PAYING FOR SUCCESS

- Monday, 14th April 2008

 

 

Paying for Success

How to make contracting out work in employment services

Edited by Peter Lilley MP and Oliver Marc Hartwich

Policy Exchange is an independent think tank whose mission is to develop and promote new policy ideas which will

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and other experts and commission major studies involving thorough empirical research of alternative policy outcomes.

We believe that the policy experience of other countries offers important lessons for government in the UK. We

also believe that government has much to learn from business and the voluntary sector.

Trustees

Charles Moore (Chairman of the Board), Theodore Agnew, Richard Briance, Camilla Cavendish, Richard Ehrman,

Robin Edwards, Virginia Fraser, George Robinson, Andrew Sells, Tim Steel, Alice Thomson, Rachel Whetstone.

About the

contributors

and editors

Thomas Bredgaard

is an Associate

Professor at the Centre for Labour Market

Research at Aalborg University, Denmark.

Dr Oliver Marc Hartwich

is the Chief

Economist at Policy Exchange.

The Rt. Hon. Peter Lilley MP

is the

Member of Parliament for Hitchin and

Harpenden and a former Secretary of State

for Social Security.

Peter Saunders

is a Professor Emeritus at the

Centre for Independent Studies, Australia,

and Adjunct Professor at the Australian

Graduate School of Management.

Dr Hilmar Schneider

is the Director of

Labor Policy at the Institute for the Study

of Labor, Germany.

Els Sol

is an Associate Professor at the

Hugo Sinzheimer Institute, University of

Amsterdam, The Netherlands.

Jason Turner

was one of the designers of

the welfare reforms in Wisconsin. He was

also a commissioner for the New York

Human Resources Administration under

Mayor Rudy Giuliani.

2

© Policy Exchange 2008

Published by

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Contents

Executive summary 4

1 Paying for success - the international experience of contracting out 7

by Peter Lilley MP

2 The experience of contracting out employment services in Australia 15

by Peter Saunders

3 The experience of privatization of welfare services in Wisconsin 34

by Jason Turner

4 The labour market reform in Germany and its impact 49

on employment services

by Hilmar Schneider

5 The creation and regulation of markets in employment services 59

- Danish experiences

by Thomas Bredgaard

6 It’s the client, stupid! An active role for the client in 71

Dutch employment services

by Els Sol

www.policyexchange.org.uk

• 3

Executive Summary

In December 2006 the Department for

Work and Pensions commissioned David

Freud to investigate welfare reform. The

Freud Report, which was published in

March 2007, had one core recommendation:

to use the private and voluntary sectors

in the provision of employment services.

But while Freud briefly mentioned

experiences made abroad, there was no

detailed analysis of the reforms in other

countries. Among UK policy makers,

knowledge of international experience is

patchy.

This gap spurred Policy Exchange to

commission research about five countries

that have reformed the way in which they

provide employment services to jobseekers:

Australia, the United States (Wisconsin),

Germany, Denmark and the Netherlands.

These countries are most frequently mentioned

in welfare reform debates. Their

experiences are assessed with regard to the

lessons they hold for the UK by former

Secretary of State for Social Security, Peter

Lilley MP.

Welfare systems are notoriously complex.

Understanding them requires considerable

knowledge of the political systems,

culture and labour markets in which they

operate. Policy Exchange thus commissioned

local experts who had in-depth

knowledge of their (welfare) states. Their

task was twofold: on the one hand they

were asked to judge the effects of contracting

out employment services on employment

and, consequently, welfare spending.

On the other hand, they were tasked with

identifying any difficulties that had been

experienced in the process.

The overall results are encouraging. The

essays in this compilation show how use of

the private and voluntary sectors has

brought improvements in the employment

services sector. While it is sometimes hard

to isolate the effects of reforms in this area

from the more general changes to the welfare

system, it is clear that contracting out

employment services can improve the jobseekers’

chances to find work quickly.

However, potential difficulties arise from

the design of the contracting out regimes.

Some of the authors have reported cases of

‘creaming’ and ‘parking’, where service

providers concentrated on jobseekers that

were the easiest to deal with or delayed and

sometimes even ignored the most challenging

cases. In Australia, success fees were

sometimes fraudulently paid to employers

taking on jobseekers for a limited period.

Altogether,

Paying for Success provides

insights into the design, implementation

and pitfalls of contracting out regimes in

employment services. While welfare reform

experiences are hardly ever directly transferable

from one country to another because of

national peculiarities, the reforms documented

in this collection of essays will be

valuable to UK policy makers.

There appears to be growing cross-party

recognition that welfare reform along the

lines suggested in the

Freud Report is the

way forward, and indeed

Paying for Success

confirms its benefits. But in doing so, mistakes

made abroad should and can be

avoided.

Key lessons:

Peter Lilley: Paying for success



The welfare reforms documented in

this volume show the potential of contracting

out employment services. In

Wisconsin welfare rolls fell by 80%

over three years. If similar changes in

the UK achieved only a quarter of this

change, the annual budget for

Incapacity Benefit claimants would be

cut by £1 billion, and funding for lone

parents with children over seven by

around £300 million.

4



If the UK matched the 50% drop in

job placement costs achieved in

Australia, the cost of operating the welfare

system would be cut by £250 million.



In mainland Europe, too, welfare

reforms have had positive effects.

Germany’s unemployment count fell

by 1 million in the two years after it

started to reform its welfare state. Both

Denmark and the Netherlands have

been more successful in getting lone

parents and the disabled back to work

than other EU countries.

The main lessons that should be learnt

from the international employment services

reforms are as follows:



Markets for welfare-to-work schemes

evolve rapidly, so policy makers must

be prepared to change regulations, particularly

incentives, when they do.



Each country has unique circumstances,

and must pay attention to

them when designing its own system.



Deadweight losses are significant in systems

that pay by results. ‘Creaming’,

where companies concentrate on the

people who are easiest to get back to

work, and ‘parking’, where private

providers ignore the hardest to get into

employment, can be significant problems.

