult and single

mother. Taking into account all households in the country, single parent families

constituted the category which had the highest proportion of social assistance

recipients: third of all single parent households received social assistance in 1994. Time-

series studies show that the rate of unemployment strongly affects the rate of social

assistance recipiency. The social assistance also seems to act as a substitute for

unemployment insurance benefits. (Living allowance 1994).

For single parent families the Finnish social policy system offers several alternatives to

act depending on the age of children. The figure 1 shows us how the Finnish social

policy effects on single parents position in labour market. Almost half of the single

parents stays at home when their child is under 3 years old. Most of them receive home

care allowance and almost twenty percent is unemployed. When the child is 3-6 years

old 55 percent of parents are employed and 25 percent are unemployed. Those parents

that are solely taking care of their children at home have almost vanished. When the

child gets older most of the single parents are again back in the labour market.

Figure 1. Single parents’ position in labour market (single parent with one child, by the

age of the child), %.

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Another way of looking at the situation is to study in which way single parents in

different phases of life cycle collect their income e. g. in which way their income

package is combined. The figure 2 shows how single parents’ income package differs

between families with children in different age. The disposable income and work

incomes are highest in families with child over six years and lowest in families with

under 3 years old child. Families with child under three years get social transfers

(housing benefits, home care benefits) more often than families with older child. These

social transfers targeted to families with child under 3 years old keep families above

poverty line and for that reason the role of social assistance is not significant. Families

with a child over six years seem to be much better off than other familytypes. Their

disposable income, work incomes and paid taxes are all higher than in other families.

The amount of social assistance is also lower than in other family types.

Figure 2. Single parents’ income package in Finland in 1994 by the age of the youngest

child (Fmarks)

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As mentioned earlier modern Scandinavian family policy has at the same time several,

often contradictory functions. Child support package have distinct and explicit

objectives. Some are clearly related to education, housing, health and child care policy.

Others are more generally related to a vision of family life or the role of women in

labour market. Because the functions are varied and sometimes contradictory

disincentive situations can be found when regarding the system as whole. Income based

benefits together with income-tested housing allowance, income based daycare fees and

homecare allowance can very easily lead to disincentive situation. This disincentive

problem occurs especially in single parent families.

When focusing on the situation of single parents with child over 3 years old it can be

said that Finnish policies are not decommodifying in the sense of providing market

independence. Instead, there have been promoted labour market participation and

earnings are the main component in the income package of single parents. The situation

in single parent families with child under 3 is different. Homecare allowances together

with housing benefits create a situation that is in many cases disincentive for labour

market participation. The average net income for unskilled female worker is about 87

000 Fmarks per year. All possible benefits for unemployed single parent with a child

under 3 are about 79 400 Fmarks a year. Daycare fees per one year can be as high as 15

730 Fmarks per year. Economically thinking there is not any incentive to work if the

above described family structure and income conditions are fulfilled.

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5. DISINCENTIVE WORKING SITUATIONS IN ONE PARENT FAMILIES

In order to tackle the Finnish family policy specific country study is needed to unravel

the possible disincentive working situations built in the social security system. The

Finnish case is interesting in a sense that a country provides rather high welfare

provisions and can thus expected to exercise impact on lone parents’ choices of welfare

and work.

By using microsimulation we will inspect how the income tax and social security

contribution system might provide disincentives for single parents to participate in the

labour market. Incentives can be evaluated by comparing incomes in paid work and out

of paid work. We have compared incomes when earning from what single parents

would receive if they had no income on earning and were dependent benefits paid to

single parents outside the labour market or were dependent on social assistance. The

intervals where the marginal change of disposable income is negative or constant, family

might face work disincentive situation.

5.1. Disposable incomes

The level of incomes and benefits for single parents can be measured in a number of

ways. This analysis has looked at the disposable incomes of the Finnish one parent

families receiving benefits comparing them to the incomes of family in paid work.

Disposable incomes consist of total earnings and social transfers get deducted social

transfers paid.

The results can be illustrated an a number of figures. Figure 3 shows the disposable

incomes at different income levels of single parents with one child under three years of

age if the parent is living on benefits or have incomes from earnings.

