2.3.3  Case Three: A Two-Income Couple Without Children

Figures 10 and 11 show EMTR profiles and budget constraints of a person with a working partner based upon the family’s combined income and the different sources of this income (market incomes earned by both people and welfare payments). Figure 10 is based on an assumed wage rate of $10 per hour and figure 11 is based on an assumed wage rate of $15 per hour. In both cases it is assumed that the working partner has an unchanging gross market income of $11,500. Net family incomes are shown on the vertical axis at the left of the figure. EMTRs are shown on the vertical axis at the right of the figure. Hours of work are shown on the horizontal axis of the figure. The extent that personal income taxes reduce gross total family income is also shown in the figures. Vertical lines in the diagrams indicate the hour levels corresponding to personal income tax thresholds applying to the market income of the spouse whose hours vary. However, for couples the thresholds applying to personal income tax rates on total individual gross income are not necessarily equivalent to these lines. This is because total individual income for tax purposes includes both individual market income and one half of the family’s gross benefit income.

Figures 12and 13 show the frequency distributions of the hours of work of individuals who are members of couples without children. These figures exclude those people with zero hours of work. Given that there are likely to be few observations of particular family types at certain wage rates, wage bands (of below and above median wages for particular demographic groups) have been used to calculate the frequency distributions of hours of work. Figure 12 shows the distribution of hours of work for those people receiving wage rates up to and including the median wage rate for this demographic group. Figure 13 shows the distribution of hours of work for people receiving wage rates above the median wage rate for this demographic group. The median wage is calculated as the median wage of all those people in couples (including primary and secondary earners) who receive market income. The median wage for this demographic group is $15.46 per hour. As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the distribution of hours of work and the distribution of incentives would be likely to arise.

As the working partner earns $11,500 the family non-benefit income is already greater than $80 per week when the person for whom the profile is drawn begins to earn market income. This person thus immediately faces Unemployment Benefit abatement on non-benefit earnings. In a couple, the income tax rate on benefit income for each individual is calculated on the basis of half of the family’s total benefit income. The marginal income tax rate applying to the benefit income is thus 15%. While the person’s total income (market income plus half the family’s benefit income) is under $9,500 (until approximately 12 hours of work at $10 per hour and approximately 8 hours of work at $15 per hour) the marginal tax rate on the total income is also 15%. Thus when the person works for one hour the gross benefit abatement is 0.824 (given by 0.7 / (1 – 0.15)), the change in gross income equals 0.176 (given by 1 – 0.824), the change in disposable income equals 0.138 (given by (0.176 (1 - 0.15) – 0.012), and the EMTR equals 0.862 (given by 1 – 0.138). (The method for calculating EMTRs is explained in appendix 3.)

This EMTR of 86.2% continues until the person’s total income increases to above $9,500 and the marginal tax rate on total income increases to 21% (the marginal tax rate on benefit income remains at 15%, however). Thus when this person works for one additional hour the gross benefit abatement is 0.824 (given by 0.7 / (1 – 0.15)), the change in gross income equals 0.176 (given by 1 – 0.824), the change in disposable income equals 0.127 (given by 0.176 (1 - 0.21) – 0.012), and the EMTR equals 0.873 (given by 1 – 0.127).

This EMTR continues until the point at which the benefit is abated. The higher the hourly wage the person receives the sooner this point is reached. When the benefit is fully abated the EMTR drops to 22.2%, a level that it remains at until the person’s income increases to $38,000 and the EMTR increases to 34.2%.

A person in a couple without children receiving the Unemployment Benefit has little incentive to undertake part-time work if his or her partner has a fixed income of $11,500. At around 24 hours of work at a wage rate of $10 per hour (or at 16 hours at a wage rate of $15 per hour) the benefit is fully abated. There is thus a reduction in the disincentive to supply labour above this point.

As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the measured distribution of hours of work and the measured distribution of incentives would be expected. In spite of this, however, the financial incentives from social assistance programmes do appear to play an important role in influencing the frequency distribution of hours of work of different demographic groups.

The frequency distribution of hours of work for couples with two incomes and without children and with hourly wages equal to or below the median for the demographic group ($15.46) demonstrates a large mode at around 45 hours. This mode at around 45 hours is above the abatement of the Unemployment Benefit and thus is more likely to be influenced by incentives that arise from the personal income tax scale and Low Income Earner Rebate and abatement of the Family Assistance programmes. A small proportion of people in these couples face relatively high EMTRs due to the abatement of the Unemployment Benefit below this point.

As with those couples with two incomes and without children and with hourly wages below or equal to the median ($15.46), the frequency distribution of hours of couples with wages above the median demonstrates a small mode at around 5 hours and a large mode at around 45 hours. The large mode is above the abatement of the Unemployment Benefit and is thus more likely to be influenced by incentives that arise from the personal income tax scale and Low Income Earner Rebate and abatement of the Family Assistance programmes. A small proportion of people in these couples face relatively high EMTRs due to the abatement of the Unemployment Benefit below this point.

Overall, few people locate in the abatement-free zone for the Unemployment Benefit, but there may be a large number of people at zero hours of work who could nevertheless be affected by any change to this zone. The lower the hourly wage the greater the significance of the abatement of the benefit and the abatement-free zone for financial incentives. Large proportions of people in this demographic group face incentives that arise from the personal income tax scale and Low Income Earner Rebate.

In comparison to other family types, the numbers of individuals in both distributions of working couples without children are relatively large. Significant numbers of individuals in working couples without children who work do so for around 30 hours per week or more.

Figure 10: EMTR Schedule and Budget Constraint of a Person with a Working Spouse and without Children and with a Wage Rate of $10 per hour

Figure 11: EMTR Schedule and Budget Constraint of a Person with a Working Spouse and without Children and with a Wage Rate of $15 per hour

Figure 12: Frequency Distribution of Hours of Work of People with a Working Spouse and without Children (Wages up to and including Median ($15.46) for Group)

Figure 13 Frequency Distribution of Hours of Work of People with a Working Spouse and without Children (Wages over Median ($15.46) for Group)