Welfare To Work Programmes Need Careful Design

Welfare to work programmes like the UK''s New Deal seem to be the most effective way of increasing employment among the poor and socially excluded. But according to Professor Robert Moffitt, writing in the November 2006 issue of the Economic Journal, where such schemes involve a requirement to work, they must strike a balance between protecting the most disadvantaged and strongly encouraging workamong those with the capacity for it.

He argues that there needs to be a recognition that not all families are able to take up work, and there should be exemptions for those with very young children or family members with special care needs, and for those who do not have the skills to find a job. The government must use all information it has to make that determination: the family situation, education level, past work experience and other indicators.

The government will inevitably make some errors, forcing work requirements on some who have low skills and allowing exemptions from work requirements from many who can work. To minimise such errors, the government must commit the expenditure necessary to determine the work capacity of unskilled individuals to the maximum extent. In the absence of such an effort, the errors made in a work requirement programme will exceed their potential benefits.

Professor Moffitt notes that governments in most advanced industrial countries have struggled in the last decade with how to increase employment among the poor and socially excluded. Most countries now recognise that a generous social welfare system may provide adequate benefits to low-income families but may not provide them with the proper encouragements to work.

Countries like the UK and the United States have enacted generous programmes that pay special in-work benefits to those who work. But in the United States at least, these programmes have not been regarded as sufficient to increase employment among the poor to a high enough level.

The US government has consequently introduced work requirements into their social welfare programmes, requiring most recipient families to work to continue to receive benefits. While controversial, these programmes are regarded as a success in the United States. Work requirement programmes may be considered seriously in Europe in the future, but they need to be carefully designed to minimise the chances of hurting the most disadvantaged while helping those who have

capacity to work.

Both the US and UK governments currently strongly encourage work among the poor and unskilled. With its Earned Income Tax Credit, the United States subsidises earnings by up to 40% per year, and provides subsidies to families as high as $30,000 in annual income. The UK''s Working Tax Credit provides even more generous benefits to those poor who work, but does not provide payments to families as high up the income distribution.

Both programmes have been shown to increase work effort to some degree, but not by large amounts. In 1996, the United States turned to the use of work requirements in its main social welfare programme. Most families were required to work at least 20 hours per week and were usually required to find their own jobs; the government did not provide them. Families refusing to participate in searching for a job or finding employment were given benefit reductions and, in many cases, were terminated from the welfare rolls entirely.

As a result of this reform, and the good fortune of a strong economy in the 1990s, the United States reduced the caseload in the programme by over 50%, an historic change unequalled by any prior reform.

Work requirements have not been used in most European countries. The UK does have a mandatory component to its New Deal for Young People, and in its New Deal for Lone Parents, recipients are required to have an interview with a social welfare official to be counselled on how to obtain a job, but are not required to take action towards finding one. But these programmes are the exception rather than the rule.

''Welfare Work Requirements with Paternalistic Government Preferences'' by Robert Moffitt is published in the November 2006 issue of the Economic Journal.