Encouraging Work

SANTIAGO – Some policies are economically illiterate, for they cause avoidable inefficiency. Others are heartless, for they cause avoidable human suffering. Few policies manage to be economically illiterate and heartless all at once. But Britain’s Conservative government has achieved just that, by cutting tax credits for low-income workers.

The system, introduced in 2003 by a Labour government, is modeled after the United States’ Earned Income Tax Credit. Both work in practice like a wage subsidy for those with low incomes, cutting poverty – particularly among women with young children – while strengthening incentives to work.

Success has attracted emulators. Turkey adopted regionally targeted employment subsidies in 2004-2005. When I was Chile’s finance minister, our center-left government adopted a wage subsidy in 2008, focused on young workers. South Africa’s government did much the same in 2014. Other middle-income countries have discussed adopting similar policies.

The Tory move in the United Kingdom is based on shortsighted fiscal calculations (appearing to shave additional pounds from the budget deficit) and shortsighted political calculations (displaying “toughness” to right-wing voters who believe that the poor are undeserving). But the move is also interesting in terms of what it reveals about the coming debate on the role of work (and of labor-market policies) in both advanced and emerging economies.