The state may therefore have to

identify the hardest to place individuals

if private contractors do not have a positive

incentive to do so. However, for all

parties it is hard to identify such people.



Negotiating contracts that give private

providers appropriate incentives is difficult.

To get the right outcomes, the

state needs to be shrewd and may need

to bring in negotiating skills from outside

when it draws up such agreements.



Choice is important, but experience in

some countries suggests that benefit

recipients do not pick and choose

between welfare to work providers as

much as scheme designers would like.



Rating systems can reinforce payment

by results to ensure desired outcomes.



The conditions and sanctions faced by

benefit recipients are central to their

participation in back-to-work schemes.

Australia: The experience of contracting out

employment services in Australia

(Peter Saunders)



Contracting out cut the cost of getting

claimants back in to work significantly.

The Australian Productivity Commission

found that in the first four years

after the changes, the cost of the country’s

labour market programmes fell

from AUD 3.7bn to AUD 1.3bn.



The pursuit of cost savings has damaged

the service quality received by the

most needy welfare recipients.



The ‘choice’ aspect of the market-based

system has had little impact. Claimants

have not acted like customers in a real

market.



The contracting out model worked

well when its goal (getting claimants

back into work) was simple. But when

its aims became less clear (i.e. once it

was given more social targets), it

became less effective.

The United States (Wisconsin):

The Experience of Privatization ofWelfare

Services inWisconsin (Jason Turner)



The state saved around 15% of its welfare

budget during the first contract

period after the start of the reforms.



Claimants showed themselves to be far

more resilient to changes in their benefits

and demands for them to work

than previously thought.



Flexibility among system designers and

managers was important when they

had to steer the system past unexpected

problems.



Big changes in what the state politicians

were saying about welfare reform

significantly affected the behaviour of

the private contractors.

www.policyexchange.org.uk

• 5

Executive Summary

The vitality of private providers, plus

the incentives they faced, was vital to

the success of the scheme.

Germany: The Labour Market Reform in

Germany and its Impact on Employment

Services (Hilmar Schneider)

The reforms of employment services

were part of a bigger welfare reform

package that made significant contributions

to the falls in unemployment

after their introduction between 2003

and 2005.

Because claimants have not had strong

incentives to demand high quality services

from providers, the system has not

worked as well as it could have done.

The lack of a price mechanism that

could reveal the costs of working in certain

areas has made placing the hardest

to reach claimants unprofitable.

The introduction of private providers

has induced a significant amount of

deadweight loss.

Denmark: The creation and regulation of

markets in employment services – Danish

experiences (Thomas Bredgaard)

The introduction of the contracting

out approach gave policy makers an

opportunity to shift welfare policy

towards a ‘work first’ approach.

The Danish reforms moved through

two phases: the regime was created

first, but it was tweaked when contractors

were asked to ‘make a difference’

rather than just relieve the state of its

administrative burdens.

The creation of the market exposed

politicians to the problems of dealing

with behaviour that was profit-seeking

but not supportive of the needs of

many claimants. They thus had to deal

with a situation that was working well,

but not as efficient and simple as they

had expected. Ultimately, the designers

of the changes were made aware of the

need to strike a balance between the

possibilities of a market system and the

social objectives of welfare policies.

The Netherlands: It’s the client stupid!

An active role for the client in Dutch

employment services (Els Sol)

The emphasis on short-term job outcomes

meant there were no incentives

for providers to help the most disadvantaged.

Outcomes were improved once

Individual Reintegration Agreements

were introduced in 2004 and the system

was thus moved away from a ‘one

size fits all’ structure.

Comparing the quality of providers has

been difficult, but the introduction of a

ratings system will help.

Paying for Success

6

1

Paying for success -

the international

experience of

contracting out

By Peter Lilley MP

Payment by results is not a difficult concept

to grasp. Nor is it novel.

Reward success and people will be more

likely to deliver success. Invite organisations

to compete to deliver the success

which brings that reward and success is

even more likely. But it has taken a long

time even to consider applying these simple

concepts to the public services.

There are few areas where success is

more valuable than in helping people off

welfare and into work; it is in the interest,

above all, of the workless person; it is in the

interest of their families and communities;

it is in the interest of taxpayers through

reducing the welfare burden; and it is in

the interest of the economy through

increasing the workforce.

The only people at present who do not

stand to benefit directly from success in

enabling people tomove fromwelfare towork

are those whose job it is to help them do that.

Maybe that is one reason the UK has

been less successful at boosting employment

than might be expected after a long

period of steady growth with a deregulated

labour market.

Even among men of prime working age

1

– 25 to 49 – more than one in nine is not

in gainful employment after 15 years of

steady growth. Their employment level has

stagnated between 88 and 89% throughout

this decade and is still below the recent

peak employment rate of 90.3% reached in

1990. Even that is far short of the employment

rates of prime working age men in the

1950s and 60s which were over 96%, albeit

not on an entirely comparable basis.

Among older workers and lone parents the

proportion currently not in work is far

higher even than one in nine. And the proportion

of young people not in work or

education has actually risen since 1997.

The New Deal has not achieved the success

that its supporters expected and even

its critics hoped for. So it is not surprising

that attention is returning to the idea of

harnessing reward and competition to

make our efforts to get people back into

work more effective.

The last Conservative government

announced plans to pilot a scheme called

Britain Works loosely modelled on

AmericaWorks which features in the studies

below. It sought to harness the profit

motive to the task of getting the long term

unemployed into work on the basis of payment

by results. As Secretary of State for

Social Security I was disappointed that we

had not started to do this earlier. The division

of responsibilities between the

Department of Social Security (DSS) and

the Department of Employment (DEmp)

was a major factor slowing things down.

www.policyexchange.org.uk

• 7

1 For comparisons over time it is

best to look at the employment

rate of males of prime working

age since the proportion of

women who wish to work has

changed over time for cultural

reasons as has the proportion of

young people staying in education

and of old people approaching

retirement age who choose

early retirement.