Figure 3. Disposable incomes before and after day care payments in one parent family

with one child under three years of age

15

0

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Gross income 1000 Fim/month

IN WORK BEFORE DAYCARE COSTS

IN WORK AFTER DAY CARECOSTS

HOME CARE ALLOWANCE

BASIC UNEMPLOYMENTALLOWANCE

EARNING RELATEDUNEMPLOYMENTALLOWANCEINCOME SUPPORT RATE

In the case of single parent with one child under three years old the disposable income

when getting an income related unemployment cash benefit, basic unemployment

benefits or home care allowance are even higher than the case of earnings. This trend

will last up to 5000 FIM/month in gross income and after that disposable income when

working start to increase slowly. After taking account the day-care fees paid as a

consequence of higher earnings the level where it is financially worth working increases.

If single parent at work has to pay for child care the social security system provides

disincentives to work even at very high incomes. After 12 000 FIM/month gross

incomes produce higher disposable incomes from earnings than from unemployment

benefit. If child is older and there are no child care cost then single parents incentive to

work is lower. Also it has to be remembered that costs of working increases the

reservation wage. A single parent with child under three years of age is often in poverty

trap even if the wage level is higher than average. The combined effects of extra taxes

paid and benefits lost as a result of an increase in income leads to the poverty trap.

Poverty trap arise not just from the income tested benefits, but also from the interaction

between the income test, other means-tested forms of assistance and the personal

income tax system.

Figure 4. Disposable income before and after day care payments in single parent

families with two children under three and seven years of age

16

0

2000

4000

6000

8000

10000

12000

14000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Gross income 1000 Fim/month

Dis

po

sab

le in

com

e F

im/m

on

th

IN WORK BEFORE DAYCARE COSTS

IN WORK AFTER DAY CARECOSTS

HOME CARE ALLOWANCE

BASIC UNEMPLOYMETALLOWANCE

EARNING RELATEDUNEMPLOYMENTALLOWANCESOCIAL ASSISTANCE

In the case of the single parent with two children under three and seven years old it is

not worth working even at the very high gross income. To get same disposable income

from earnings than from earning related unemployment benefit, the gross income have

to be more than 16 000 Fim/month if day care payments are taken account. Disposable

income from work starts to increase if single parent earns more than 17 000

FIM/month. In the lower level disposable incomes do not increase because loses of the

income deductible housing allowance and higher day care fees paid as a result of

increase in incomes. It seems that taking account the child care payments in income

brackets between 9000 FIM-15 000 FIM/month, disposable income will actually

decrease if the parent begins to work.

The interaction effects of social security and taxation and also the fees of social services

in microlevel can lead that people are trapped to unemployment or recipiency of social

benefits. The effect of the amount of the day care fees might indicate a distinct role

producing poverty traps. This means that the day-care payments alone put middle

income families in a poverty trap where any additional post-tax income will go directly

to increased day-care payments. In many situations lack of co-ordination between

income transfers and service fees creates a ”perverse” situation, where an increase in

income cause at the end financial losses to the income earner.

17

Figures 3-4 reveal also that low income families get greatest utility from the home care

allowance. This imply that there exist a rather strong incentives to stay at home when

child under three years old, if the potential wage is low. However, home care allowance

is based on idea that mothers can choose whether to stay home and take care of their

children or return back to work after maternity leave. The income support level lies

below the income that can be received by working or in other non-working situations.

So, social assistance does not produce poverty traps to the lone parent families.

Earning-related unemployment cash benefit bring the strongest disincentive work

situations to the one parent families with child under three years old in the case of low

incomes. This is because of high compensation of housing allowances among single

parents. Housing subsidies are a significant component of the benefit package on

unemployed and for some lone parents a move from unemployment to work can bring a

sharp increase in the proportion of the rent which they have to pay and this can be a

disincentive to work.

Figure 5. Compensation of unemployment, single parent family with one child under 3

years old.

0

1000

2000

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6000

7000

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9000

10000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Gross income 1000/month

DAY CARE FEES

HOUSING ALLOWANCE

EARNING RELATEDUNEMPLOYMENTALLOWANCE

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Figure 5 shows how earning-related unemployment benefit and housing allowance

compensate losses of earnings at the different income level. Earning-related

unemployment benefit increases according to the previous earnings. Housing allowance

compensate a huge amount of housing cost among single parent with one children under

three years of age. Compensation for unemployment is highest at the income level

above 16 000 Fim, because unemployed single parent does not have to pay for child

care.

