Does the UK really spends too much on labour market policies?

Consistent with previous trends in reforms of labour market policies, the UK government has announced yet another restriction on unemployment benefit claimants. The striking thing about these reforms is not that they are unlikely to be effective, nor that even if they were effective they probably wouldn’t make much of a difference in reducing the unemployment rate. Instead, the main issue is that they completely misrepresent the nature and extent of the problem.

Two sets of claims generally underpin the rhetoric of these reforms. The first is that benefit recipients fraud and that one must therefore restrict their access to prevent them from doing so. As official statistics (see page 13) themselves reveal, the amount of fraud is in fact very low: fraud cost only about 2.6% of expenditure on income support and 2.9% of spending on Job seeker allowance (see table below).


The second claim is that these policies simply cost too much and that the system is too generous in the UK. To assess the validity of this perception, I look at 2009 spending data on various labour market policies (from the OECD statistics website). One should distinguish between so called active labour market policies that include training schemes, employment incentives, rehabilitation programs, etc, and passive labour market policies that are mainly composed of traditional unemployment benefits.

Starting with the former, the table below shows that the UK ranks 21st among developed countries in terms of spending on active labour market policies expressed as a percentage of GDP. Scandinavian countries and continental European countries spend important amounts on these policies, while the US, Australia and Canada, along with some eastern European countries spend much less. With respect to passive labour market policies (again expressed as a percentage of GDP), the UK ranks 31st among developed countries… If one divides the spending on these policies by the unemployment rate to get a measure of relative ‘effort’ given the ‘need’, the picture still looks bleak for the UK’s unemployed.

spending on ALMPs as of GDP



PLMPs as  GDP by UR

Of course there is significant evidence that the design of unemployment benefits (and other social policies) has important effects on recipients’ incentives to return to work. But the paradox is that as one reduces the amount that unemployed can claim, their incentive to actively seek work to avoid losing benefits actually falls (i.e. the cost of non-compliance with benefit schemes’ requirements decreases as the amount of the benefit is reduced).

In addition, for active labour market programs to be effective they need to be well-funded. In other words, improving incentives can only achieve so much if unemployed are not properly trained, there are no funds to promote their mobility, and the net gains of employment are low because an insufficient number of full time jobs . Given that the level of fraud is low and that spending on labour market policies is comparatively small, it makes no sense for the government to try to further restrict eligibility and add sanctions (on a benefit system that has already been significantly ‘activated’). Instead, there is a need to improve training and access to education, and to support aggregate demand (instead of tightening budgets) to increase the number of vacancies that have no yet recovered:

New Picture (1)