United Kingdom: Selected Issues
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International Monetary Fund
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Publication Date:
26 Jan 1998
eISBN:
9781451814071
Language:
English
Keywords:
ISCR; CR; minimum wage; GDP; GDP growth; GDP data; employment effect; GDP figures; inflation targeting period; Inflation targeting; Minimum wages; Labor markets; Employment; Unemployment; Europe; Australia and New Zealand; Global; labor market performance; B. labor market market trend; job-search assistance; far-reaching labor market reform; employment gain; Wages; Unemployment rate
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92. Changes in labor market laws and regulations in the United Kingdom since the early 1980s have created a relatively flexible labor market with favorable consequences, including improved efficiency and low structural unemployment. At the same time, this period has witnessed a significant increase in wage dispersion and in the number of people excluded from the labor market. The new government, while recognizing the benefits of flexibility, has sought to improve the workings of the market further. Its flagship initiative is the Welfare-to-Work program, a package of active labor market policies (ALMP) including job subsidies, training and workfare. This program represents a shift in focus from the previous government’s more narrowly targeted assistance to job search for the long-term unemployed; although it includes some elements that had previously been introduced as pilot programs. The central feature of Welfare-to-Work, so far, is the “New Deal” for unemployed youth; the program also includes more limited measures aimed at the long-term unemployed and lone parents.

Abstract

92. Changes in labor market laws and regulations in the United Kingdom since the early 1980s have created a relatively flexible labor market with favorable consequences, including improved efficiency and low structural unemployment. At the same time, this period has witnessed a significant increase in wage dispersion and in the number of people excluded from the labor market. The new government, while recognizing the benefits of flexibility, has sought to improve the workings of the market further. Its flagship initiative is the Welfare-to-Work program, a package of active labor market policies (ALMP) including job subsidies, training and workfare. This program represents a shift in focus from the previous government’s more narrowly targeted assistance to job search for the long-term unemployed; although it includes some elements that had previously been introduced as pilot programs. The central feature of Welfare-to-Work, so far, is the “New Deal” for unemployed youth; the program also includes more limited measures aimed at the long-term unemployed and lone parents.

IV. LABOR MARKET PERFORMANCE AND POLICIES IN INTERNATIONAL PERSPECTIVE38

A. Introduction

92. Changes in labor market laws and regulations in the United Kingdom since the early 1980s have created a relatively flexible labor market with favorable consequences, including improved efficiency and low structural unemployment. At the same time, this period has witnessed a significant increase in wage dispersion and in the number of people excluded from the labor market. The new government, while recognizing the benefits of flexibility, has sought to improve the workings of the market further. Its flagship initiative is the Welfare-to-Work program, a package of active labor market policies (ALMP) including job subsidies, training and workfare. This program represents a shift in focus from the previous government’s more narrowly targeted assistance to job search for the long-term unemployed; although it includes some elements that had previously been introduced as pilot programs. The central feature of Welfare-to-Work, so far, is the “New Deal” for unemployed youth; the program also includes more limited measures aimed at the long-term unemployed and lone parents.

93. As background to assessing these recent initiatives, it is important to review the performance of the United Kingdom’s labor market, highlighting its relative strengths and weaknesses. The discussion of this experience presented in Section B of the paper observes that the United Kingdom’s most glaring deficiency is the rising rates of inactivity, especially among older men; in contrast, youth unemployment in the United Kingdom has been relatively low by international standards—although solving youth unemployment is nonetheless a challenging task.

94. The international experience with labor market policies has displayed a wide diversity of results, depending on the initial conditions and the details of the program; in some cases, programs have turned out to be successful but in others expensive and ineffective. Section C discusses the details of the Welfare-to-Work program. Noting that the program contains many elements that have been tried, either previously in the United Kingdom or in other countries, Section D reviews the experience with these elements. Section E concludes that, while implementing Welfare-to-Work presents a considerable challenge, its basic approach is appropriate, and macroeconomic conditions, overall labor market flexibility, and the low existing rate of youth unemployment favor its success. Greater challenges lie ahead, however, in addressing the more persistent problems of adult long-term unemployment and inactivity.

