Why people work informally while claiming benefits: special report

Working while claiming benefit and taking cash-in-hand jobs to avoid tax are often a response to poverty or a crisis such as family breakdown, a new report from the Joseph Rowntree Trust declared last week.

The picture the report paints is a world away from the welfare utopia described in a speech by work and pensions secretary John Hutton this week.

“We have begun to replace the one-size-fits-all, reactive system of benefit dependency of years gone by with a new approach based on tailored support to help people back into work and new obligations for people to do everything possible to help themselves,” said Hutton.

The government is to go ahead with planned welfare reforms including replacing incapacity benefit with a two-tier employment and support allowance, the Department for Work and Pensions said this week, publishing a report on responses to its consultation on the welfare reform green paper.

The Joseph Rowntree report finds the reasons why people defraud the system are due to “need not greed” and include low benefit rates, low wages, rules limiting the hours some groups can work, complex tax and benefits systems, high rents, the cost of childcare, and health problems.

It describes a bureaucratic and inflexible welfare system that makes people reluctant to come off benefits. Claimants worry that if a job does not work out, they will be left unable to pay rent and facing delays before benefit is reinstated.

An understanding of why people feel the need to cheat the system must inform future tax and benefit reform, according to the report.

It recommends that the tax and benefit system should be simplified, and that benefit levels should be raised.

Other policy recommendations include support and training for people wanting to come off benefits and cash-in-hand work; and flexibility by employers to accommodate workers who need childcare or have poor health.

Report author Aaron Barbour, said, “People in deprived areas are resorting to informal paid work because they are trying to support, feed and clothe their families. They are hard-working ordinary people trying to survive day-by-day. The government needs to understand and include the informal economy in all its strategies if it is to reach its employment, anti-poverty and regeneration targets. They should harness the assets of people working informally – their effort, skills and willingness to work – rather than seeing it as a problem.”

Case studies in the report illustrate how people defraud the system out of desperation. All are from the deprived London borough of Newham.

A father of a disabled child describes how he declares some but not all of his income, so that he can keep his benefits. He needs additional money to look after his family. His wife cannot work as she cares for their daughter full-time.
He cites the main reason for not declaring his cash-in-hand work as fear of not being able to afford his high rent and council tax if these were not covered by benefits.

A student took cash-in-hand work. “I worked informally throughout the time I spent at university and it was a matter of keeping my head above the water rather than cheating the system. I had to take care of the needs of my children in the best way I could, which in this case was carrying on with temping work, but not declaring it,” says Joe. He had earlier declared spells of temping but then when he stopped working faced delays  – which he could ill afford  – to get his benefits reinstated.

Respondents to the government’s consultation on the welfare reform green paper including charities and local authorities expressed concern that pressing issues – including those highlighted in the Joseph Rowntree report – are not addressed in the government’s welfare reforms.

These include the earnings disregard, the amount people can earn while on benefit. It is £5, unchanged since 1988. As the minimum wage is £5.05, claimants can’t even work for one full hour per week without losing benefit.

Other issues are a lack of flexibility, over-complexity, and people finding themselves in financial difficulties after coming off benefits to attempt work.

Long-term the government has pledged to reduce complexity and simplify the benefits system and has set up a benefit simplification unit.

But change is going to be slow and addressing the chronic issues of low pay and a bureaucratic inflexible benefits system is going to take a revolution which does not appear imminent.