The Socioeconomic Consequences of “In-Work” Benefit Reform for British Lone Mothers

Abstract

In October 1999, the British government enacted the Working Families' Tax Credit, which aimed at encouraging work among low-income families with children. This paper uses panel data collected between 1991 and 2001 to evaluate the effect of this reform on single mothers. We find that the reform led to a substantial increase in their employment rate of about five percentage points, which was driven by both a higher rate at which lone mothers remained in the labor force and a higher rate at which they entered it. Women's responses were highly heterogeneous, with effects double this size for mothers with one preschool-aged child, and virtually no effect for mothers with multiple older children. The employment increase was accompanied by significant increases in paid childcare utilization and our analysis in fact suggests that the generous childcare credit component of the reform played a key role in explaining the estimated employment and childcare usage responses. We also find that the increase in labor market participation was accompanied by reductions in single mothers' subsequent fertility and in the rate at which they married, behavioral responses, which in turn are likely to influence the reform's overall impact on child poverty and welfare.