B. Labor Market Trends in OECD and United Kingdom

95. In the past 15 years, the United Kingdom introduced far-reaching labor market reforms which contributed to significantly increase market flexibility39 and helped reduce both equilibrium and actual unemployment rates. Some of these reforms dramatically altered industrial relations, including by restricting strikes and secondary picketing, introducing more democratic checks on union decisions, and decentralizing wage bargaining. Hiring and firing restrictions were also liberalized. Other measures included reducing the duration of unemployment benefits and tightening the associated eligibility criteria. In addition, the wage councils that had set minimum wages were abolished.

96. The changing structure of the United Kingdom’s economy is another key factor affecting its labor market performance. Arguably, so-called “Anglo-Saxon” policies are particularly suited to economies where an increasing share of employment is in the service sector (now accounting for over ¾ of total employment in the United Kingdom) and with a relatively large share of smaller firms with higher entry and exit rates. Flexible labor markets allow the economy to adapt to changing conditions, and reduce the persistence of unemployment; a possible down side is that the United Kingdom has tended to have larger variations in the unemployment rate across the economic cycle than in countries like Germany, France, and Italy (Morgan, 1996a).

97. Figure 1 presents some comparisons of labor market conditions in selected OECD countries in the 1980s and 1990s. The labor market in the United Kingdom has expanded, with a lower unemployment rate (currently running at 5½ percent) than major European countries, and approaching levels found in the United States. Employment growth in the United Kingdom has been modest in relation to the United States but has been stronger than in continental Europe over the 1990s. Unemployment in the United Kingdom fell earlier in the recovery in the 1990s compared with the 1980s and employment has become more variable and correlated with changes in output.40 Participation rates have also been higher than in continental Europe, but declined during the 1990s.

FIGURE 1.
FIGURE 1.

UNITED KINGDOM: LABOR MARKET INDICATORS

Citation: IMF Staff Country Reports 1998, 004; 10.5089/9781451814071.002.A004

Sources: IMF, World Economic Outlook; and OECD, Economic Outlook.

98. In addition to cyclical changes in unemployment, diverse changes in structural employment have taken place (Table 1). The United Kingdom, together with New Zealand, the Netherlands and Ireland, have seen declining structural rates over ten years to 1996. An OECD study (1997) notes that the former two countries pursued both wide-ranging and deep structural reforms starting in the 1980s, while the Netherlands followed a more gradualist approach, which, as in Ireland, involved the social partners. Successful comprehensive reforms have affected broad groups in the labor market, including those characterized as “insiders.” In other countries (France, Italy, and Spain), structural unemployment has moved higher from an already high level, and in some countries (Sweden and Finland) increases have been abrupt.

Table 1.

United Kingdom: Developments of Structural Unemployment: Selected OECD Countries 1/

(As a percent of total labor force)

article image
Source: OECD (1997)

Based on national definitions of unemployment. Structural unemployment rates are OECD estimates of non-accelerating wage rate of unemployment (NAWRU).

Weighted averages of all OECD countries.

99. One common factor behind rising unemployment across most OECD countries appears to be a secular shift in labor demand in favor of more skilled workers both between and within industries and occupations. Katz (1994) argues that institutional factors translated similar demand and supply shifts since 1970s into differences in labor market outcomes—either widening wage differentials or rising structural unemployment. The two countries with the largest increases in wage dispersion (Figure 2)—the United States and the United Kingdom—have relatively more decentralized wage-setting systems, and less structured pathways from school to work for those not going to college; these countries also experienced significant declines in the influence of unions and minimum wages in wage determination during the 1980s. Countries with greater institutional intervention in wage setting—including France, Italy, and Sweden—were able to prevent wage inequality from rising during parts of the 1980s. But policies that suppress market wage adjustment without directly addressing changes in underlying market conditions through appropriate human capital investments risk generating persistently high unemployment for young and less-educated workers.

FIGURE 2.
FIGURE 2.

UNITED KINGDOM: TRENDS IN EARNINGS DISPERSION FOR MEN

Citation: IMF Staff Country Reports 1998, 004; 10.5089/9781451814071.002.A004

Source: OECD, Employment Outlook.1/ For Italy, the data have been interpolated for missing years. 1995

100. Efforts to improve education and training levels in the bottom half of the ability range were a key contributor to Germany’s labor market performance, which until the 1990s, compared favorably with the United States and the United Kingdom. Nickell and Bell (1996) note that the real wages of the bottom decile in Germany were twice that of the same decile in the United States and the United Kingdom, while (in 1991-92), unemployment rates were lower and similar, respectively.41 Tempering this hypothesis, Robinson and Manacorda (1997) conclude that the education and training system in United Kingdom not only kept pace with demand changes (1984-94) but allowed employers to hire more qualified workers for what seems to be essentially the same job. This would imply that intensified efforts to increase educational attainment would not necessarily do much to reduce unemployment.