5.2. Replacement ratios

Comparing single parents incomes when earning to the welfare benefits replacement

rate is a good indicator. Benefit replacement rates are usually calculated by comparing

the levels of out of work benefit income to some measure of income in work (Esping-

Andersen 1990; Eardley et al. 1996; Whiteford and Bradshaw 1994). Benefit

replacement rate show what percentage of earnings is replaced by benefits.

One measure used to detect potential incentive problem is the connection to the gross

replacement rate, i.e. the benefits received in relation to the income before tax when

working. The net replacement rate is a more realistic approach, because housing costs

and housing benefits are also included in the calculation. For the single parents with the

pre-school child, the in work net disposable income also takes account of child care

cost. The replacement rate close or to or above 100 per cent indicate incentive problem

e.g. living on social benefits give the same income level as work.

Replacement rate can be used as indicators of potential income effects of benefits

system. If a typical rent level is assumed, table 1 contains the gross and net replacement

rates for a single parent with one and two children when getting welfare benefits. These

replacement rates are calculated at the average income level (7833 mk/month). Gross

replacement rate is calculated by comparing gross earnings to the benefits which person

would receive on living on welfare. Net replacement rate take account the housing

benefits in different families and the replacement rate depend on the provision of

housing allowance. The calculations base on the simulations.

19

Table 1. Replacement ratios as percentages of gross and net income at average earnings

in 1994.

Gross income

replacement rate

Net income

replacement rate

1 ADULT AND 1 CHILD

Income support 40 76

Home care allowance 45 84

Basic unemployment benefit 38 78

Earning-related unemployment

benefit

66 95

1 ADULT AND 2 CHILDREN

Income support 56 82

Home care allowance 50 86

Basic unemployment benefit 41 81

Earning-related unemployment

benefit

68 95

For single parents gross income replacement rates are quite low, suggesting there are no

incentive problems. Net replacement rates are higher, because of compensation of

housing assistance of housing cost. At the average income level single parent has to pay

for child care and that increases the net replacement rate. These replacement ratios

show, how the benefits compensate the losses of earnings in most unemployed.

6. SINGLE PARENTS LABOUR MARKET BEHAVIOUR

In the previous chapter we have described the social security scheme and how it in

theory produce disincentive working situations for single parent families. The central

issue regarding the welfare benefits and the labour market behaviour is also an empirical

one. Benefits in theory have effects which are negative with regard to the income level

in labour market and evidence is needed to determine the effects to the labour market

behaviour of single parents. The question is does welfare state benefits effects the

labour market behaviour. The mere existence of the social provisions disincentive to

work is not itself a sufficient argument against the labour supply.

20

In this chapter we will test the work disincentive hypothesis. How do the Finnish single

parents really behave in the different work incentive /disincentive situations? Do high

level of social transfers decrease the work incentive behaviour? Or is it so that the most

of single parents act like homo sociologicus. We begin by showing how the social

transfers are targeted in different groups and in which groups the disincentive problems

are strongest. After that we will examine this group’s work behaviour and in this group

we will make comparison between different familytypes and between those who are

working and those who are unemployed.

Table 2 shows us groups to which social transfers are mostly targeted. The mean of

amount of social transfers out of child households’ disposable income is about 29. The

groups that have most social transfers out of disposable income are families with

children under 3, young parents and single parent families. This indicates that the work

disincentive problems occurs easily in these groups.

Table 2. Correlation of Number of children, Age of the youngest child, Familytype, Ageof parent and Vocational training with percent of social transfers out of households´disposable incomes (Multiple Classification Analysis).

N Eta Unadjusteddeviations

Beta Adjusteddeviations

Grand mean 28.88 28.88NUMBER OF CHILDREN***

12

3 or more

12441221 584

.07-1.38-1.826.73

.02-.61-.462.26

AGE OF THE YOUNGESTCHILD***

0 - 2 -years3 - 6 -years

Over 6 years

8087261515

.29

22.09-3.78-9.97

.29

22.04-3.29-10.18

FAMILYTYPE***Two parent family

Single parent family2797252

.06-.9010.00

.09-1.2213.53

AGE OF PARENT*15-24 years25-44 years

Over 44 years

662309674

.1746.521.05-8.14

.0822.86-1.111.57

VOCATIONAL TRAINING***Vocational school

Vocational collegeUniversity

No vocational training

1118685441805

.132.88-.57-13.894.10

.132.37-1.28-13.355.12

Multiple R2 .113

21

A positive deviation from the grand mean indicates increasing amount of social transfers out ofhouseholds’ disposable incomes. Asterisks indicate the statistical significance of the differences. *p <0.05; **p < 0.01; ***p < 0.001.

