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CEP occasional paper

Welfare to Work and the New Deal

'This paper addresses two questions: -Can Welfare-to-Work expand employment and -Has Britain's New Deal for young people actually done so, and have its benefits justified the cost? There is ample evidence that unemployment (and employment) is affected by how the unemployed are treated. Other things equal, countries that offer unemployment benefits of long duration have more unemployment (and less employment). This is because employment depends on the effective supply of labour. Cross-sectional and time-series evidence is presented.

The British New Deal for Young People is a policy that prevents young people from entering long-term unemployment. To get a crude estimate of its overall effects on the unemployment (and employment) rate of young people, we can take the change in the rate between April 1998 and April 2000 and subtract from it the change in the rate for adults aged 30-49. The estimated effect is then a fall of 70,000 in unemployment - and a rise of 35,000 in employment. This compares with the NIESR's latest estimates of 45,000 and 25,000 respectively. For illustration we perform a forward-looking social cost-benefit analysis, using figures of 50,000 and 25,000 respectively. The net social benefit per year is estimated at £100 million (this compares with the gross Exchequer cost of about £350 million a year). On any reasonable assumption the policy passes the social cost-benefit test.'

Richard Layard

January 2001     Paper Number CEPOP15

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