The Labour Market Impact of the Working Families' Tax Credit


  • The authors are grateful to Andrew Dilnot and John Vickers for useful comments, and to the Bank of England for financial support for this study. The paper forms part of the research programme of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at IFS. Data from the Family Resources Survey and the Family Expenditure Survey, made available by the Office for National Statistics through the ESRC Data Archive, have been used by permission of the Controller of Her Majesty's Stationery Office. The authors are responsible for all errors and interpretations.


In October 1999, the working families' tax credit (WFTC) replaced family credit as the main package of in-work support for families with children. Among a range of stated aims, the WFTC is intended to‘… improve work incentives, encouraging people without work to move into employment'. In this paper, we consider the impact of WFTC on hours and participation. To simulate labour supply responses, we use a discrete behavioural model of household labour supply with controls for fixed and childcare costs, and unobserved heterogeneity. In simulation, we experiment with a number of scenarios regarding the take-up of the credit, entry wage level and hourly childcare price. We find participation rates among single mothers to increase by around 2.2 percentage points for the base-case scenario, while for married women participation rates are modelled to fall. Our simulation results indicate a small increase in overall participation of around 30,000 individuals.