101. Other aspects surface from a broader perspective on the United Kingdom’s labor market—including indicators of joblessness and flows between states in the market—which might indicate scope for well-designed ALMP’s to reduce structural problems. During the recovery in the first half of the 1990s, and despite rising employment and falling unemployment, the total workforce remained fairly static. One reason behind this was that the number of men of working age who were economically active fell and the economically inactive rose 9 percent. This rise is indicative of a less favorable trend in joblessness than would be suggested by unemployment figures. While the number of inactive is obviously affected by rates of school attendance and the prevalence of choosing early retirement, a significant proportion of these in both of these categories (particularly the latter) may essentially be discouraged workers.

102. In this light, broader indicators of joblessness furnish a useful complement to the picture of the United Kingdom’s labor market conditions and trends provided by official unemployment rates (Figure 3). The first three indicators (U1-U3) are focused on labor market slack while another three (U4-U5b) are more related to social distress (more dependent on the distribution of joblessness across households). In keeping with a household perspective, some 18 percent of all households were workless in 1995 compared with 7 percent in 20 years earlier. The majority of new jobs have gone to households where there was already someone in work, primarily reflecting higher female participation; by contrast, declining male employment is concentrated on single men and those with non-working partners (Employment Audit, 1996). Moreover, in Ireland, the United Kingdom, and Germany, youth unemployment is most heavily concentrated (at around 35 percent in 1993) in households where no other person is employed (OECD, 1996).

FIGURE 3.
FIGURE 3.

UNITED KINGDOM: ALTERNATIVE JOBLESSNESS RATES

(In percent)

Citation: IMF Staff Country Reports 1998, 004; 10.5089/9781451814071.002.A004

Source: Labour Force Survey, Quarterly Bulletin.U1 = ILO unemployed; U2 = U1 + discouraged workers + people seeking work but unable to start;U3 = U1 + all those who want jobs; U4 = more than 6 months unemployed; USA = Individuals in workless households;USB = workless households.

103. The United Kingdom’s youth unemployment performance overall is not unfavorable in relation to other industrialized countries: male youth unemployment rates in the United Kingdom have moved from above OECD average in 1983 to close to the average in 1994, and female youth unemployment rates have moved from average to significantly lower.42

104. Analyzing the flows between employment, unemployment and economic inactivity reveal that it has become increasingly difficult for the unemployed to move into employment and increasingly likely that they would slide into inactivity. While the probabilities of moving between states are dependent on the economic cycle, some underlying changes stand out (Table 2). Although the probability that an employed person will flow out of employment has remained broadly unchanged over time, chances of leaving unemployment into a job have dropped from 47 percent to 33 percent. Furthermore, the risk of dropping out of the labor market when leaving unemployment rose from 10 percent prior to the 1980s recession to over 20 percent in the mid-1990s. The probability of moving from unemployment into inactivity is higher for women than for men, but has risen much more sharply for the latter; (for men, from 5 percent in 1981 to 17 percent in 1994; and for women from 14 to 29 percent). The probability of moving from employment to inactivity has also increased in recent years.

Table 2.

Probability of Flowing Between Employment States

(In percent)

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Source: Labor Force Survey, 1977-94, spring quarter.

C. Welfare-to-Work

105. The central theme of Welfare-to-Work is to use unemployment benefits in a more effective way to create opportunities and positive incentives for long-term unemployed instead of merely subsidizing idleness. The shift toward active labor market policies aims to break the persistence of unemployment and integrate outsiders into the labor market—by introducing positive employment and training programs and incentives. These programs include an element of compulsory participation complementing the compulsory job search associated with the Job Seeker’s Allowance (JSA) introduced in October 1996.43

106. At the center of the new government’s Welfare-to-Work agenda is a “New Deal” for unemployed youth aimed at putting young long-term jobless into work. These measures are targeted at people aged 18-24 years who claim JSA and have been unemployed for more than six months. The four options open to the unemployed involve a job with a private sector employer, work with a voluntary organization or with an environmental task force, or full time education and training. The “New Deal” program will start in January 1998 with demonstration projects covering around 10 percent of the country before it goes nationwide in April;44 it is run for the remainder of the present parliament, i.e., for four years.