It is obvious that single parents with a child under 3 are behaving differently in labour

market than single parents with children over 3 years because of the home care

allowance. The majority of single parents with children under 3 years of age (46 %) are

at home, 20 % are economically active and 26 % are unemployed. This can be

explained by the principle tasks of our family policy. The one of the main principle of

family policy is to make it possible for parents to choose between employment and

caring the child by themselves. The result is that almost half of the single parents choose

the alternative to stay at home. This indicate the attractiveness of home care allowance.

The popularity of home care allowance implies that married as well as single mothers

tend to stay at home when children are under three years of age. This trend can be seen

also in labour force statistic. In the case of women aged 20-39 the labour force

participation rates have dropped and the number of women engaged in household duties

has increased (Ilmakunnas 1997).

In figure 6 we have compared single parents’ and two parents families’ unemployment

rates. Unemployment rate for single parents with at least one child between 3-6 years

old is three times higher than unemployment rate of two parents families. The

unemployment rate for two parents families is almost the same in spite of the age of the

youngest child, whereas the unemployment rate for single parents is first very low, when

the child is 3-6 years olds the rate increases and when the child starts the school the

unemployment rate decreases remarkably.

Figure 6. Unemployment of single parents and two parent families

22

0 - 2 years 3 - 6 years 7 - 17 years

Lone parent Two parent families

Single parents’ three times higher unemployment rate when the youngest child is 3 - 6

years old can indicate that this group is behaving as work disincentive hypothesis

assumes. The families with children over three years of age are not anymore eligible to

the home care allowance and parents have to make decisions whether they return to the

labour market. There are other explanations too. High unemployment rate of single

parents with children over three years of age indicates that at the time of the high

unemployment there was not working possibilities available to the low educated single

parents. Single parents had to be registrated to the job searchers, but working

opportunities were minimal. The other explanation is that single parents go on dole

because it is economically better solution than going to work and paying high daycare

fees.

According to calculations based on KOTO-modelling single parents are very often in

work disincentive situations. Single parents wages are lower than the average because

of their young age and low education level. This economic disincentive situation

maintain until the gross incomes get higher than 12.000 - 15.000 Fmarks per month.

This sum is depending on the number and age of children in a family. In our data only

14 % of employed single parents had the income level higher than what they would have

got when unemployed. This means that most (86 %) of the employed single parents are

working despite that higher disposable income would be received from benefits. One

could say that these persons are behaving irrationally from the homo economicus’ point

of view. On the other hand they might be behaving as homo economicus if we evaluate

their behaviour in long run. As the work incentive hypothesis assumes earning-related

23

welfare benefits encourage people to work and people are motivated to work for qualify

better benefits.

But what explains greater unemployment rate for single parents with children between 3

and 6 years old. We might find some evidence on work disincentive hypothesis when we

compare this group to unemployed single parents with school age children and to

employed single parents with the children same age.

Table 3. Comparison between unemployed and employed single parents and twoparents families (with unemployed mother) by some background variables.

Unemployedsingleparents witha child 3 to6 years old(N=24)

Unemployedsingleparents witha child over6 years old(N=29)

Unemployedtwo parentfamily witha child 3 to 6years old(N=32)

Employedsingleparents witha child 3 to 6years old(N=38)

AGEbelow 35

35 or over54,245,8

24,1*75,9

59,440,6

65,834,2

CHILDRENone

two or more37,562,5

82,8***17,2

28,171,9

44,755,3

VOCATIONAL TRAININGno

yes41,758,3

37,962,1

34,465,6

28,971,1

TYPE OF HOUSINGowns a house or an apartment

lives in rented flat16,783,3

44,8*55,2

81,3***18,8

36,863,2

LIFE SATISFACTIONDissatisfied with life

There has been negative life eventsLack of money to buy food

12,554,295,8

24,127,6*67,9*

12,531,368,8

13,239,563,2*

EFFECTS OFUNEMPLOYMENT

Increased economical problemsIncreased relationship problems

Increased fear of loosing workskills

70,830,429,2

72,444,858,6*

68,821,943,3

24

Increased time to enjoy hobbies 34,8 41,4 37,5Asterisks indicate the statistical significance of the differences. *p < 0.05; **p < 0.01; ***p < 0.001.

