Van Reenen, John

English

Research Papers in Economics

  1
 
 
ELECTION ANALYSIS 
 
Welfare to Work: The Evidence on Labour’s New Deal Policies 
 
•  The UK labour market currently has a high proportion of people in jobs. 
Around three quarters of working age people have jobs – a higher proportion 
than in France, Germany and even the United States. 
 
•  According to the government, ‘At the heart of this success has been welfare to 
work policies such as the New Deal programme. Since it was launched the 
programme has helped almost a million people back to work’. By contrast, the 
Conservative Party is pledged to scrap most of the New Deal programme. 
 
•  The New Deal for the Unemployed comprises ‘carrot and stick’. Everyone on 
Jobseeker’s Allowance gets help with job search from a dedicated ‘personal 
adviser’ (after six months of claiming the allowance for unemployed people 
aged less than 25 years old and after eighteen months for others). If 
unemployed people still cannot find a job after four months, they are entitled 
to four options, including a full-time education/training option or a subsidised 
job. This is mandatory: there is no ‘fifth option’ of staying on benefits. 
 
•  By December 2004, there were 67,820 people under 25 years old and 51,970 
people over 25 years old participating in the New Deal for the Unemployed. 
 
•  The best evaluations of the programme suggest that it has raised the chances 
of unemployed people finding a job by between 5% and 7%. This effect 
appears after four months and seems to persist for at least one year. 
 
•  Expenditure on the New Deal for Young People is forecast at £330 million in 
2005/06. But most of this comprises unemployment benefits that would have 
to be paid even in the absence of the programme. So while the total number of 
jobs created is far below one million, the true cost is also modest, so it is likely 
that the program’s benefits have outweighed the costs.  
 
 
     2
Introduction 
 
The New Deal is a flagship policy of the Labour government and was inscribed as one of the ‘five 
pledges’ in 1997. Ministers see it as a key policy in bringing down unemployment to historically low 
levels in the UK. Employment rates for the working age population are 75%, much higher than the 
OECD and European Union averages. 
 
Michael Howard has promised to ‘scrap the New Deal’ if elected. The Conservatives argue that the 
New Deal has not contributed to bringing down unemployment and is not good value for money. 
 
This analysis describes the New Deal for the Unemployed, what have been its likely effects and what 
parts of it may be worth keeping. 
 
What is the New Deal? 
 
There is a proliferation of New Deals – for the disabled, for lone parents, for partners of the 
unemployed, etc. The first and best studied is the New Deal for the Unemployed, which involves a 
‘carrot and stick’ approach. Everyone on Jobseeker’s Allowance gets help with job search from a 
dedicated ‘personal adviser’ (after six months of claiming the allowance for people under 25 and after 
eighteen months of claiming the allowance for people over 25). 
 
If unemployed people still cannot find a job after four months, they are entitled to four options: 
education/training; an employment subsidy; a subsidy for working in the voluntary sector; or a place on 
the environmental task force (government jobs). Participation in one of these options is mandatory. 
There is no ‘fifth option’ of staying on unemployment benefits. 
 
The idea behind the New Deal was to improve the incentives and ability of the long-term unemployed 
to find jobs. The longer someone is in unemployment, the lower their chances of escaping it because of 
the loss of skills, motivation and job contacts.  
 
Figure 1 shows the number of people participating in the New Deal for the Unemployed: by December 
2004, there were 67,820 people under 25 years old and 51,970 people over 25 years old. Numbers 
peaked in mid-1999 and have been falling ever since. 
 
Has the New Deal increased jobs? 
 
Although employment rates have risen since 1997, it is difficult to disentangle whether this is due 
partly to the New Deal or other factors such as continued robust economic growth. The government 
claims: ‘At the heart of this success has been welfare to work policies such as the New Deal 
programme. Since it was launched the programme has helped almost a million people back to work.’
1 
 
But not all the people going into employment after passing through the New Deal would have been 
unemployed in the absence of the New Deal, so the true impact of the programme on jobs is a lot lower 
than one million. 
 
Researchers have tried two main methods to investigate the effects of the New Deal. First, the New 
Deal for Young People was introduced earlier in some ‘pilot’ regions at the start of 1998 before the 
subsequent national rollout. This enables the job prospects of young unemployed people in the pilot 
areas to be compared with similar young unemployed people in comparable areas before and after the 
introduction of the New Deal. 
                                                             
1 Department for Work and Pensions (2004)   3
Figure 1: Total participants in the New Deal for the Unemployed, January 1998-December 2004 
 
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
under 25
25+
 
Source: Department of Work and Pensions (http://www.dwp.gov.uk/asd/ndyp.asp) 
 
 
A second strategy is to take advantage of the fact that 24 year olds are affected by the New Deal after 
six months unemployment whereas 25 year olds have to wait eighteen months. By comparing 24 year 
olds who are eligible to 25 year olds who are not eligible, it is also possible to estimate the impact of 
the New Deal policy on moving people into jobs. 
 