107. The “New Deal” relies heavily on a case managed approach, also building on the JSA. Each unemployment benefit claimant is to pass through a “Gateway”—counseling and advice in finding a job provided by the Employment Service. Those who remain unemployed after six months will be offered one of the four options provided by the Employment Service. In principle, there will be no fifth option of drawing benefit while remaining idle.

108. The first option, on which hopes are high for providing a substantial number of opportunities, involves a subsidy or rebate of up to £60 a week to employers for six months for each jobless person less than 25 years old who is hired. The job should include at least one day per week in education and training designed to reach an accredited qualification; £750 per person have been allocated to this purpose. In addition, for those aged more than 25 and who have been unemployed more than two years, a £75 subsidy per week for the employer will be available.

109. The other three options are as follows: second, working for a voluntary organization45 for six months (with a component of education and training toward accredited qualifications), in return for a weekly pay equivalent to the JSA; third, working for the government’s Environment Task Force, paid at the same rate; and fourth, further full-time training and education designed to lead to a qualification.46

110. While in one of the options, unemployed youths will continue to receive support from personal advisors, with a focus on getting or maintaining a job in the regular labor market after the “New Deal” period. Young people who return to claimant unemployment after their six months in one of the options will receive further help from the Employment Service to get back to work as quickly as possible.

111. Although broad-based, the size of Welfare-to-Work is modest in relation to active labor market programs implemented in continental Europe. It will add some 0.1 percent of GDP47 to spending on ALMP on top of the existing level of roughly ½ percent, compared with an average spending in OECD of 1.0 percent of GDP. Even if the immediate consequences for aggregate unemployment should be expected to be limited, the effects on the targeted groups could be significant, even if labor demands are left unchanged.

112. Most of the items on this menu of programs have their counterparts in other countries. In particular, Working Nation, beginning in 1994 in Australia, sought to improve equity and efficiency through policies geared toward providing skills and experience that would enable the long-term unemployed to compete effectively for jobs (Borland, 1997).48 More generally, many countries have had experience with job training and subsidies, in most cases with rather mixed results. It is important to examine this experience in more depth before considering the prospectus for successful implementation of Welfare-to-Work under present conditions in the United Kingdom.

D. Experience with Active Labor Market Policies

113. Welfare-to-Work incorporates elements from ALMPs which have previously been implemented in other countries. The overall sources of such policies depend on targeting assistance to workers who really need it (thus avoiding deadweight costs) and providing training, experience, and job-search assistance that equips them for meaningful employment. It also depends importantly on the program’s impact on other workers, via the substitution and displacement effects (Table 3).

Table 3.

Definitions of Some Terms in the Evaluation Literature

article image

114. There are a variety of ALMP’s in the OECD countries with different objectives. Policies include job creation in the public sector, wage subsidies to the private sector, training programs and job-search assistance. They may be targeted at specific groups, e.g., youths, long-term unemployed, and displaced workers, with the aim of improving the functioning of the labor market. Both implementation and funding vary across countries.

115. ALMP’s have two potential roles to play: to reduce structural and frictional unemployment and to improve earnings and employment rates of the targeted groups. The chances of success of an ALMP should be evaluated in a broader context including characteristics of the labor market in which it operates. Policies can be sorted into three broad categories; (i) demand-side policies that attempt to stimulate employment increases through direct job creation in the form of public sector employment or the subsidization of private sector jobs; (ii) supply-side policies that invest in education and training to upgrade the skills of the target groups; and (iii) policies to enhance the efficiency of the process of matching job seekers with job openings, such as job search assistance and improved labor market information. While useful as analytical distinctions, in practice many programs do all three.

