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.