Making work pay? The labour market effects of capping child benefits in larger families

Child benefits are typically paid on a per-child basis, without restrictions on family size. In this paper we generate unique evidence on the effects of capping child benefits by family size by examining the introduction of the UK’s ‘two-child limit’, which restricts means-tested child benefits to just two children per family. The UK government justified this policy on grounds that it would incentivise employment among larger families. We use mixed methods – combining quasi-experimental quantitative techniques and qualitative longitudinal research – to investigate the policy’s employment effects. We find no evidence that capping child benefits increases employment. Labour market activity among larger families seem to be particularly ‘sticky’ in response to reductions in benefits income, likely due to parents’ commitment to unpaid care, the scale of caregiving responsibilities and barriers to paid work. Our qualitative evidence also indicates that the effects of negative income shocks can render such policies counter-productive by pushing people further away from the labour market.