THE (WELFARE) STATE OF THE NATION: THE US LABOUR MARKET: IMITATING BRITAIN ? BILL WELLS DEPARTMENT FOR BUSINESS, INNOVATION & SKILLS

CONCLUSIONS What works in what country? –UK: Work is the best form of welfare: You can do it. We can help. An efficient & effective Citizen’s Charter [John Major.] –US: Work is the only form of welfare: You can do it. What does not work? In both countries. –The state treats individuals as ‘Victims not Victors’: David Blunkett: And it does not expect or press them to get a job. What major problems remain? –Social Exclusion: The state abandons the individual after a long period of welfare dependency. What happens next for them?:- UK: Individuals leaving all stages of education. US: Individuals whose extended period on benefits expire.

1. LABOUR MARKET OUTCOMES. Labour Supply: Faster growth in the US. –Population growth much faster in the US. –US participation rate grew (virtually) continuously Since then it has fallen – in a period when it was rising in the UK. Employment Rates: –UK: Structural deterioration in Post War period (peaks and troughs lower than in the previous cycle) until Now it is improving. –US: Structural improvement until Now deteriorating. Wage & Quantity Adjustments: –US: Real Wages now lower than in Substantial turnover. –UK: Real Wages doubled by Now falling. Substantial turnover. Productivity Growth: –Higher in the UK until 2008: Now higher in the US.

Over the past ½ century the US working age population has more than doubled whereas the UK’s has increased by a fifth…

…and, until 2000, more of the US population were entering the labour force. Since then the activity rate has fallen. Until the early 1990s UK activity rate varied around a constant trend. Since then it has grown.

Consequently, until 2008 the numbers joining the labour force and needing jobs has grown substantially faster in the US. Since then US numbers have stagnated whilst the UK has continued to grow.

Despite the rapid growth in the numbers needing jobs the peaks and troughs in the US employment rate were higher than the previous one until the early 2000s. Since then it has fallen…

…and since the early 2000s the US employment rate has shown a structural deterioration. In the UK the opposite is true with a deterioration until early 1980s and an improvement since then.

Until the early 1990s nominal wage growth was substantially less in the US than in the UK. Since then the two countries have grown at roughly the same rate…

…and by 2008 real wages in the UK had doubled whilst in the US they were still below the level of the early 1960s. Since 2008 UK real wages have fallen…

…and so until 2008 real wage growth in the US has been much more employment friendly – it has fluctuated around zero. Since 2008 UK real wages have become more employment friendly.

In addition to its real wage (price) flexibility quantity adjustment in the US – as measured by turnover rates – is also substantial. However, because of its real wage inflexibility, the UK has to rely almost entirely on its good quantity adjustment – labour market flexibility – record.

Given the price and quantity responsiveness in the US labour market it has meant that output growth has been very ‘job rich’. But, consequently, this does mean that it has been ‘productivity poor’…

…and it has continued to be ‘productivity poor’ compared to the UK until 2008 when the situation was reversed.

2. STRUCTURAL FEATURES OF THE US & UK LABOUR MARKETS. There is no ‘single golden road’ but both the US and the UK have chosen a route to being ‘successful employment performers’ [OECD 2006] based on a free and open market-based approach:- –Both the product and labour markets are amongst the least restrictive in the OECD. –Non-wage labour costs imposed by Government (employer social security payments) are well below the OECD average – but rising. –UK direct tax burden (income tax & employee NICs) is (just) above the OECD average. The US’s is below. And it is falling in both. –The UK’s ‘light & even’ employment regulation regime delivers the dynamism & diversity that drives labour market flexibility. –The US labour market has always been individualistic and decentralised. Between 1966 and 1986 the UK moved towards a more collectivist and corporate system but has more than reversed that trend since then.

Free and open product markets apply pressure on the labour market to adapt wages or quantities. The OECD estimate that the UK has the least restrictive product market regime. And the US is not far behind…

…in the labour market the UK and the US also have amongst the least restrictive regimes. But the ordering is reversed with the US now having a less restrictive regime than the UK.

Government imposed non-wage labour costs – employer social security payments – are well below the OECD average in both the US and the UK. However, the rates have risen in recent years whereas the OECD average has drifted down…

…direct taxes in the UK are above the OECD average. This is partly because the welfare state is paid more through general taxation rather than social insurance. Direct tax rates are generally trending down. In the UK the fall has been particularly marked since 2007…

…with the UK focus on taking people out of tax & NICs leading to the low paid benefiting the most. Both because their take home pay has risen and also because the cost of employing them has fallen…

… and the tax cuts enjoyed by the low paid have been combined with above average wage rises since the introduction of (a moderate) National Minimum Wage in 1999.