116. Spending on ALMP’s has increased or remained stable in most countries in the 1990s, averaging 1.0 percent of GDP in 1995 up from 0.8 percent in 1990 (Table 4). On the back of rising unemployment, however, passive spending on income support increased faster than active spending in half of the OECD countries. The broad orientation of active spending has remained largely unchanged (Table 5), For the most part, the English-speaking countries have increased emphasis on job-search assistance and counseling of those facing particular disadvantages in the labor market; an early example is the Restart Programme in the United Kingdom (see below). By contrast, some of the Nordic countries have scaled back their spending in this area.

Table 4.

United Kingdom: Evolution of Spending on Active Labor Market Policy: Selected OECD Countries

article image
Sources: OECD (1997), and Nickell (1997).

Unweighted average of all OECD countries.

Table 5.

The Orientation of Spending on Active Labor Market Policy: Selected OECD Countries

(Percent of total active spending)

article image
Source: OECD (1997)

Spending on public employment service and administration.

Labor market training.

Subsidies to regular employment in the private sector.

Direct job creation (public or non-profit).

Youth measures, support of unemployed persons starting enterprises, and measures for disabled.

117. In a macroeconomic context, evidence suggests that spending on ALMP’s contributes to explaining differences in unemployment rates across countries but effects are small (Camfors, 1994 and Scarpetta, 1996). However, even if labor demand is held constant, recent models (Richardson, 1997) indicate that policies that increase the relative outflow rates from unemployment will be effective provided they are targeted on those who are, or are likely to become, unemployed long-term (given that deadweight costs are less than 100 percent). Given that outflow rates depend inversely on duration (i.e., the longer someone is unemployed, the less likely he or she is to find work), the choice of policy involves a trade-off between larger proportional effects at longer durations of unemployment and the greater difficulty of improving outflow rates. Estimates indicate that a well-designed policy could reduce equilibrium unemployment by as much as two percentage points—with a four-percentage-point reduction in long-term unemployment partially offset by substitution and displacement effects on short-term unemployment.

118. To illustrate some of the pitfalls and opportunities linked to different labor market measures in practice, results from evaluations of OECD countries’ experiences are summarized below. Most of these evaluations focus on establishing which policies work and which do not, rather than establishing why. As will be discussed, experiences hint that deadweight and substitution costs are substantial and that careful targeting and implementation are crucial.

Subsidies to employment

119. Wage subsidy programmes in United States, Belgium and Australia have been found to have substantial deadweight and substitution effects (Table 6). On balance, such schemes appear to increase employment slightly but short-run effects are small. There is little evidence on the long-run effects of wage subsidies, i.e., whether short-run displacement leads to longer term benefits through reintegration of the targeted group.

Table 6.

United Kingdom: Subsidies to Employment

article image
Source: Fay (1996)

120. In the United Kingdom, the Jobstart scheme in operation during 1986-90 offered employers a subsidy of up to 22 percent of earnings for hiring full-time a person who had been unemployed for more than two years (Table 6). Evaluations suggest that more than half of the unemployed who benefitted from the scheme would have secured a job anyway (deadweight cost). There was also evidence that some employers took on long-term jobless in place of other workers (substitution effects).

121. From a policy perspective, high deadweight and substitution effects may not be considered all that important since “shuffling the queue” of job seekers is, in part, what the schemes are intended to do. Even if long-term unemployed are hired as a result of the subsidy at the expense of the short-term unemployed, that may be important for both equity and efficiency reasons. If on the other hand, employers replaces workers whose subsidy has expired with new subsidized recruits, the gains resulting from increased turnover could disappear.

Training programs

122. Evaluations indicate low or insignificant returns to many public training programs. Small-scale, well-targeted training programs (on both employer and job seeker needs) are likely to offer the best returns and relatively long training programs should lead to recognized qualifications. For youths, training measures need to be considered in conjunction with more general education policy. In contrast, training is found to have little impact on employability where it is a pro forma requirement to requalify for benefits, or used as a solution to large scale unemployment. Some studies of general training programs even point to possible adverse impacts of program participation—possibly indicating negative signals to prospective employers. (Table 7).

Table 7.

United Kingdom: Training Programs for the Unemployed: Targeted and General Training

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Source: Fay (1996)

123. Evaluations of the Employment Training (ET) and the Employment Action (EA) programs in the United Kingdom (up until 1993) show that the most influential factors in leading to a full-time job were time spent on employer placement (found to be of little value unless it was of long duration) and qualifications gained in the schemes. The ET/EA helped participants to get full time jobs, and the training provided helped some participants to get higher paid jobs, at least in the short run. Overall, however, wage gains were modest and may have disappeared in the longer run.