Anyone with experience of Whitehall will

know that it was easier to get the USA and

USSR to cooperate at the height of the

cold war than to get two Whitehall departments

to work together.

Whether by accident or design, the

Labour government removed that obstacle

by merging the DSS and DEmp into

the Department for Work and Pensions

(DWP) in 2001. Had the plans to bring

in private initiative and payment by

results not been sidelined before then,

that merger would have speeded up their

implementation. It will make it easier to

implement them now that they are being

revived

2 .

In the meantime other countries have

taken up the idea of contracting out

employment services to the private and

voluntary sectors and of paying them by

results for helping people get off benefit

and into work. If we are to make up for our

lost decade we need to learn from experience

built up abroad.

That is why Policy Exchange commissioned

five studies carried out by experts in

each of the main countries which have

been experimenting on these lines.

These studies reveal that the potential of

this approach is, indeed, considerable.

Wisconsin saw welfare rolls fall by 80%

over three years. If the UK were a quarter

as successful over the long run we could

hope to see savings in the annual budget

for Incapacity Benefit of over £1 billion

and of the order of £300 million on lone

parents with children over seven.

Australia reportedly reduced the cost of

job placement by half. If DWP’s placement

costs are proportionate to those in

Australia and savings were a quarter of

those in Australia the British taxpayer

could save around £1/4billion annually on

operating costs alone.

Above all the process of contracting out

focuses attention on the central objective

of helping people back into work. In

Germany, before this was done, only 10%

of the Federal Labour Agency’s 90,000

employees were involved in job placement.

It is hard to quantify the impact of contracting

out in most of the countries studied

since it formed one part of more comprehensive

reforms which often came in

over several stages. Nonetheless, it is significant

that, for example, in the two years

following the contracting out of some

placement, Germany has seen unemployment

fall by 1 million - the largest and

most rapid decline in its history. And both

Denmark and the Netherlands, who make

extensive use of the voluntary and private

sectors, have been more successful than

other EU countries in increasing employment

among previously excluded groups

like the disabled and lone parents.

We have made considerable progress in

the UK in tackling unemployment, i.e. in

reducing the number of people on Job

Seekers’ Allowance. There is more to be

done particularly for the long term unemployed,

the repeat claimants and the growing

number of NEETS (youngsters not in

employment, education or training).

However, the largest category of people

who are excluded from employment is

those on Incapacity Benefit. This is an

international phenomenon. It reflects two

factors. First, changes in the labour market

in developed countries have reduced the

number of jobs available to the least skilled

requiring purely physical effort or repetitive

actions. They have been replaced by

jobs mostly in the service sector which may

not require formal skills but involve a

degree of mental or personal involvement

and adaptability. The second factor is that

people displaced from the old physical and

repetitive jobs have discovered how to

access incapacity and similar benefits

which are usually higher than unemployment

benefits and do not require them

actively to seek work. Once on those benefits

they tend to lose motivation and

employability so that they become permanently

detached from the labour market.

Paying for Success

8

2 Although, when Chancellor,

Gordon Brown was hostile to the

idea for contracting out put forward

in the Freud report, he has

recently given them his backing.

In the UK access to the old Invalidity

Benefit simply required a note from the

claimant’s own doctor which was usually

forthcoming. So the number on it trebled

over 15 years. After I replaced this with

Incapacity Benefit (IB), which required an

objective medical test, the number of

claimants fell slightly, but then stabilised at

the still appallingly high level of 2.6million.

Welfare reform is not a static process. I

always envisaged further reforms and will

wholeheartedly support measures by this

government or the next to actively help

people move from IB into work. Clearly

some people with particularly severe disabilities

will be unable to do so. However,

the majority probably could do some form

of work and would benefit from it. The

more successful we are at helping them

into work the more generous we will be

able to be towards those who are genuinely

too handicapped to do so.

The problem is that most people on IB

face a chicken and egg situation. Out of

work they lose motivation, their health

deteriorates, and they become less attractive

to employers. If they could get into

work it would restore their motivation,

often be good for their health, and enable

them to acquire on the job skills. Even

unskilled jobs require some knowledge and

familiarity with the task - most of which

can only be acquired on the job. Although

most IB claimants could do valuable work,

far fewer have the ability to identify what

they can do beyond their previous occupation,

fewer still have the ability to market

themselves. And even if they could, a

potential employer may require compensation

for the period during which a new

recruit is learning on the job.

So if we are to make serious progress in

helping people off IB they will need support

from an organisation which is motivated

– to boost their confidence; to identify

their aptitudes; to ‘market’ them to

potential employers; and, if need be, subsidise

them for a period. We take it for

granted in most other spheres that those

involved in marketing and sales themselves

require incentivising with rewards for success.

It is high time we introduced that into

the business of helping to sell the substantial

but currently unrealised abilities of

those on Incapacity Benefit.

Key lessons

The five studies commissioned by Policy

Exchange reveal that, although the concepts

of payment by results and contracting

out are simple, their application is

complex and fraught with difficulties.

Every country that has adopted this

approach has largely had to learn from trial

and error how to implement it effectively.

Hence the value of these studies. We can

at least learn from their experience, emulate

their successes and avoid some of their

mistakes.

An adaptable system is essential



Markets for welfare to work schemes

evolve rapidly, so policy makers must

be prepared to change regulations, particularly

incentives, when it does.



Each country has unique circumstances,

and must pay attention to

them when designing its own system.

However much we benefit from foreign

experience and however well planned the

system may be at the start, it will still need

further adaptation in the light of experience.

That has been true of every other

country. One reason is that the market

evolves as new suppliers gain expertise or

prove inadequate and fall by the wayside.

In Wisconsin the system was so successful

that it had to be scaled down to deal with

a far smaller case-load. In Germany illjudged

contract terms bankrupted the

major provider of placement services.