The UK’s ‘light & even’ employment regulation regime delivers the widest range of types and patterns of work in the world. This diversity allows more UK workers to find jobs that suit them.

The US labour market has always been individualistic and decentralised. Between 1966 and 1986 the UK moved towards a more collectivist and corporate system but has more than reversed that trend since then.

3. WELFARE IN THE UK. In the UK:- –From 1966 benefits ceased to be time limited. Also by 1986 there was no jobsearch conditionality in the unemployment benefit system. Since then the conditionality has been restored and improved but time limits on benefits have not. –Welfare to work/’activation’ has been introduced for people on ‘inactive’ benefits and active ageing policies for older people… –…and there has been substantial improvements in long term claimant unemployment; and benefit numbers & employment for all the groups. –Conversely, the transition from education to work has got much worse as the state shifted away from a universal, continuous service focused on promoting job search and individuals moving into training.

Since 1986 a system of ‘activation’ – getting people to look for work – was re-introduced into the unemployment benefit system and has been improved since. And despite the recession the current levels are half that of Long term claimants have benefited even more.

In contrast, the pattern of US unemployment benefits during the period was very different from the UK experience (and recent US experience). The numbers rose sharply during the recessions but then, unlike in the UK, they also fell back quickly.

The extension of welfare to work policies to people on inactive benefits has helped to reduce the numbers on these benefits to their lowest levels of 20 years; …

…and also the ’activation’ of older workers including through the equalisation of state pension age…

…and promoting more people above the state pension age to stay or move back into the labour market…

…and with employment rates of lone parents, the disabled & older workers all rising – including in the recession – welfare to work policy seems to be the main driver.

There has also been an improvement in staying-on rates in education…

…whilst there is still more work to do on the transition from education to work.

3. WELFARE IN THE US. In the US:- –The benefit system is much less comprehensive than in the UK. So people tend to need to work. Their means tested benefits are restricted to lone parents… –…and in the 1990s they introduced an ‘activation’ system that reduced the numbers on these benefits. –Conversely, the numbers on invalidity benefits are growing as they receive benefits without any conditionality. –Unemployment benefit is regarded as an insurance system and a common approach is to wait until near the benefit expiry date before looking for work. And the authorities do not do much to promote job search or to provide help… –…which is alright when benefits expire at 26 weeks but not when it was extended to 99 weeks. Particularly if they are unable to find a job before the expiry date as there is no further state provision that can help.

Welfare to work policies with jobsearch conditionality are concentrated in the US on lone parents. Thus, the introduction of the Clinton reforms in the 1990s led to a reduction. By contrast, the numbers on invalidity benefits have continued to grow partly because they do not have an ‘activation’ regime.

Similarly, there is little conditionality in the US benefit system. The biggest spur is the fact that benefits end after 6 months and there is no other benefit to move on to. But this changed in 2008…

…when the duration of Federal benefits was extended from 26 to 99 weeks and also eligibility was loosened in other ways. And there was no equivalent increase in conditionality…

…and these easements of the system were on a much greater scale than previously. So, whilst the number on the regular programmes is roughly back to normal these special payments are still in place.

…and it seems that these changes in the benefit system have had an adverse effect on the labour market. So, whilst shorter term ‘frictional’ unemployment is back to close to normal levels…

…there has been a record rise in the US long term unemployed at a time when the UK figure is around half what it was in the 1980s. US long term unemployment is now falling…

…but it seems that the long term unemployed are moving into inactivity rather than work. And boosting the growing numbers on disability benefit who will be inactive…

…so the combination of inactive people & the long term unemployed in the US are now back to mid 1970s levels. Whereas the recent UK peak is much lower that its 1980s and 1990s predecessors…

…and, consequently, the overall UK employment rate is now at the US level for the first time since the late 1970s.

CONCLUSIONS What works in what country? –UK: Work is the best form of welfare: You can do it. We can help. An efficient & effective Citizen’s Charter [John Major.] –US: Work is the only form of welfare: You can do it. What does not work? In both countries. –The state treats individuals as ‘Victims not Victors’: David Blunkett: And it does not expect or press them to get a job. What major problems remain? –Social Exclusion: The state abandons the individual after a long period of welfare dependency. What happens next for them?:- UK: Individuals leaving all stages of education. US: Individuals whose extended period on benefits expire.