Welfare trap

The welfare trap (or unemployment trap or poverty trap in British English) theory asserts that taxation and welfare systems can jointly contribute to keep people on social insurance because the withdrawal of means tested benefits that comes with entering low-paid work causes there to be no significant increase in total income. An individual sees that the opportunity cost of returning to work is too great for too little a financial return, and this can create a perverse incentive to not work.

The term used for this concept varies depending on country. In the United States, where government benefit payments are colloquially referred to as "welfare", the welfare trap often indicates that a person is completely dependent on benefits, with little or no hope of self-sufficiency.

The welfare trap is also known as the unemployment trap or the poverty trap, with both terms frequently being used interchangeably as they often go hand-in-hand, but there are subtle differences.

In other contexts, the terms "welfare trap" and "poverty trap" are clearly distinguished. For example, a Southern African Regional Poverty Network report on social protection clarifes that "poverty trap [means] a structural condition from which people cannot rescue themselves despite their best efforts. A welfare trap in this context, by contrast, refers to the barrier created by means tested social grants that have in built perverse incentives." The South African definition is typically used with regard to developing countries.

This concept may include other adverse effects of welfare such as on the family structure: it may encourage the increase in the numbers of single-mother families and divorce rates, as individuals see a distinct benefit in such a lifestyle.

In the UK, there is a distinction between two concepts within the welfare trap:

If a person on welfare finds a part-time job that will pay the minimum wage of $5 per hour for eight hours per week (totaling $40), and, of the amount earned per week, $20 is deducted from welfare, there is a net gain of only $20. If the government imposes taxes on the $40, at say 15% ($6), and there may be extra child-care and commuting costs as well since that the person can no longer remain at home all day, the person is now worse off than before getting the job. This result occurs despite performing eight hours of work per week that is productive to society.

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