The model family method is an attempt to make comparisons of the tax/benefit package controlling for some of the variation that exists. It has, as a premium, the aspiration to compare like with like. A number of studies using this method have been carried out at the University of York (Bradshaw et al., 1993; Eardley et al., 1996; Bradshaw et al., 1996; Kilkey, 2001; Ditch et al., 1995, 1996, 1998; Kemp, 1997) but we do not claim to have pioneered this method in comparative research. The OECD has been using the method for many years in its series now called Taxing Wages (OECD 2001a). The latest edition covers the situation in 1999. This collects information on the treatment of standard families7
by the tax/benefit system. Data is also collected by OECD on short-term unemployment benefits and on social assistance and used to derive replacement rates (see OECD, 1998). Although this report uses similar methods to OECD, it is more up-to-date and covers a wider range of family types, income levels and elements of the child benefit package.
In an effort to make comparisons between countries' benefit systems and to ensure that as far as possible like is being compared with like, national informants complete a set of matrices (see Appendix A.1 for an example of a matrix).
7 Their analysis covers a childless single person on two-thirds, average and one-and-two-thirds average
earnings; a lone parent at two-thirds average earnings; a childless couple at average and a third average and couples plus two children on average, average and a third average and average and two-thirds average earnings.
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1.5.1
Income cases
There are eight sheets for each country representing different INCOME CASES as follows:
• Case1: One earner working 16 hours per week (64 hours per month) for the minimum wage in each country8.
• Case 2: One earner, half national average male earnings or the minimum wage (for a 35 hour week) if higher.
• Case 3: One earner, half national average female earnings or the minimum wage (for a 35 hour week) if higher.
• Case 4: One earner, average male earnings. • Case 5: One earner, average female earnings.
• Case 6: Two earners, average male earnings and half average female earnings (or the minimum wage for a 35 hour week if higher).
• Case 7: Two earners, one on average male earnings and one on average female earnings. • Case 8: No earners - receiving social assistance.
These choices are designed to cover a range of earning types and levels in each country. The cases cover average (and proportions of average) male and female earnings. It was decided not to take a 'rich' case in this study because the child benefit package is arguably of less importance at such a level of earnings. Case 7 represents the top end of the earnings distribution in this study.
1.5.2
Family types
On each sheet there are columns for different FAMILY TYPES as follows: • Single (all adults assumed 35 years old).
• Couple (assume married).
• Lone parent (assume divorced) plus one child (aged 2 years and 11 months) receiving full-time, formal, not in school childcare of the most common form in the country. No childcare in the social assistance case.
• Lone parent plus one child (aged 7) at school, no childcare. • Lone parent plus two children (aged 7 and 14) at school.
• Couple plus one child (aged 2 years and 11 months) receiving full-time, formal, not in school childcare of the most common form in the country. No childcare if there is a non-working spouse or in the social assistance case.
• Couple plus one child (aged 7) at school, no childcare. • Couple plus two children (aged 7 and 14) at school.
• Couple plus three children (aged 7, 14 and 17) all at school.
8 In the UK tax/benefit system those working 16 hours or more are deemed to be in employment and
covered by in-work tax/benefits. Those working less than 16 hours are entitled to out-of-work benefits. Therefore 16 hours was chosen for Case 1. Also, some countries do not have a minimum wage and therefore 14 per cent of the national wage was assumed.
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The data is collected on childless singles and couples so that we can calculate how much more (and in some countries less) lone parents and couples with children receive as a result of the tax benefit package. Data is collected on school age and pre-school age children to assess the costs of pre-school childcare. The 17 year old represents a child staying on at school after school leaving age. The number of children ranges from one child to three children. This represents the most common family types in most countries.
1.5.3
Child benefit package
There are 14 rows to each matrix with a row to record: • gross earnings;
• income tax payable;
• employee social security contributions; • income-related child benefit;
• non-means-tested child benefit; • gross housing costs;
• net housing costs; • gross local taxes; • net local taxes; • net childcare costs; • health charges/benefits; • education charges/benefits; • guaranteed child support, and • other.
The national informants completed the matrix according to a set of instructions, which included specification of the earnings levels, the size and type of dwellings, location in each country, type of childcare, standard packages of health and education and other instructions.