Most countries found that incentives

needed to be modified to avoid inducing

perverse responses or because they were

exploited in unintended ways. And systems

www.policyexchange.org.uk

• 9

Paying for success - the international experience of contracting out

need to adapt to each country’s unique circumstances

– its labour law, economic structure,

employment culture etc. So it is important

that the initial system is not too rigid,

top down, over specified or inflexible to be

adapted in the light of experience.

Getting the incentives right



Deadweight losses are significant in systems

that pay by results.



‘Creaming’, where companies concentrate

on the people who are easiest to

get back to work, and ‘parking’, where

private providers ignore the hardest to

get into employment, can be significant

problems.

The experience of all five countries suggests

that one of the most difficult problems is

designing the right structure of incentives

for the providers. The most intractable issue

inherent in any system of payment by

results is how to minimise ‘deadweight losses’,

discourage ‘creaming’ and prevent ‘parking’.

A ‘deadweight loss’ is payment for

helping people to get jobs who would have

got them by their own efforts. ‘Creaming’ is

where suppliers select (if they have any say

in who they take on), or focus their efforts

on, those clients who are easiest to get into

work – many of whom would have

obtained a job with little or no help. This is

particularly likely if providers are paid the

same amount for everyone they help into

work rather than being paid more for the

harder to place or for increasing the proportion

of their case load who find work above

a base level. ‘Parking’ is ignoring, or devoting

least attention to, the hardest to place

clients who actually need the most intensive

support. ‘Parking’ is likely to be a particular

problem if the remuneration system provides

additional resources or rewards for

helping the hard to place only after they

have been unemployed beyond a threshold

period.

There is no simple solution to these

problems in practice.

But in theory they can be minimised by

designing incentives to align providers’

interests with those of the taxpayer - which

largely coincide with those of the jobless.

The taxpayers’ interest is to maximise savings

on benefits (by helping people get

work and stay in work) net of the cost of

providing such help.

Bizarre as it may seem, not even the

DWP’s interests have been aligned with

those of the taxpayer. The Department has

not been allowed to use any of the savings

in the benefit bill that it makes from welfare-

to-work programmes to fund those

programmes. The Conservative Green

Paper on Welfare Reform promised to

remedy this problem. This seems to have

prompted the Chancellor to announce in

his 2008 Budget statement that he will do

likewise in future years.

Ideally, providers’ interests would be

aligned with those of the taxpayer if, in

respect of each cohort of benefit claimants

for which they were given responsibility,

the providers were rewarded for reducing

the benefits this cohort claimed in each

future year by being paid a share of those

benefit savings. The providers would use

their share of benefit savings to meet the

costs they incur in getting and keeping

people off benefits – any surplus representing

their profit for doing so effectively.

One way to establish a fair and competitive

level for the share of benefit savings needing

to accrue to the provider would be to

invite them to bid in terms of the amount

they would require to undertake the task.

To assess how much the cost of benefits

had been reduced by the provider’s efforts

would require a reliable forecast of what

the benefits incurred by that cohort would

have been in each future year without the

provision of a welfare-to-work programme.

Such forecasts can be made. Experience

shows what proportion of a given cohort

typically leave benefits each year and how

many subsequently return and for how

long.

Paying for Success

10

For example, for a given cohort of new

Incapacity Benefit claimants about 25%

leave within three months; by six months

some 42% have left; by nine months 52%

have left and by the end of the first year it

is about 58%. The pace then slows and by

the end of the second year the original

number of claimants has fallen by some

67%. So a provider would only be remunerated

in any period to the extent he had

reduced the welfare rolls below the projected

base level for that period. This would

eliminate the ‘deadweight loss’ problem.

Logically, the provider should be

responsible

indefinitely for each cohort of

individual claimants assigned to him. He

would then have an incentive to identify

potential long term claimants and help

them into work early, even if that requires

disproportionate resources, since he will

then be remunerated in respect of every

future year they are not claiming benefit.

Thus there would be no incentive for

‘parking’ the hard to place. On the contrary,

providers would have an incentive to

identify those who, without help, would

probably spend the longest time on benefit

and focus his efforts on them because if he

can reduce the number of long term

claimants he will be rewarded annually.

Moreover, the provider would only be

remunerated in respect of additional

claimants helped into work for as long as

they remain in work. The provider would

not have any incentive to focus on the easy

to place unless he could accelerate their

return to work relative to what they would

have achieved without extra help. And he

would only do so as long as the cost did

not exceed his promised share of benefit

savings. So there would be no incentive for

‘creaming’.

I emphasise that this is the theoretically

optimal system of remunerating providers.

It has not been adopted in full in any of

the countries studied. Wisconsin Works

has come nearest to it, with remuneration

for welfare-to-work providers based on

savings relative to welfare spending plus

administration costs in the pre-contract

period.

One reason this model is likely to

remain a purely theoretical ideal is that it

implies indefinite responsibility for each

cohort of claimants allocated to a provider.

That would require indefinitely long contracts

for a given cohort – which is unlikely

to be acceptable and would limit competition

and contestability. It would also

require the ability to forecast with confidence

the base level of benefit the long

stayers would be receiving were it not for

the extra welfare-to-work services provided

under the contract. That information

exists nationally on the basis of past experience

but may not be available for local

markets and specialist subgroups of

claimants who may be assigned to individual

contractors. The longer the contract

period the more it is likely to be affected by

changes in the economic environment

which can neither be predicted by the

Department nor influenced by the

provider. Also, once contracting out

becomes the norm there will no longer be

any information about what would have

happened in the contemporary economic

climate in the absence of welfare to work

programmes. So that too would make the

theoretical model unacceptable in practice.

Nonetheless, the model provides a useful

theoretical template against which actual

and proposed contract terms can be evaluated.

