Earnings bunching at benefit abatement thresholds: evidence from recent policy changes

Abatement thresholds
lead to bunching in earnings
but small responses

Income support and abatement policies: balancing benefits and costs
Government income support policies face a balance between providing adequate income, maintaining work incentives, and managing fiscal costs to the government. Recent changes to abatement thresholds in Aotearoa New Zealand aim to improve support and work incentives, though they may increase costs to the government.

Under abatement policies, beneficiaries can earn up to a threshold level without affecting their benefits. Beyond that level, their benefit income is reduced. This can discourage recipients from earning beyond the threshold, leading to a ‘bunching’ effect, where many earn up to the threshold, but no more.

In April 2020 and April 2021, the New Zealand Government increased abatement thresholds (the amount beneficiaries can earn before their benefit reduces) for some government benefits, including Jobseeker Support (JSS), Sole Parent Support (SPS) and the Supported Living Payment.

This study analyses the effects of these changes on recipients' employment, earnings, and net incomes.

Data sources for this research
This analysis uses data from Statistics New Zealand’s Integrated Data Infrastructure (IDI), including Inland Revenue earnings information for MSD benefit recipients.

Policy implications for Aotearoa New Zealand
The recent increases to abatement thresholds increased average incomes of beneficiaries by $6-7 (2-3%) per week. However, as most recipients don’t have other paid income, few benefited. The data shows recipients' work behaviour didn't significantly change due to the new abatement rules, and the net income gains were modest compared to the increases from higher benefit rates.

Summary
Raising abatement-free earnings thresholds allowed benefit recipients to boost their incomes, though the effect was limited to a small fraction of recipients.

Most recipients did not significantly alter their earnings behaviour, and the overall impact on their incomes was minor.

Citation

Hyslop, Dean R., and David C. Maré. 2024. "Earnings bunching at benefit abatement thresholds: evidence from recent policy changes." Motu Working Paper 23-05. Motu Economic and Public Policy Research. Wellington, New Zealand. 

DOI: doi.org/10.29310/WP.2023.05