Job-search assistance

124. The intervention that appears most cost effective is job-search assistance (possibly combined with other labor market measures). Job-search assistance comes in a variety of forms, including initial interviews and compulsory interviews after a certain point in an unemployment spell. The difficulty lies in deciding who needs assistance and who does not in order to minimize deadweight losses. However, short-term deadweight losses should be weighed against more costly intervention for the long-term unemployed, particularly where outflows from unemployment are low.

125. Most studies point to significant and positive gains from job-search assistance (OECD, 1997). Restart was initiated in 1986 in the United Kingdom and offered a counseling interview to people with unemployment spells exceeding six months. Simulations (Lehman, 1993) imply that some 35 percent of the decrease in long-term unemployment (associated with substantial substitution effects for the short-term unemployed) between 1984 and 1990 can be ascribed to the introduction of Restart. OECD (1997) attributes part of the decline in the NAWRU and the fall in the participation rate in the United Kingdom in the 1990s to expansion of the Restart scheme. Recent studies in the United States (Meyer, 1995) tend to find small but significant declines in unemployment insurance receipts associated with various job-search programs. It is, however, not clear if these would be enough to generate a positive benefit-to-cost ratio.

What works?

126. On balance, experience suggests that job-search assistance should be emphasized as a first step in helping the unemployed to get back to work (Fay, 1996). For long-term unemployed, training can help if it is well-targeted (Table 8). Subsidies to employment can also help reintegrate them back into work, and may be particularly useful if combined with on-the-job training. As for different groups, youths are the most difficult group for which very careful targeting is needed. Education and labor market policy need to be considered in tandem if the root of the problem is found in low educational attainment resulting from early school drop-out. The long-term unemployed appear to benefit from tailored services, job-search assistance and wage subsidies.

Table 8.

United Kingdom: Summary of Lessons from the Evaluation Literature

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Source: Fay (1996)

127. Several circumstances specific to the United Kingdom would seem to speak in favor of successful implementation of Welfare-to-Work. It has been pointed out that, while in continental Europe spending on ALMP has been large, policies have not been sufficiently “broad” and deep” to folly exploit complementarities among them.49 As Welfare-to-Work is implemented in an already flexible market and targeted at long-term unemployed youth, the flexibility of the market may mitigate the adverse impact on other groups. To have an impact on entrenched behavior, a permanent break with past policies may be required to signal a change in the regime. Another crucial design characteristic is the emphasis on screening and job-search in the “Gateway” period, which may limit deadweight costs by ensuring that participants have had an adequate chance to find a job before entering one of the “New Deal” options. (At the same time, the “Gateway” may not address substitution costs which reflect the responses of employers.) The elements of formal training toward recognized qualification may help maintain the quality of training. The involvement of employers through an advisory taskforce may also secure their cooperation in making the work experience aspects meaningful. As for the timing of policies, at this point in the business cycle, brisk labor demand appears to have almost eliminated slack in the labor market. Therefore, the program would generally have the benefit of “working with the grain” (Figure 4) in trying to lower the structural unemployment rate. One possible aspect to the contrary is that the program coincides with the introduction of a national minimum wage, which if set too high, could thwart efforts to put unemployed young people into work. (See Chapter V below).

128. On the downside, it should be noted that if a sufficient number of employers (in particular small- and medium-sized firms) failed to subscribe to the tax rebate, the success of Welfare-to-Work will rely more heavily on the voluntary sector and the environmental task force which are likely to be less useful in providing relevant work experience. This may be heightened by regional disparities of long-term unemployment; in areas where the long-term joblessness is particularly widespread, it is also likely to be more difficult to place people in private sector jobs or to mobilize community support for voluntary work. Although Welfare-to-Work is intended to be kept within budget even if unemployment rises, there are uncertainties related to the influence of a possible economic downturn if the steam goes out of the labor market, transfers of the unemployed into regular jobs would diminish, increasing the magnitude of the program’s task.50

FIGURE 4.
FIGURE 4.

UNITED KINGDOM: UNEMPLOYMENT PATTERNS

(In thousands)

Citation: IMF Staff Country Reports 1998, 004; 10.5089/9781451814071.002.A004

Source: Office for National Statistics.