If these groups differ from each others we may get some answers to the work

disincentive hypothesis. We compare these groups by gender, amount of children,

vocational training, type of housing, effects of unemployment and life satisfaction.

Table 3 shows that there is just few variations which are statistically significant. Most of

the statistical significant differences are found in comparisons between unemployed

single parents with under 7 and over 6 years old children. Single parents with school

age children are naturally older than single parents with younger child. They also have

more often just one child and they are economically better off than single parents with

child under school age. Differences between two parent families (mother unemployed)

and families with children 3 to 6 years old are minimal. The only significant difference is

connected to type of housing. Most of the two parents families owns their apartment.

The most interesting finding is that there is just one statistically significant difference

between unemployed and employed single parent families. This difference is connected

to unemployed single parents families’ everyday life’ s problem to make their ends meet.

Unemployed single parents have had more problems to make ends meet than employed

single parents. It seems that unemployment has some negative effects on families’

economic situation although comparisons based on disposable income do not show it.

It seems that the higher unemployment risk for single parents with children 3 to 6 years

old can’t be explained by main background variables of the group. Perhaps the higher

unemployment risk is connected more generally to problems of life cycle together with

problems of the lack of the other parent in a family. It is said that single parents with

young children are discriminated by employees because their risk to be absent (because

of children’s sickness) is greater than two parent families’ and because they are not able

to be flexible in working hours.

All in all it seems that according to our results the work disincentive hypothesis does

not get strong support. Our inspection detached some cases where there are some

25

incentive problems in the Finnish social security system. Moreover there seems to be a

portion of persons in such situations that are living on social benefits. But the majority

does not act as predicted by the Homo economics hypothesis. Unemployment has not

been targeted to any special group within the single parents. Those single parents which

are unemployed don’t differ from other single parents. In short time perspective we

could say that single parents are behaving rather as homo sosiologicus than homo

economicus. In the long run perspective they are acting like homo economicus because

for most of single parents labour force participation guarantees high social insurance for

possible future risks.

7. DISCUSSION

Two contradictory theories have been presented on the impacts of welfare state

programs to work. The work disincentive theory maintains that if state assumes

responsibility for the economic well-being of the one-parent families, parents will

assume less responsibility. Increasing incomes through welfare state benefits will reduce

the incentive of parent to work and increase their reliance on public welfare. In the

economic theory it is mainly the economic incentives to work that are considered. The

work incentive theory assumes, that social policy is not constructed to violate the work

ethic, on the contrary, it was designed to promote labour market participation.

In this study, we have compared the financial incentives facing single parents which may

have an influence on their decisions to work. It has shown that the relationship between

the structure of benefits system facing single parents and their individual behaviour is

clearly not straightforward. These results suggest that the pattern of the financial

incentives is not the sufficient explanation for variations in the employment of single

parents. Despite of the high welfare benefits in Finland, single parents are working and

even if they would receive higher disposable incomes by benefits. Taken these factors

together it is probably that many low wage earners will have only marginal income

26

benefit in work. In other words, many single parents work with only small financial

benefit, especially is this true for many single parent families with day care payments.

Therefore it seem that people are driven by high work ethics. Instead of pursuing the

economic advantage, people hold societal norms in the highest regard, e.g. people are

behaving more like homo sociolocigus than homo economicus.

These findings are in contrast to the widely held popular opinion that welfare state has

seriously damaged work incentives. In contrast, this study support the work incentive

hypothesis.

However, income from employment is only part of the story. Despite of the high labour

force participation of single parents in Finland, single parents are dependent on social

transfers to met criteria for well-being. Therefore reducing social expenditure from this

group it would weaken their situation. In other words, reducing welfare benefits

targeted to the single parents, would decrease their incentive to work.. Looking at the

previous studies (Kahn and Kaherman 1983; Bradshaw et. al 1993; Sainsbury 1996;

Lewis 1997), it seems that single parents are likely to do best where benefits for single

parent families and children are generally generous. Single parents welfare is also

greatest where they are allowed to package income, that is where there is income from

employment and from social transfers.

27

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