Can the unemployed be 'nudged' back into work?

Nudging the unemployed

This is an interesting paper about the implications of behavioural economics for labour market policy.  Behavioural economists argue that conventional economists are wrong in their assumptions about how people behave and make decisions, ideas that are broadly linked to notions of people as rationally driven and self-interested individuals.

In policy terms, this is worrying: the standard economic view has had a profound influence across many areas of public policy.  Take welfare-to-work for example.  The assumption is that after making a rational cost-benefit analysis of his or her situation, the unemployed person then makes a decision about whether to work or not.  Given this decision-making strategy, it is the role of the state to alter the incentives involved: make benefits less generous, threaten people with sanctions and so on.

Babock et al, the authors of the above paper, argue that behavioural economics shows that people often don't behave so rationally.  People 'make systematic errors, (are) put off by complexity, they procrastinate and (they) hold non-standard preferences and non-standard beliefs'.

As a result, they argue that such findings about human behaviour have implications for how policies are designed.  Applied to the labour market, they argue that welfare-to-work policies should control for the ways in which humans actually behave, rather than how economists have previously thought they do.  Policy proposals include radically simplifying employment support and training, as well as managing 'loss aversion' in relation to taking a new job.

Would it work?

Policies that are designed for how people actually behave are preferable to ones that aren't.  Many of the assumptions underlying welfare-to-work schemes have been based upon interpretations of jobseekers as rational agents, weighing up the costs and benefits of returning to the labour market.  In reality, whether or not a person finds a job is determined by a far larger, more complex set of determinants.

In this sense then, incorporating findings from behavioural economics into new welfare policies is likely to bring about better results.  However, there may be some limits to how far such changes can go: what if, for example, the whole basis of welfare-to-work was wrong in the first place?

This is the argument of Steve Fothergill from Sheffield Hallam, who says that the premise of welfare-to-work policy is based on an idea of the labour market that doesn't exist.  In post-crisis Britain, the 'work-first' supply-side approach of the boom New Labour years is horribly unsuited to the many parts of the country: places where the demand for labour is the real issue, as well as obstacles of poor skills and ill health.

If Fothergill is right, then there is only so far that welfare-to-work - based on behavioural economics or otherwise - can achieve.  Ultimately, all welfare-to-work (whether nudging or shoving) is based around increasing the ready supply of labour for employers.  In the current situation, in which many parts of the country suffer from a sharp lack of demand for labour, this approach isn't likely to be too successful.

Unemployed people would be better served by welfare policies that take into account evidence about the reality of human behaviour.  However, they would be much, much better served by policies that take into account evidence about the reality of the labour market.  For many unemployed people, this will involve a much different and broader system of support: something that I doubt the current government will be budged, or even nudged, into moving on.

Labour, Rachel Reeves and welfare reform: the beginning of the end for reviving the contributory principle?

With Liam Byrne sacked as shadow DWP minister last week and replaced with Rachel Reeves, some people sensed this might be the start of a shift in Labour's welfare strategy.  Out with the old remnants of Blairism and in with Ed Miliband's new social democracy.

That optimism lasted until Sunday, when Reeves' first interview in the job was spun to the press as 'Labour will be tougher than the Tories on welfare'.  Little seems to have changed then: the policy is still the same (a guaranteed job for the long-term unemployed), as is the message (tough but fair).

I suspect that many on the left exasperate at the sales pitch on welfare, rather than what's actually on offer.  Providing paid work for all long-term unemployed people is a solidly social democratic welfare policy of the type the Tories don't like.  And realistically, Labour couldn't offer these jobs without some conditionality.  This is a fact of the landscape of political attitudes in Britain.  A majority of the public might welcome left-wing moves on the cost of living, but are simultaneously, resolutely small-c conservative on welfare.

However, perhaps the most interesting point to note was Reeves' language on the contributory principle: a revived idea that's been floating around the centre-left for a few years now.  For some, the contributory principle is the mechanism by which Labour can revive support for the welfare state, yet Reeves' language was unforthcoming: 'we are not in an environment where there is more money around'.  

In all likelihood, this shift probably reflects Labour's weariness of introducing huge reforms to social security.  From the experience of Universal Credit, politicians know that changing the benefits system is far from straightforward.  A pledge to revive the contributory principle would soak up a lot of Labour's time, money and political capital.  There is also the (mistaken) mindset that public attitudes are inert and that it is beyond Labour's power to shift opinion on the welfare state.