Interestingly, David Freud suggested

a three year contract period in respect of

each cohort of claimants. This is considerably

longer than applied elsewhere and

apparently twice as long as the Treasury is

prepared to consider. It would, however,

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• 11

Paying for success - the international experience of contracting out

The aim must be not just to get people into work but to

help them stay in work and preferably in rewarding jobs

give scope – subject to getting other contract

features right - greatly to reduce the

incentive to ‘cream’ and ‘park’ benefit

claimants. In addition, the problem of

‘deadweight losses’ would be reduced by

only allocating to a provider a cohort of

claimants who had already been on benefit

for, say, six or twelve months.

One reason the Treasury is reportedly

reluctant to envisage three year contracts is

that they tacitly assume that providers will

not be paid until the end of the contract

period and will therefore demand substantially

higher rewards. In fact, payment

related to the saving in benefits relative to

that expected in each period for each

cohort could result in payment to

providers as and when savings in benefits

actually accrue to the Treasury.

One point this ideal template highlights

is that remunerating providers simply on

the basis of the absolute number of

claimants helped into work in each period

can lead to distortions. It gives no incentive

to help them remain in work. Indeed,

Germany found that making the first payment

to the provider immediately after one

of their clients was placed in a job led to

fraud as well as ‘deadweight loss’. Still less

does it give providers any incentive even to

identify claimants who are likely to be

hardest to place – let alone to devote proportionately

more effort to prevent them

becoming long term unemployed and

eventually unemployable.

Identifying hard to place claimants early



The state may have to identify the

hardest to place individuals if private

contractors do not have a positive

incentive to do so. However, for all parties

it is hard to identify such people.

If the provider of welfare-to-work services

does not have an incentive to identify

those likely to be hardest to place, the

DWP or its prime contractor will have to

undertake this. It will need to establish a

triage system to categorise claimants from

the beginning by the degree of help they

are likely to need and assign rewards and

resources for helping them into work correspondingly.

Unfortunately, it is not easy to identify

those likely to be hard to place. Attempts

to find criteria which correlate with the

effort needed to help any individual into

work have not been very successful. Even a

past benefit record is only a partial guide –

partly because a majority of all claimants of

JSA, for example, have been previous

recipients. The fact that any individual is

particularly difficult to place often only

becomes clear with the passage of time

after the basic interventions have failed.

Yet we know that the longer people spend

out of work the harder it becomes for them

to get a job. So the earlier the intervention,

the better.

Developing a triage system with criteria

which accurately identify hard to place

individuals early on should be a high priority.

The methods used in Australia to classify

claimants and in the Netherlands to

relate support packages to individuals may

be valuable in developing such a system.

Some categories of jobless people are

self evidently more likely to be hard to

integrate into employment than others –

particularly drug and alcohol abusers, exprisoners,

those with serious mental

problems or learning difficulties. They

will also probably need specialist help

and may well need to be assigned to specialist

organisations, appropriately remunerated

for the more intensive effort

needed to help them into work. It may

well be that other categories are also

identifiable and could usefully be

assigned to a specialist provider – those

unable to read or write or lacking numeracy,

for example.

Acquiring skills in negotiating contracts



Negotiating contracts that give private

providers appropriate incentives can be

Paying for Success

12

difficult. To get the right outcomes,

the state needs to be shrewd and may

need to bring in negotiating skills from

outside when it draws up such agreements.

A key feature of the contracting out of welfare

to work – as Denmark established as

early as 1992 – is that it requires a split

between purchaser and provider. The purchaser/

provider split has been found to be

beneficial in other areas of public services.

It focuses attention on defining the objective

of the service. And it prevents decisions

being dominated by the vested interests

of the provider.

However, it raises a central issue which

every country has faced in trying to contract

out their welfare-to-work system

based on payment by results: how to negotiate

contracts which provide appropriate

incentives with the right choice of organisations

to take on the task of helping people

get into work.

As the UK goes down this route we will

need to be clear about our objectives. The

aim must be not just to get people into

work but to help them stay in work and

preferably in rewarding jobs. Remuneration

should reflect and incentivise that. At the

same time the contract must encourage

suppliers to focus on helping the hardest

to place back into work while avoiding

paying for those who would have got jobs

anyway. Ideally contracts should allow

suppliers time to build up expertise (particularly

at the start of the process) in the

art of helping people into work. Yet it is

also desirable that suppliers face challenges

from new entrants and from other suppliers

who prove more successful. The ultimate

aim is to ensure the services provided

are best suited to the needs of those

who are being helped into work – which

may differ between different categories

like the long-term unemployed, older

workers, those with different incapacities -

as well as between individuals. That may

require specialist organisations contracted

to focus on specific groups. Voluntary and

other organisations with such skills may

exist in some locations but need to be

built up from scratch in others. In theory,

at least, claimants are the ‘clients’ and

should be able to choose between

providers thereby exercising consumer

pressure on them.

Devising and negotiating contracts

which appropriately incentivise a suitable

array of suppliers through remuneration

terms, duration, degree of monopoly, geographical

extent and scope of specialisation

is a highly complex task. It requires

skills that government Departments rarely

possess and will need either to master or

delegate to others – most likely through a

appointing a prime contractor. It will be

necessary to harness a large number of

providers working in collaboration. But

as the Wisconsin study suggests it is

important that there is a lead contractor

who can decide who does what. Relying

on a partnership of equals can result in

paralysis.

Giving claimants a choice of provider, though

desirable, may not be worth pursuing



Choice is important, but experience in

some countries suggests that benefit

recipients do not pick and choose

between welfare to work providers as

much as scheme designers would like.

The idea of allowing claimants to choose

between alternative providers is attractive

in theory. It should put pressure on

providers to offer jobless people the services

they want in ways they find most accessible.

And it should make it more likely

that jobless people are matched to

providers offering the approaches best suited

to their needs. But Australian experience

suggests that these theoretical attractions

do not emerge in practice. Most

claimants failed to choose and had to be

assigned to a provider. The Danes and

www.policyexchange.org.uk

• 13

Paying for success - the international experience of contracting out

Germans also found that in practice few

claimants exercised choice. The Australian

authorities attribute this to the fact that

benefit claimants are often people who are

least used to exercising choice. It may also

be that choice is most effective where people

have to repeat the decision process – as

when we buy necessities. But choice is least

effective where, as in this case, the user is

making a one off choice between providers

with no previous experience of any of them

to draw upon.

