Introduction: Active Labour Market Policy

Pub. Date
26 October, 2007

Over the past decade active labour market policy has been an integral part of the Labour Government's strategy for achieving employment opportunity for all, encompassing Welfare-to-Work programmes such as the various New Deals for the unemployed and the more recently introduced Pathways to Work for people with a disability. Two of the hallmarks of policy development have been the increasing importance of the concept of 'mutual obligation' or individuals' 'rights and responsibilities' in the delivery and design of active labour market policy and the extension of the target group for these measures, traditionally the unemployed, to include also the economically inactive.

The change in focus on rights and responsibilities, i.e. the 'carrot and stick' design of active labour market policy, was perhaps most noticeable with the introduction of the New Deal for Young People shortly after the Labour Government came to power. Hereafter it was no longer possible for young people to claim unemployment benefit for long periods of time without participating in or taking up the offer of help provided by the job search assistance, training, subsidised employment and work placements available through the New Deal for Young People. Failure to participate led to benefit sanctions. With the introduction and subsequent re-engineering of the New Deal 25+, this design feature of benefit delivery and active labour market programmes was later extended to adults who had been claiming unemployment benefit for more than eighteen months.

Active labour market programmes intended to improve individuals' employability were also made available to lone parents and individuals claiming disability related benefits. For these groups participation in programmes is generally not a condition of benefit receipt. However, with the introduction of mandatory work-focused interviews first for lone parents claiming Income Support and subsequently for individuals claiming Incapacity Benefit, the concept of mutual obligation has also been introduced for claimants of these and other social security benefits. This is also evidenced by the linking of agencies responsible for benefit delivery and the employment service into one with the national roll-out of Jobcentre Plus.

This issue of the Review provides four articles on active labour market policy reflecting these developments in policy. The first article, by Jan van Ours, reviews the evidence on the role of compulsion in the design of active labour market programmes. As a starting point he sets out a model within which to analyse the effects on the labour market of compulsion in programmes. In this framework active labour market programmes enhance the employability of the unemployed, but they also reduce the utility to the individual of claiming unemployment benefit. Both effects increase the exit rate from unemployment, but the reduction in the utility of being unemployed that arises through mandatory participation in programmes also reduces the quality of jobs that individuals find. Based on the empirical evidence to date on the incentive effects potentially associated with compulsion in active labour market programmes the author concludes that all active labour market programmes should include an element of compulsion.

In the second article Richard Dorsett summarises recent empirical research on the labour market impacts of Pathways to Work, the Government's latest initiative intended to increase employment amongst people claiming disability related benefits. With this package of reforms, many Incapacity Benefit claimants are obliged to participate in a series of work-focused interviews as a condition of receiving benefits. This evidence suggests that Pathways to Work has made some headway in increasing the exit rate from Incapacity Benefit to employment. The exit rate from Incapacity Benefit more generally has been less affected. The author concludes that the policy may help the Government to achieve its aim of increasing the employment rate amongst all people of working age. It is less likely to lead to significant reductions in the numbers of people claiming Incapacity Benefit. Examining the impact of Pathways to Work on different sub-groups of Incapacity Benefit claimants, the study suggests that the reforms do not appear to have been successful in changing labour market outcomes for the large group of Incapacity Benefit claimants with mental health problems.

Perhaps this latter finding illustrates the limits in scope of active labour market policy, despite the attempt to tailor the help provided to suit the individual. Richard Layard and his colleagues examine the impacts of psychological therapy on employment and on the economy. They evaluate the potential costs and benefits of wider provision of cognitive behavioural therapy, a treatment for depression and anxiety disorders that has proved to be at least as effective as drugs. They suggest that the positive effects on employment from improved health would be associated with significant savings to the Exchequer in the form of reduced Incapacity Benefit claims and higher tax receipts. Society at large would benefit from the output generated through the additional employment, but the largest benefits to society would accrue through the resulting reduction in suffering measured by the value of the increase in quality adjusted life years.

Finally, mandatory participation in active labour market programmes and the extension of active labour market policy to people traditionally regarded as outside the labour market are not distinct features of policy development in the UK alone. Indeed, these features are stipulated in the European Union's guidelines for employment policies for its Member States, supporting the Lisbon Strategy. In the last article in this issue of the Review, Jon Kvist and Lisbeth Pedersen review recent active labour market policy in the context of the Danish flexicurity model, where activation policies are accompanied by generous social security protection and relatively lax employment protection. Since 1994, active labour market policy there has increasingly been designed around the concept of mutual obligation between individuals and society, which has been extended to virtually all claimants of social assistance in an effort to increase labour supply and promote social integration. It is often believed that these changes in labour market policy have contributed to the currently favourable employment situation in Denmark. Interestingly, the authors conclude that the empirical evidence to support this belief is relatively scant.