Why Britain is no longer in America’s shadow on employment

The US approach to working-age welfare may come in for criticism in some quarters for failing to offer much support to those who fall out of work, but at least it delivers strong employment outcomes. Not like in the UK of course. While not quite as generous as some of our European neighbours, out-of-work welfare in the UK provides a universal safety net that boosts incomes at the bottom, but damages work incentives. Right? Well, no actually. Worklessness may once have been a problem in the UK but, even insofar as it was ever true, this characterisation is decades out of date, as set out in the latest report in our project on full employment.

We need only look at trends in employment rates in the two countries to realise that there’s been a quite remarkable switch in labour market performance. As the chart below shows, the US had an employment rate three percentage points higher than the UK in the mid-1990s. Both countries were improving as their economies grew strongly just before the millennium but, since then, something has shifted. The UK overtook the US in 2001 and held a lead of around one percentage point heading into the financial crisis. Today, the gap stands at around 5 percentage points.

Put another way, if the UK had the US’s employment rate, it would have two million fewer people in work. Or – if you’re a fan of big numbers – if the US had the UK’s employment rate, it would have an extra 10 million people in work. When it comes to George Osborne’s goal to have the highest employment rate in the G7, the US appears to be well out of the running.

Even worse for the US, the story is not simply one of cyclical unemployment. While the dot-com recession of 2000 and the late-2000s downturn both led to sizeable job losses in the US, the subsequent recoveries in employment were muted. That’s because too many of those who were displaced seem to have moved out of the labour market entirely – being neither employed, nor actively seeking work. In contrast, UK labour market participation has risen steadily throughout this period.

The UK has had particular success in boosting employment among women, especially single mothers. The proportion of single mothers in work has risen from 40 per cent in the early-1990s to 62 per cent today. There remains a lot to do on female employment relative to some other countries, but it’s significant that the female participation rate continued to rise throughout the recent economic downturn.

The steady improvement in employment in the UK has reduced the prevalence of out-of-work welfare receipt. While not often mentioned in the welfare debate, receipt of both single parent benefits and unemployment benefits has been steadily declining (bar a brief spike post-2008) since the mid-1990s. Excluding disability benefits, out-of-work welfare receipt is lower than at any other time in the figures we have. Even with disability benefits included (in this area the proportion hasn’t shifted much in recent years) the rate of receipt is at its lowest since 1980.

So what’s behind the remarkable turnaround in the relative labour market positions of the two countries? Of course, there are many factors at play. Demographics are important, as too might be differences in economic performance (though if we treat the period since 2000 as a whole, it’s remarkable how similar the economic and wage growth figures appear – it’s just the timings of expansion and contraction that have differed). In practice, it’s impossible to pinpoint the causes with any certainty. But might the UK’s welfare approach have made a significant contribution?

Set against the trends described above, Britain’s strong and sustained focus on helping parents to work, ‘activational’ out-of-work schemes and requirements, and generous in-work support (relative to the US) might well be described as a policy success – and instructional for the US.

But while it’s worth reflecting on just what’s worked (and making sure we don’t inadvertently press reverse on any of these during a period of cuts in spending on welfare), we need to recognise the areas in which there is much more for the UK to do. In future reports, we’ll look again at how we can reach ‘full’ employment.

In particular, out-of-work sickness and disability benefit receipt has not fallen at the same pace as other out-of-work benefits, and indeed has risen in the most recent data. Those interested in boosting employment beyond its already high levels need to explore how far it might be appropriate and possible to reduce worklessness in this key area, and what can be done to help. There is still plenty of headroom on female (and especially maternal) employment, on which the UK still lags global leaders by some distance.

The shift we’ve seen in recent decades points to the need to update our view of the welfare debate. The problem of households in which no one works is a rapidly shrinking one. Fewer than 100,000 non-disabled couples with children are in this position. Yet much of our political and media rhetoric continues to focus on worklessness. Instead, alongside rising employment we’ve faced an increase in in-work poverty. This is the area that we must get to grips with in the coming years. The rollout of Universal Credit (UC) also presents an opportunity – and a risk – in this regard. A major new Resolution Foundation report on Monday will offer a blueprint for improving the design of UC.

So the UK can do better on employment, on welfare reliance and on its support systems, but we mustn’t forget the positive record it now has, and the reforms that have helped achieve that. And the evidence increasingly suggests that looking to the US for tips on higher employment – while once reasonable and perhaps still fashionable – would now be deeply misguided.