So for now, Ed Miliband is playing it safe with welfare: his strategy is one of largely accepting the Coalition's position whilst highlighting small differences in what Labour would do.  Reeves' inteview seems to signal the end of Labour's flirtation with the contributory principle: the most radical centre-left suggestion of the past few years.  This is damage limitation but, as Mark Ferguson says at Labour List, it is a dangerous strategy: accepting and entering an 'arms race' on welfare will, in the end, blow up in Labour's face.

The hidden costs of welfare reform

Both the left and right in British politics are obsessed with economic outcomes.  The impact of a policy – whether it is a tax cut, tax rise, welfare reform or a free school meal – is almost exclusively evaluated and argued over in terms of its economic effect.  Will it make people better off? Who are the winners and losers?

We often seem to forget that policies have other effects too.  Extending free school meals, for example, will not just give parents more income, but more time.  In schools, it might give a stronger sense of togetherness amongst pupils (less us versus them).  For policy-makers, it will make it easier to improve children’s nutrition.

The same is true of welfare reform.  The research that more or often than not makes the headlines is that which prices up the impact of a new policy.  The IFS are masters at this.  A policy is judged as a success if it happens to put an extra fiver in someone’s wallet.

Yet we cannot understand the true impact of a policy without considering a broader range of outcomes.  And this is the case most poignantly in the area of welfare, where the most disadvantaged and vulnerable people in society have been subjected the most powerful policy changes.  Welfare reforms have made many people poorer, that’s true.  But the wider costs go way beyond tightened purse strings.

We got a sense of these costs this week, with new research in the BMJ showing a rise in suicide associated with the global recession.  My own research focuses on the health and well-being impact of unemployment and the ways in which welfare reforms alter the nature of experienced worklessness.

My findings are somewhat complex to untangle.  In some instances, moving people to welfare-to-work schemes appears to improve well-being.  But there are many caveats here: this only appears to hold for younger people and for people on specific types of programmes.  Unsurprisingly, there is no well-being benefit to the Work Programme.

However, there is one solid finding I encounter time and time again: people who are put on welfare-to-work schemes have significantly higher anxiety than other unemployed people.  The graph below (using data from the Annual Population Survey) shows that unemployed people have an anxiety score of 6.42 (the higher the score, the lower anxiety).  This, as we would expect, is lower than those in work, students or the retired.  However, people on welfare-to-work schemes have much higher anxiety than the unemployed (6.25).

Further, this relationship holds even when we look at different types of welfare-to-work participants.  The evidence shows that the kind of welfare-to-work participant who benefits most from these schemes tend to be young, male, poorly educated and enrolled on a scheme that gives demonstrable training or work experience, as opposed to the Work Programme.  However, even these types of participants have similar levels of anxiety to the unemployed.

This evidence leads to a worrying conclusion – welfare-to-work (and potentially welfare reform in general) – leads to an increase in anxiety amongst the unemployed.  Why this might be is an avenue for future research.  The evidence on welfare-to-work is mixed – for certain types of people, and for certain types of wellbeing, some kinds of welfare-to-work programmes appear to be positive.

However, for most participants – regardless of age, qualification level and gender – welfare-to-work appears to increase anxiety.  This is a potent reminder that the costs of welfare reform cannot – and should not – be measured in economic terms.  They go way beyond what can be counted in pounds sterling.

Where to go next with welfare reform?

Over 18 months ago I wrote a post about 'welfare reform 2.0'.  It argued that the Coalition would not stop with present reforms, driven by the belief that social security must be radically changed and (most importantly) that the public want to see this.

Then, I made five predictions about where the Coalition would go next.  These were:

• Intensified workfare
• Time-limited benefits
• Abolishing contributions-based benefits
• Regionalised benefits
• Limiting Child Benefit

Since I published that piece, only 1.5 of my predictions have come true.  The Government will intensify workfare (announced this week but piloted for the past year) and they have limited Child Benefit, but only to richer families.  They haven't, yet, limited the amount of children that Child Benefit is payable to.

There are numerous reasons why new reforms have been relatively scarce during the past year and a half.  One reason is that the Government has been preoccupied by the introduction of Universal Credit and its other reforms, such as the benefit cap.  There simply hasn't been the time to focus on new reforms.

Secondly, the politics of the Coalition prevents the introduction of even more punitive welfare reforms.  The Lib Dems like to boast that they have tamed the Tories from their wilder instincts.  As the Coalition has already gone pretty far, new reforms will be within an exclusively Conservative sphere.

The third is more strategic.  The Conservatives are already way ahead on welfare; there isn't, as yet, the political incentive for them to go too much further.  This means that as the election in 2015 approaches, we'll probably see more and more policy proposals on welfare.

Finanlly, I could just be bad at making predictions.  We'll see.  But the big announcement yesterday - that benefits may be stopped for young people - suggests that, far from it, the Tories aren't finished yet.