So it would probably be unwise to rely

too heavily on claimant choice to force

providers to compete to offer ever improving

services to jobless people. If choice can

only be provided by artificially creating

alternative suppliers, who may be suboptimal

in size, it is probably not worth the

candle.

On the other hand the Dutch experience

of providing each claimant with a personally

tailored and transferable work plan

may well be worthwhile studying.

Successful outcomes, rather than a prescribing

process, should drive up quality



Rating systems can reinforce payment

by results to ensure desired outcomes.

The Australians, finding claimant choice

to be ineffectual, have developed a star rating

system to drive up quality. This may

have a degree of merit. But the overriding

incentive to succeed should be provided by

the system of payment by results.

Conditionality is key to success



The conditions and sanctions faced by

benefit recipients are central to their

participation in back-to-work schemes.

The success of contracting out and payment

by results ultimately rests on making

benefits conditional on engagement

with work. The conditions and sanctions

regimes are crucial – though the subject

of future Policy Exchange study rather

than these papers. The rigour with which

conditions and sanctions are enforced will

markedly affect providers’ success in getting

people back to work. If those powers

were given to the provider there could be

a severe temptation to exercise them too

vigorously. So it is important that

enforcement powers are exercised by a

separate body – in the UK the DWP

itself.

Conclusion

There can be little doubt in the light of

foreign experience that it is right to seek

to harness the profit motive to help people

from welfare to work. But it will meet

with resistance from those with vested

interests in the status quo. That includes

not only the public sector unions but

some of the welfare lobbies who are more

interested in seeking compensation for

their client group than helping people

leave it.

So implementing a successful programme

of contracting out will require

both courage and skill. But the intellectual

tide worldwide is moving in this direction.

The practical evidence suggests it can

hardly fail to be an improvement on the

status quo. And, above all, the needs of several

million of our most disadvantaged fellow

citizens demand that we harness the

powers of competition and incentive to

give them the opportunities from which

they have been excluded.

Paying for Success

14

2

The experience

of contracting

out employment

services in Australia

by Peter Saunders

Introduction:

Welfare reform in Australia

Over the last twenty years, the Australian

welfare system has been radically reshaped.

The reforms started under the Hawke and

Keating Labor governments, and gathered

pace with the election of John Howard’s

Liberal/National Coalition government in

1996. With the return of a Labor government

in November 2007, further reform is

likely, although the direction that this will

take is not yet clear.

The reforms of the last two decades have

affected both the payment of benefits,

where claimants have increasingly been

required to undertake some prescribed

activity in return for income support, and

the organisation of employment services for

jobless people, where government has come

to rely on private and community sector

organisations to deliver key functions.

The changes to the benefits system are

not dramatic when compared with, say, the

US experience, but they are significant.

Activity requirements were initially applied

to young, unemployed claimants, but they

have gradually been extended both to older

unemployed people and to sole parents

with children of school age. There have

also been changes to the definition of

‘incapacity’ in an attempt to limit the

growth of Disability Support Pension

numbers. Nevertheless, most working-age

Australians drawing income support are

still not expected to perform any activity in

return for their benefit, and total spending

on income support has continued to rise.

About one in seven working-age

Australians is wholly or mainly dependent

on welfare, even though the economy has

been booming and jobs appear plentiful.

1

The privatisation of employment services

was a more dramatic change, for when the

old Commonwealth Employment Service

(CES) was shut down and replaced by a new

purchaser-provider model in 1998, Australia

went down a path that no other country had

explored. This system has now been in operation

for almost ten years and has attracted

growing attention around the world.

The origins of contracting out

The welfare reform process started in 1988

when a voluntary training, job placement

and child care service (JET) was introduced

for single parents seeking to return

to the labour market. At the same time, a

new unemployment benefit, called

Newstart Allowance, was introduced and

the long-term unemployed were for the

first time required to participate in

‘Intensive Assistance’ in return for their

payment.

2

1 Saunders P, “What are Low

Ability Workers to do When

Unskilled Jobs Disappear?’

Issue Analysis (Centre for

Independent Studies)

, no 91,

December 2007

2 Intensive Assistance offered

personalised support to help

claimants get back into work.

Following assessment of skills

and job capability, it aimed to

improve employability through

tailored education and training.

www.policyexchange.org.uk

• 15

These innovations were followed in 1994

by the

Working Nation program, the core of

which was a ‘Job Compact’ which guaranteed

claimants who had been out of work for

18 months or more a job placement for 6 to

12 months, backed up by training as appropriate.

To deliver this, the government

enlisted the help of a variety of non-government

agencies. The CES remained responsible

for finding unemployed people jobs (the

‘job matching’ function), but management

of labour market programs was shared

between the CES agency, ‘Employment

Assistance Australia’, and a variety of specialist

voluntary and commercial agencies

judged to have expertise in handling people

with special difficulties. Contracts were

awarded by fixed-price tender, and by 1996-

97, 20%of cases had been contracted to private

firms and 25% were being handled by

community sector agencies, with the

remaining 55% still managed by CES or

other public sector agencies such as further

education colleges.

3

The new Liberal/National Coalition government

that came to power in 1996

scrapped Labor’s

Working Nation program

on the grounds that it was expensive and

largely ineffective in getting people permanent

jobs. In its place, it introduced a policy

of ‘mutual obligation’ which required that

young unemployed people should undertake

a recognised activity in return for their payments.

Over time, this mutual obligation

policy has been extended. Although nearly

two million people (almost one-fifth of the

working age population) are still drawing

welfare benefits of one kind or another, and

the welfare dependency rate among working-

age adults is as high as it has ever been.

