Welfare - to - Work : Which Policies Work and Why ?

Alongside the growth in overall employment and the steady rise in average real incomes over the 1990s, the UK experienced a concentration of worklessness and low pay among certain groups in society. This was particularly acute for low-income families with children, but was also reflected in the frequency of spells out of work by the young and by the falling attachment to the labour market of older men. In response, the focus of welfare policy shifted towards “making work pay”. The Working Families Tax Credit and the New Deal were central among the policy options that were implemented. This lecture considers the validity of the arguments underlying this shift in welfare policy and, drawing on evidence from the UK and abroad, asks: which policies work and why? It examines two broad classes of policy options that are motivated by the make work pay objective: active labour market programmes that involve wage subsidies together with improved job matching; and earned income tax credits that supplement wages for working low-income families. These programmes have many features in common. They are also similar to many policy reforms in Europe and North America. Using the evaluation of the UK reforms this lecture brings empirical evidence into the debate on the effectiveness of these programmes and assesses which aspects of the design of welfare to work programmes work well and which aspects could be improved. Acknowledgements: I would like to thank Mike Brewer, Tom Clark, Monica Costa Dias, Alan Duncan, Hilary Hoynes, Costas Meghir, Michal Myck, Howard Reed, Barbara Sianesi, John Van Reenen and Ian Walker and for their help and for extensive discussions. I would also like to thank the editor of these proceedings and my two discussants, John Ermisch and John Flemming for their helpful comments. This research is part of the programme of research at the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS. University College London and Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE, United Kingdom, www.ifs.org.uk: email [email protected]