POLICY, & THE ASPIRATIONS GAP

Helping people into work can do more harm than good. This is the message of a new paper by Andrew Oswald and Richard Dorsett.

They studied the Employment Retention and Advancement programmeintroduced by the DWP in 2003. This offered extra training and temporary financial incentives to work longer hours to some randomly-chosen single parents but not to others. It was therefore a rare example of an RCT in economic policy.

But here's the thing. Oswald and Dorsett find that although this intervention raised the earnings of those in the ERA programe, it also led to "substantially lower well-being", even five years later. They conclude:

From a well-being perspective, randomly assigning in-work benefits appears to have hurt rather than helped.

The reason for this, they suggest, is that the temporary extra cash paid to participants raised their reference income and so increased aspirations, and the subsquent gap between high aspirations and actual incomes increased their financial worries and decreased happiness.

We should read this in the context of Andrew Clark's recent finding, that people do not adapt to poverty, because their aspirations don't fall sufficiently to match their low incomes. In raising aspirations, the ERA was therefore scratching an open wound.    

One inference from this could be that the best way to help the poor is not through temporary micro incentives but through macro policy - job creation and permanent redistribution.

But there might be a wider message. Given politicians' tendency to over-promise and under-deliver, perhaps almost all policies reduce well-being by creeating an aspirations gap. Personally, I think this would be too big an inference - because nobody seriously believes politicians' promises. But it is perhaps a warning that even quite benign policies might inadvertently prove to be harmful. 

via:http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/02/policy-the-aspirations-gap.html