What was not scrapped, however, was

Labor’s policy of contracting out employment

services. Indeed, within a year of

coming to office, the new government shut

down the Commonwealth Employment

Service altogether and replaced it with a

completely new system based on the purchaser-

provider model.

The new employment services system:

Centrelink and the Job Network

From 1946 to 1998, the federal government’s

employment service, the CES, was

responsible for assessment of job seekers,

employment assistance, management of

labour market programs, and monitoring

compliance with activity requirements.

4 But

in the 1996-97 Budget, the government

announced that CES was to be closed and

replaced by a single statutory authority,

called Centrelink, working with several

hundred non-governmental employment

agencies, organized as a ‘Job Network’ (JN).

Centrelink was conceived as the ‘gateway’

for unemployed people seeking

labour market assistance. Operating under

a Business Partnership Agreement with the

Department of Employment and Workplace

Relations (DEWR), its role included:

determining eligibility of job seekers

for Job Network services;

providing information to job seekers

about Job Network services;

registering job seekers;

assessing the job seeker’s relative labour

market disadvantage;

referring job seekers to Job Network

providers; and

administering job seeker participation

and compliance requirements.

5

Under this system, Centrelink is the first

point of entry for anyone seeking unemployment

assistance. At its 321 Customer

Service Centres, job seekers are assessed,

registered and then referred on to a JN

service provider. The original idea was

that, once assessed, clients would choose

their own JN provider, but most do not in

fact do this and are instead allocated

through an automated referral system.

6

All other employment services were contracted

out to JN agencies. These represented

a mixture of for-profit and not-forprofit

(charitable, religious and community)

service providers, many of which

3 Eardley T, “Outsourcing

Employment Services: What

have we learned from the Job

Network?” Paper to Centre for

Applied Economic Research

conference on the Economic

and Social Impacts of

Outsourcing, University of New

South Wales, pp 6, 4-5

December 2003

4 Wong P, “Reward for effort:

Meeting the participation challenge”,

Australian Labor Party

Discussion Paper,

November

2006

5 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

6 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, June

2002

16

Paying for success

7 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

, Centre

for Labour Market Research

Discussion paper, no 3, pp 6,

2003

8 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

, Centre

for Labour Market Research

Discussion paper, no 3, 2003

9 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

The experience of contracting out employment services in Australia

www.policyexchange.org.uk

• 17

already had some experience of running

labour market programs under previous

Working Nation

contracts. 7

The employment assistance agency formerly

run by CES (Employment Assistance

Australia) was turned into a commercial

company in which government owned

100% of the shares, and it joined the Job

Network under its new name of

Employment National. At the first round of

tenders (Employment Service Contract 1, or

ESC1), Employment National won a 37%

market share,making it the biggest single JN

service provider, but its share declined

sharply to just 8% in ESC2, and in 2003, at

the end of the ESC2 contract period, the

company was wound up when the federal

government failed to find a buyer.

8

JN service providers are answerable to

DEWR, although their customers are

referred to them by Centrelink (see Figure

1). They were given responsibility for three

core functions which had previously been

the responsibility of the CES: Job

Matching (i.e. finding vacancies for unemployed

people to fill), Job Search Training

(a total of 15 days training in writing

application letters, compiling CVs, and

interview techniques), and Intensive

Assistance, which is aimed at those who

have been out of work for an extended

period or are deemed to be at risk of longterm

unemployment. JN providers also

manage some minor programs, like the

New Enterprise Incentive Scheme (to help

job seekers set up businesses) and Harvest

labour services (organising vacancies for

seasonal farm work), and they are required

to monitor job seeker compliance with

activity requirements and to inform

Centrelink of any breaches.

JN members enjoy flexibility in the services

they provide and how they do it.

Some specialize (e.g. by providing services

for those with disabilities or for Indigenous

job seekers), although unemployed people

with special needs, such as those with mental

health or substance abuse problems, are

referred to the Personal Support Program

which operates outside the Job Network.

The relationship between DEWR (the

purchaser), job seekers (the clients) and

Centrelink combined with the JN agencies

(the providers) is set out in Figure 1.

From the outset, the idea was that JN

members should compete for referrals and

be paid by results (‘outcomes’). Fees-forservice

were paid by DEWR when a job

seeker was taken on by a JN provider, and

outcome payments were added when

Contracts

Job seekers services

Business Partnership Arrangement

Job seeker services

DEWR

JOB

NETWORK

MEMBERS

CENTRELINK

JOB

SEEKERS

CLIENT PROVIDER PURCHASER

Figure 1: The new purchaser-provider model for delivery of

employment services

9

10 Strictly speaking it is not a

‘Work First’ strategy, for clients

are registered for unemployment

allowances by Centrelink and

are then referred to a JN

provider to find them work. This

contrasts with the US ‘Work

First’ approach where the

emphasis is on finding clients a

job before they register for benefits

(see Mead L,

Government

Matters

, Princeton University

Press, 2004). Nevertheless,

compared with the previous system,

the new arrangements

undoubtedly emphasise job

placement as the primary outcome.

11 ‘New job network to replace

the CES’, media release, 26

February 1998.

12 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, table 1 pp 8, 2003

13 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, June

2002

18

Paying for success

clients were successfully placed in a job (a

lower outcome fee is payable if they complete

an education or training course). This

structure of fees and outcome payments has

been revised over time as DEWR’s policy

priorities have shifted between rewarding

rapid placements of job-ready clients and

encouraging long-lasting placements of disadvantaged

job seekers. But the key measure

of success has always been placement of

unemployed people in work (a so-called

‘Work First’ strategy).

10 The more successful

a JN provider is in getting unemployed

people back into work, the more DEWR

pays them, and the more likely they are to

have their contracts renewed at the next

round of bidding.

The aim of the reform was simple. It

was hoped that an incentivised system

would result in more unemployed people

getting jobs more quickly, and in cost savings

(efficiency gains) accruing to the government.

