In 2005, there were 16,756 persons on unemployment assistance and social assistance benefits. Ten years later, in 2014, there were 21,656. Despite the economic growth that followed Malta’s accession to the European Union, the number of those on benefits was not just stuck at high numbers – it was, in fact, growing year after year.
The welfare system was passive and made no attempt at inducing people to work. To give an example, a four-person household on social assistance got some €125 per week in benefits alone, while if they went into employment, the minimum wage, net of social security contributions, was €149 per week. Opting for employment did not make financial sense.
Then, in 2014, the government made a paradigm shift and adopted several active labour market policies to make work pay. Today, the number of those on unemployment assistance and on social assistance is down to 8,214, or less than 40% what it was a decade ago. This is nothing short of a social policy miracle.
The role of the tapering of benefits (TOB) scheme
In a recent study, a Central Bank economist looked into the extent to which this result was due to the implementation of one of the flagship active labour market policies – the tapering of benefits (TOB) scheme. This scheme aimed at unlocking the poverty trap stalemate for unemployment assistance, social assistance, and single unmarried parent assistance beneficiaries. For those on these benefits, Government started to continue paying them a part of their benefit for three years after joining employment. In this way, going back to the example above, instead of going from €125 to €149, the four-person household on social assistance went from €125 to €230 (€149 + 65% of €125). By nearly doubling income, the TOB was a real example of making work pay.
Using high-quality national data on the whole population of beneficiaries and their employment history, the study seeks to understand how the scheme affected job-finding and job-termination rates in Malta. The data show that, in the absence of the scheme, after 14 months on benefits one is 25% likely to go into employment whilst after 62 months, one is 50% likely. Individuals on unemployment assistance are 25% likely of going into employment after only 6 months on benefits. For single unmarried parents, this proportion is reached only after 46 months, while for those on social assistance, this period is lengthened further to 61 months. With regards to age, the 56+ category have a lower probability of going into employment, after which they completely drop out since they reach retirement age and hence shift to pension schemes.
The study indicates that the introduction of the TOB scheme effectively doubled the probability of those eligible to find a job. The gains from the TOB are largest for single unmarried parent assistance recipients, showing that the scheme was particularly successful in incentivising single parents to overcome the poverty trap. The effect is least powerful for social assistance recipients, although the improvement is still considerable, standing at 67.3%. Being in the youngest age group means that you are more likely to enjoy the benefits of the scheme.
As for job terminations, without the scheme, after 5 months from job start, the likelihood of the person losing the job stood at 25%. This reaches 50% after 19 months and 75% after 65 months. The probability of females experiencing a job termination is higher than that of males throughout. Individuals previously on social assistance and single unmarried parent assistance have a higher probability of experiencing the event. They are 50% likely to experience a job termination after 11 months. For unemployment assistance beneficiaries, this stands at 21 months. The youngest age group experiences a job termination more swiftly, with the probability standing at 50% after 13 months.
The author found that the chance of job termination drops by 11.8 percentage points for eligible individuals. Furthermore, its impact once the scheme ends is not different from that observed during the first 36 months, showing that its impact is robust in the medium term.
Changing families’ lives
As a result of this, the author concludes that, “given that the aim of the TOBscheme was to bring jobseekers closer to the labour market by eliminating, or at least diluting, the poverty trap and lead to stable employment, the scheme can be considered very successful.”
This shows how a progressive social policy ended up changing the lives of thousands of families, leading to a better standard of living and improved social outcomes. The investment that the Government made when paying tapered benefits was more than offset by the wider economic benefits generated by these thousands of changed lives.
The further improvement of the scheme in the Budget for 2023 has made the scheme even stronger and will ensure that incentives to work remain dominant, even while Government is continuing to improve the level of social assistance.