Capping welfare payments for workless families increases employment and economic inactivity: Evidence from the UK's benefit cap

Abstract

In this paper, we examine the labour market effects of lowering the UK's benefit cap in 2016. This policy limits the total amount a working‐age non‐disabled household with no‐one in employment can receive in social security. We treat the sharp reduction in this benefit cap as a natural experiment, comparing those at risk of being capped and those who were not before and after the cap was lowered. Drawing on data from ~500,000 individuals, we find that this reform reduced unemployment compared to those not at risk of being capped. The reform also increased economic inactivity, partly because the cap harmed mental health but also because those at risk of being capped were eligible to claim disability‐related welfare payments that made them exempt. Limiting total monthly welfare payments of low‐income families may increase employment for some but it can also push others out of the labour market altogether.