E. Concluding Remarks

129. The Welfare-to-Work program seeks to improve on what is, on the whole, already relatively favorable labor market performance. Whether it will indeed do so depends on learning from the experience of similar programs in other countries. That experience suggests that the overall success of the program depends not only on how it affects those toward whom it is targeted, but also on the indirect effects on other workers (via substitution and displacement effects), and on screening to direct assistance to those who really need it (avoiding deadweight costs). It will be important to select carefully the elements that have been found to work in past experience; indications so far are promising, but many details of implementation remain to be determined and could significantly affect the program’s success. The program will also benefit from its introduction into buoyant labor market conditions—provided that these conditions last. More generally, that same flexibility that accounts for the improved performance of the United Kingdom’s labor market in the 1980s and 1990s will augur well for the program’s success in improving on that performance, as a well-functioning market helps translate employability into employment.

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38

Prepared by Lars Meuller.

39

See Lane and Vanhoudt (1996) and Ramaswamy and Prasad (1994).

40

Morgan (1996b) reports evidence suggestive of increased flexibility. Three years into the recovery of the 1990s, unemployment was about 2½ percent lower than at the same point in the 1980s. Meanwhile, real wages grew more slowly and regional disparities were reduced in the recession and the recovery.

41

Nickell and Bell (1996) present data for 1991-92 showing unemployment rates for people with low education at 10.7 percent (Germany), 17.1 percent (United Kingdom), and 11.0 percent (United States).

42

The unemployment rate for young men (aged 15-24) declined from 19.3 percent in 1983 in the United Kingdom to 18.3 percent in 1994. The OECD average was 14.8 percent (aged 20-24) in 1983 and 16.7 percent in 1994. For female youth, the corresponding numbers were 16.1 percent and 10.7 percent for the United Kingdom, and 16.4 percent and 16.9 percent for the OECD average.

43

Under the JSA last October those who are unemployed cease to be eligible for unemployment benefits after six months; thereafter, they are eligible only for means-tested benefits, and no longer enter the claimant count. In addition, unemployment benefits are more difficult to obtain under the new scheme, with the claimant having to prove serious efforts at job seeking.

44

The program will be implemented by the Employment Service, in association with other government agencies and departments and with advice from an employer-led Advisory Task Force.

45

Emphasis will be placed on providing 50,000 new trained child carers to support the initiatives for lone parents (see below).

46

Full-time training in skills up to National Vocational Qualification level 2. The “16 hours study rule” which has prevented unemployed people from accessing full-time education and training will be reformed.

47

The Budget allocates £3.5 billion for the combined cost of the programs for youth and long-term unemployed people over the lifetime of parliament. Two other initiatives under Welfare-to-Work involve measures to help lone parents find and take work (£200 million allocated in the Budget) and to improve the quality of schools’ infrastructure (£1.3 billion). The government also aims to extend the Welfare-to-Work approach to other groups excluded from the labor market (provisions of £200 million made over the course of parliament).

48

Based on the rather mixed results of the Working National Program, significant reforms were subsequently introduced to improve the efficiency of labor market services. It is too early to assess the revamped program.

49

Coe and Snower (1997) point to important policy complementarities (policies have greater effect on unemployment when implemented in conjunction than in isolation) underlining the case for “fundamental” labor market reform.

50

The budgetary allocation for the Welfare-to-Work program is capped by the revenues from the Windfall Tax; in case of a rise in unemployment, the number of people benefiting from the program would be restricted, unless new legislation authorized additional funding.

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Cover IMF Staff Country Reports
United Kingdom: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 1998: Issue 004
Publisher:
International Monetary Fund
ISBN:
9781451814071
ISSN:
1934-7685
Pages:
116
DOI:
https://doi.org/10.5089/9781451814071.002
FIGURE 1.

UNITED KINGDOM: LABOR MARKET INDICATORS
FIGURE 2.

UNITED KINGDOM: TRENDS IN EARNINGS DISPERSION FOR MEN
FIGURE 3.

UNITED KINGDOM: ALTERNATIVE JOBLESSNESS RATES

(In percent)
FIGURE 4.

UNITED KINGDOM: UNEMPLOYMENT PATTERNS

(In thousands)