Housing costs
Housing costs vary with tenure, the age, size and location of the dwelling and with what supply side ('bricks and mortar') subsidies are available. In our early matrix method studies we asked national informants to provide a typical rent for the most prevalent form of rented accommodation in a given place for a dwelling of a given size. This produced widely varying housing costs - from a rent controlled private flat in Barcelona, Spain to an apartment in New York. The rents varied with household size but not income. In this study we decided to adopt the OECD method of taking rent as 20 per cent of average earnings. Thus gross rent does not vary with the size of the dwelling or income but is a consistent proportion of earnings in each country. Basically the problem of housing costs is not resolvable - any solution is arguably the least bad. The problem is that housing subsidies are an important part of the child benefit package. A number of countries move up or down the league table on the basis of whether their package is assessed before or after housing costs. Housing is discussed further in Chapter 4.
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Net childcare costs
This is the charge that typically has to be paid for full-time formal childcare of the most common form in each country. Informants are asked to deduct any direct subsidy or allowance that a family would receive towards these costs. More detail is given in Chapter 5.
School costs
It is assumed that the seven year-old child is attending a public primary school and the 14 and 17 year- olds are attending a state secondary school. We assume that the children can walk to school so there are no transport costs. Occasional small voluntary contributions to school funds or charges for outings (such as going to a museum) are ignored. Only fees or costs that parents must pay for books or equipment are included. We assume that the parents have to pay for a midday meal at school or provide a packed lunch. The cash equivalent value of any free school meals is treated as a benefit. For the 17 year old any benefit payable to keep children on at school after statutory school leaving age is included. More details are given in Chapter 5.
Health costs
The baseline assumption is that health care is free at the point of demand and funded by tax and/or social security contributions. Included in the matrix are only health insurance premiums that are required to match this assumption and any costs that families have to pay for a standard package of health care. As far as charges are concerned we asked the informants to assume:
• no inpatient episodes;
• each member of the family visits the dentist for a check-up twice per year and has a cavity filled on one of these visits;
• each member of the family visits the general practitioner once per year and receives a prescription for a standard antibiotic.
The estimate of health costs is the charges payable after any rebates or deductions or refunds. More detail is given in Chapter 6.
Child support
This is only included (for the lone parent) if it is guaranteed i.e. underwritten by the state and paid regardless of whether the non-resident parent pays.
Other
Other is for items that are not included above. If social assistance is paid to low earners in employment it is inserted here.
1.5.4
Problems w ith the model family method
There is room to argue about these choices. They are designed to ensure that like is being compared with like but they inevitably mean that the model families are illustrative rather than representative. In each country the child benefit package has unique features but a decision has to be made for all countries and the type of decision made is inevitably driven by the interest of the funding country - in this case the UK. The health costs assumptions are perhaps particularly informed by the existence of the National Health Service in the UK, free at the point of demand. For other countries the
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assumptions do present problems. Take for example Japan which is the most problematic of all for fitting into these assumptions (Tokoro, 2000):
• No other country spends as much as Japanese families do on after school schooling for their children. This private expenditure is very prevalent and reduces the living standards of Japanese families by an average of about £100 per child per month.
• In addition, Japan has a seniority wage system. Wages rise with experience and how long a person works for the company. Under the job for life arrangements and because of the tendency for people to work for the same employers, employee earnings in Japan effectively increase with age - perhaps more than in any other country. In other countries earnings rise with seniority or experience but not with age. A line worker in a Toyota plant in Japan will see his earnings rise with his length of service but this is not the case in the same factory in the UK.
• Earnings are also adjusted by employers after marriage and also often for the burdens of children. Thus there is a parallel child benefit package provided by the private sector, which certainly does not exist to the same extent in any other country.
• However companies also make contributions to other costs in Japan - many employers pay the whole of their employees’ commuting costs as well as a contribution to their housing costs. These hidden earnings subsidies are substantial.
• Further, in estimating earnings, we certainly need to (and do) take account of the very common system of bonuses paid commonly twice/three times a year and typically representing the equivalent of four months’ additional salary.
• Then in Japan there are big differences between the average earnings of men and women. These occur because of the highly segregated labour market for men and women not because of unequal pay for equal work.
• Finally, there are questions to be asked about the social assistance case in Japan. As in some other countries, social assistance is administered by welfare services, and although there are national scales of benefit, it is a highly stigmatised system and probably not taken up by many of those entitled to it, who prefer to rely on family help.
These are some of the criticisms that can be made of the model family matrix method (for others see Eardley, 1996). In the end it is a technique for making comparisons of social policies easier - for comparing like with like. The cases chosen are not representative - they are illustrative. However in Chapter 11 we produce a selected and weighted version of the model families in an effort to better represent the actual population mix that might be found in practice. The model family method seeks to show how the tax benefit system should work given the national arrangements that exist, rather than necessarily how it does work.