Celebrating IFS’s new ESRC Research Institute status

Richard Blundell writes:

"For the last 25 years the ESRC Centre for the Microeconomic Analysis of Public Policy (CPP) has provided core long term research funding for IFS. With centre funding IFS has brought rigorous evidence-based research to the analysis of public policy, allowing us to respond swiftly, authoritatively and independently to the changing public policy debate. It has created a unique environment for building new generations of economists who have gone on to take leading roles in academia, in public policy, and in the media. The new Research Institute status will enable us to grow our global leadership in research and enhance our public policy influence.

The combination of micro-data, microeconometrics and empirical policy analysis is at the centre of all we do. It has allowed us to study the detailed distributional analysis of tax and welfare reforms and to carry out rigorous assessments of how reforms would affect individuals, families and firms. We developed new methods to study how these economic players would be hit by reforms and how they would react to them. This empirical evidence base has not only become an essential input to assess different policy reforms but also how to improve on them. Our empirical microeconomic policy research began with a focus on tax and welfare reforms but now also concerns reforms to retirement incentives, to education, to training, to investment incentives, to savings incentives, to R&D tax credits, to VAT, to excise duties and so on.

Economics has been transformed in the past 30 years by this empirical revolution, meaning that fine-grained data on individuals, households and firms is now used widely in academic research and in public policy to better understand behaviour and improve people’s lives. We have been at the forefront of this revolution, pioneering the use of a huge range of data, adding to it through, for example, our role in leading the collection and analysis of the English Longitudinal Study of Ageing (ELSA), and most recently being among the first to analyse administrative data linking school, higher education and tax records.

The long-term research we do lays rigorous foundations to in-depth and independent research which makes a lasting public policy impact.

Our early work on labour supply responses to tax reform showed that tax credits had potential to work and helped create the climate for the sort of welfare reform we saw from the 1990s onwards. More recent work has reinforced earlier concerns that focusing incentives on part time work may not have been the best strategy given the very poor long-term pay-off to part-time work in terms of wage progression. This in turn has pointed to the key role of part-time work and wage progression in understanding the gender earnings gap.

Our research on inequality and poverty pointed to the very different evolution of inequality depending on whether one looked at individual labour earnings, family income or household consumption. Each measure matters in understanding the dimensions of economic inequality and the role of policy. For example, we showed that, with the exception of the very top 1%, overall family income inequality has been stable for the last 20 years, while inequality of male earnings has risen steadily over the same period. This focused attention on the role of the tax and benefit system in the UK in offsetting increasing inequality in the labour market and also on the role of family labour supply.

Our research also provided key new insights into incentives for retirement savings. With the new ELSA data we could pin down the role of health improvement in extending working lives. Using the unique British cohort studies we unpicked the causal impact of A-levels and university degrees on individual earnings, showing that these ‘returns’ were 50% overestimated if family background and early years ability was ignored.

We have also focused on understanding household spending which matters for the welfare of families as well as for understanding and predicting VAT revenues. Our work has showed how important it is to understand income and spending dynamics in order to say anything about the regressivity or otherwise of VAT. Recent work has been focused more at understanding the pricing and advertising decisions of firms, without which we cannot fully account for the way taxes on goods and firms affect the consumers who buy their products.

Long term consistent research agendas building on a deep understanding of data and models and working in stable teams is crucial for doing high quality impactful research such as all this. Given current challenges this has never been more important. That’s why we are so pleased to have the added certainty over our long term funding that the new Research Institute status will give us. Our future agenda includes:

• Addressing the sustainability of the tax and welfare system and its effectiveness in a global environment.
• Understanding the changing nature of the labour market, both at the bottom, where part-time work among men and self-employment are increasingly prevalent, and at the top, where different forms of remuneration and the increasingly global nature of income sources present new challenges for tax design and implementation.
• Helping design policies to deal with changing demographics and an ageing society. Addressing the key challenges of growth and innovation, looking at tax and competition policy;
• Carrying out an ambitious programme of work on inequality, thinking afresh about the role of the new world of work, of the welfare system, of wealth and intergenerational transfers, of education, gender, globalisation, and so on.

Finally, and perhaps most importantly, the CPP has been hugely successful in developing some of the top economists in academia, in government, and in the media. We aim to enhance our capacity building providing an environment that draws together leading academics from across the UK with new young researchers to create frontier research. Research Institute status will allow us to create a National Network of CPP Fellows to enhance interaction with our Research Fellows and Associates across the UK."

Originally published on the ESRC blog and reproduced here with permission.