Using either non-pilot areas or age as a benchmark group, researchers have found consistent results that 
the New Deal raises job prospects. After the initial four months on the New Deal, young people were 
5% more likely to find jobs.
2 Looking one year after joining the programme (that is, after people have 
been through options such as training), more recent research finds a similar, even slightly larger impact. 
 
Is the New Deal worth the cost? 
 
The fact that the New Deal has successfully increased employment does not mean that it is sound 
policy. There are many costs involved with the New Deal, such as administration costs for the 
Department for Work and Pensions and the distortions arising from the increased taxation necessary to 
finance the New Deal.  
 
Some calculations suggest that the New Deal may have increased employment by about 17,000 jobs a 
year. Although far fewer than a million, the cost is also relatively modest. Although the headline cost 
figure for the New Deal for Young People seems high, (£327 million in 2005/06
3) the bulk of this 
comprises payments that would have had to be paid in Jobseeker’s Allowance even without the New 
Deal. Overall, the New Deal for the Unemployed appears to be reasonably cost-effective.
4 
 
Conservative plans are to cut the New Deals for the Unemployed and Lone Parents and replace them 
with a private sector led, contracted out job centre service. It is assumed that this `Work First’ 
programme would be vastly more efficient than the current New Deals so that it would require only 
£286 million instead of the current £666 million. This effectively involves moving people off benefits 
on an unprecedented scale. It is part of an overall planned saving of over £2 billion a year from the 
existing job centre system and could be regarded as rather optimistic, to say the least. 
 
                                                             
2 Blundell et al (2004) 
3 http://www.dwp.gov.uk/publications/dwp/2004/dr04/expenditure/table7.asp 
4 Van Reenen (2004), Layard (2002)   4
Which parts of the New Deal work best? 
 
Evidence is less clear over which are the best elements of the programme. Sanctions are probably the 
element that is most effective and best value for money, although they carry the danger of inequity (if 
the wrong people are sanctioned) and the danger that claimants are simply moved from benefits to 
inactivity. (There is some evidence that the introduction of Jobseeker’s Allowance led to some 
increases in inactivity and crime.
5) 
 
Job search assistance via personal advisers is also likely to be cost-effective and create jobs – US 
programmes and the UK’s own Restart Initiative in 1986 seem to confirm this.
6 Wage subsidies are 
more expensive, but are also likely to have played a part. 
 
The other options, especially education and training, are the most expensive. They are also least likely 
to have had an effect on jobs. International experimental evidence is quite pessimistic about the ability 
of government training schemes to increase the labour market prospects of young unemployed males. 
This is unfortunate since in the long run, raising the human capital of the unemployed is the best way to 
lift them out of the cycle of low pay and no pay. 
 
Conclusions 
 
The New Deal has attempted to ‘activate’ the unemployed into finding a job through a mixture of 
carrots – advice, job subsidies and training opportunities – and sticks – benefit sanctions. The political 
parties are divided over whether it should be expanded or phased out. 
 
Existing evaluations have found that it has successfully got some people back to work, although fewer 
people than the government has claimed. It has managed to increase jobs at a relatively low cost. In 
terms of value for money, sanctions and job search assistance are probably best; job subsidies second 
best; while full-time education/training comes last. 
 
For further information 
Contact John Van Reenen: j.vanreenen@lse.ac.uk; or Romesh Vaitilingam on 07768-661095 
(romesh@compuserve.com). 
 
References 
 
Blundell, R., Dias, M., Meghir, C. and Van Reenen, J. (2004), ‘Evaluating the Employment Impact of a 
Mandatory Job Search Program’, Journal of the European Economic Association 2(4), 569-606 
(http://cep.lse.ac.uk/people/vanreenen/papers/bdmvr.pdf). 
 
Department for Work and Pensions (2004), Building on New Deal: Local Solutions Meeting Individual 
Needs (http://www.dwp.gov.uk/publications/dwp/2004/buildingonnewdeal/mainreport.pdf). 
 
Dolton, P. and O’Neill, D. (2002), ‘The Long-run Effects of Unemployment Monitoring and Work-
Search Programs: Experimental Evidence from the UK’, Journal of Labor Economics 20(2), 391-403. 
 
Layard, R. (2000), ‘Welfare to Work and the New Deal’, The Business Economist 31(3), 28-40. 
 
Machin, S. and Marie, O. (2004), ‘Crime and Benefit Sanctions’, CEP Discussion Paper No. 645 
(http://cep.lse.ac.uk/pubs/download/dp0645.pdf). 
 
Van Reenen, J. (2004), ‘Active Labour Market Policies and the British New Deal for Unemployed 
Youth in Context’, in Richard Blundell, David Card and Richard Freeman (eds), Seeking a Premier 
Economy, University of Chicago Press. 
                                                             
5 Machin and Marie (2004) 
6 Dolton and O’Neill (2002) 

Active Labour Market Policies and the British New Deal for Unemployed Youth in Context’, in Richard Blundell, David Card and Richard Freeman (eds), Seeking a Premier Economy,

Welfare to work: the evidence on Labour’s new deal policies.

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics