An Ocean Apart: the US-UK switch in employment and benefit receipt

Published on Jobs, Skills and Pay

There was a time when some looked to the US model – in which out-of-work benefits are less readily available, time-limited and significantly less generous – for answers to the problem of extensive European levels of worklessness. This was particularly the case during the so-called ‘tough love’ era of the 1990s. The reforms of this period resulted in sharp falls in welfare reliance in the US and coincided with high employment among even marginal groups such as single parents. The central argument was that US institutions, including the welfare system, supported high employment and low welfare reliance, but at a cost of higher earnings inequality. This received wisdom held in the UK as much as anywhere else.

Since the mid-1990s however, the lead that the US used to hold over the UK in terms of employment has been more than reversed. Out-of-work welfare reliance appears to have been on an upward trend in the US since the turn of the millennium, in direct contrast to the steady reduction recorded in the UK.

The aim of this note – the first ahead of a major report on how we might target full employment in the UK – is to chart this major shift in patterns of employment and welfare reliance across the UK and US. It notes the importance of the specific direction taken by the UK’s welfare reform programme in explaining this divergence, and considers what room there is for further improvement. In essence it asks, as people once did in relation to the US, whether the UK’s welfare model represents an important contributing factor behind its recent employment success.

This paper highlights some remarkable transformations in the UK and US over the past two decades.

  • In the mid-1990s the US employment rate was three percentage points above the UK’s. But by 2007 – just before the financial crisis – the UK rate was half a percentage point higher than the US’s. Today, the UK’s lead is around five percentage points.
  • If the UK’s rate was as low as the US’s, there would be roughly 2 million fewer people in work. Conversely, if the US could match the UK’s rate, it would have around 10 million more people in work.
  • More importantly for underlying trends, labour market participation has risen steadily in the UK since the mid-1990s, especially among women and older workers. The US, by contrast, has experienced steadily declining labour market participation. Relatively rapid falls in US unemployment since 2010 comprise some rise in employment but also a further reduction in the participation rate. More and more of those not in work in the US are not even looking for work.

The nature of welfare reforms in the two countries over recent decades appears to have contributed to the remarkable switch in labour market performance.

  • Both have increased the availability of in-work support, but the UK has taken this further than the US. Eligibility is broader in the UK and entitlement is higher, increasing incentives to work.
  • In addition, the UK has simultaneously expanded childcare support and amended maternity leave arrangements, corresponding with a particular boost in participation and employment among mothers.
  • More generally the UK system has both been more generous and more ‘activational’. That is, welfare recipients in the UK have been required to meet much more stringent behavioural conditions than exist in the US (where the focus has instead been on time-limiting receipt). These behavioural conditions have pushed UK recipients to seek out work and have been reinforced by the provision of extensive job search assistance (welfare-to-work programmes).
  • Despite the strong recent performance of the UK in relation to employment levels and reductions in out-of-work welfare reliance, substantial challenges remain.
  • In particular, the proportion of the working-age population in receipt of disability benefits has altered little since the mid-1990s and has increased slightly in the most recent period. This has occurred despite recent tightening of test procedures and limiting of eligibility. Achieving further significant improvements in employment levels and welfare reliance will require a new focus on supporting the disabled and long-term ill into work.
  • The UK must also meet the growing challenge of in-work poverty, with a majority of poor children now living in families in which someone is in work. Policy focus must increasingly shift from the availability of work – except for those groups such as the disabled who still face barriers – toward the quality of work (in terms of pay, progression and stability) and the distribution of employment within the family.
  • And these challenges must of course be met against an especially tight fiscal backdrop. Pre-election plans suggest that the new government intends to cut £12 billion from the overall welfare budget in the next two years, with the expectation being that most of this will come from working-age benefits. In delivering such cuts, and in rolling-out Universal Credit, the government will need to ensure it builds on – rather than reverses – the successes of the UK’s approach to welfare over the past few decades.