As the relevant Minister, David

Kemp, explained at the launch of the JN in

1998: ‘An overhaul of employment services

was needed because the old system

under the CES didn’t get enough people

into jobs. It tended to ‘manage’ unemployed

people rather than place them in

jobs. Job Network focuses on results. Job

Network members will be paid when they

place a job seeker in a job for a sustained

period of time.’

11

Job Network contracts

The first round of competitive tendering

for JN contracts took place in mid-1997.

Over 1,000 organisations submitted a total

of 5,300 tenders for $1.7 billion worth of

contracts. DEWR vetted all tenders on

quality and those that met the required

standard were then ranked by price.

Agencies submitting tenders could decide

which of the three core service functions

they wished to provide (it was not a

requirement that all agencies offer

Intensive Assistance as well as Job

Matching and Job Search Training), and

some bidders offered specialized services

aimed at certain kinds of clients.

Contracts were awarded to the agencies

promising to deliver the required services

at the lowest price.

Contracts were awarded to 223 successful

bidders (a slight drop compared with

the 243 agencies involved in contracting

Intensive Assistance services under

Working Nation

). 12 Half of these were private

(for-profit) contractors, 44% were

community sector organizations, and the

remaining 6% were government agencies

(including Employment National, which

ended up with a 37% market share). 79%

of successful bidders at ESC1 had previously

held government contracts for managing

and administering labour market

programs under the old

Working Nation

model.

13

Following an early DEWR evaluation of

how the JN was operating, a second round

of contract tenders (ESC2) took place in

mid-1999 when all first-round contracts

expired. The Department was concerned

that some service providers were neglecting

the most difficult of their three core functions

– Intensive Assistance to prepare the

most disadvantaged job seekers to return to

employment – and were instead making

easy money finding rapid placements for

job seekers who would probably have

found jobs anyway if left to themselves. To

counter this, ESC2 contracts required

providers to agree an individual ‘Preparing

for Work’ plan for anyone who had been

unemployed for 13 weeks. This would

identify any barriers to employment and

put in place a strategy for overcoming

them. Some observers thought this sig-

It was hoped that an incentivised system would result

in more unemployed people getting jobs more quickly

nalled a move back towards an emphasis

on training and labour market subsidies

which had been scrapped when

Working

Nation

was abolished. 14

At ESC2, the original 29 Job Network

regions were reduced to 19 in an attempt

to make contracts more financially viable.

15

These regions were then divided into a

total of 137 Employment Service Areas

(ESAs) so bidders could target their services

at particular populations (e.g. Indigenous

people in remote areas). ESAs covered

between 100 and 18,000 job seekers,

but most catered for between 4,000 and

6,000. DEWR wanted to recruit two or

three competing providers in each ESA,

but in some remote areas, no bids were

received, and agency arrangements had to

be negotiated outside the JN bidding

process.

In the end, 168 bidders (including the

government-owned Employment National)

were given contracts worth $3 billion at

ESC2.

16 The decline in the number of JN

providers as compared with ESC1 was

mainly due to the withdrawal of agencies

offering only Job Matching and Job Search

Training, for 80% of JN expenditure went

on Intensive Assistance, and without this

money, most providers found participation

in the Job Network was not financially

worthwhile (by the time of ESC3, held

in 2003, every JN provider was required

to offer Intensive Assistance).

17 But

although the number of different providers

fell, the number of sites at which they

operated rose to 2,010 (a 54% increase

over ESC1). The Job Network was therefore

expanding at the same time as it was

concentrating.

Incumbency proved a strong advantage

when it came to getting a contract at this

second round of bidding, for 87% of

ESC1 contractors succeeded at ESC2.

The market share achieved by not-forprofit

community groups increased from

30% to 45%, and for-profit companies

increased their share from 33% to 47%.

These gains were made at the expense of

Employment National whose share fell

from 37% to 8%.

Incumbency proved even more important

at the third round of contracts (ESC3)

in 2003, for sixty per cent of business was

now reserved for existing high performers.

These were identified by ‘star ratings’ based

on DEWR’s estimation of the value added

by each JN member over the previous two

years. To measure ‘value added’, DEWR

applied a complex formula that took

account of the characteristics of clientele

and of the local labour market as well as

raw job outcomes data. Star ratings had

been designed to help job seekers select the

best provider, but as we saw earlier, few of

them make an active choice. But the ratings

system also fulfils a second key function

by allowing DEWR to assess the quality

of different JN providers when their

contracts come up for review. With the

abandonment of price competition from

2003 onwards (see below), these quality

ratings have become vital in securing

future contracts.

At ESC3, the 86 best performing JN

members were ‘invited to treat’, and 74 of

them took up the offer. Only 40% of business

was put out to open tender, and in the

event, most of this was mopped up by

existing JN members. Only seven new

providers joined the Job Network in 2003,

and they won just 1.5% of the market

(four existing providers who had not been

invited to treat also won contracts in the

open competition).

In all, 2,100 bids were received in

2003, an average of 15 in each ESA, and

109 organisations eventually won contracts.

18

As in the previous contract

rounds, therefore, the number of agencies

shrank, and so this time did the number

of JN offices (down to 986 sites, with 110

offering specialist services such as those

for Indigenous job seekers). This reduction

in the number of JN outlets was,

however, balanced by the licensing of 266

14 Eardley T, “Outsourcing

Employment Services: What

have we learned from the Job

Network?” Paper to Centre for

Applied Economic Research

conference on the Economic

and Social Impacts of

Outsourcing, University of New

South Wales, pp 6, 4-5

December 2003

15 The larger number of labour

market regions and providers in

ESC1 was intended to promote

competition, but was reduced to

improve the economic viability of

providers (Productivity

Commission, “Independent

Review of the Job Network”,

report no 21, pp 4.8–4.9, June

2002).

16 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, 2003

17 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, June

2002

18 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, 2003

The experience of contracting out employment services in Australia

www.policyexchange.org.uk

• 19

19 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

20 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, 2003

21 Department of Employment

and Workplace Relations,

Job

Network Employment Services

Contract 2003-2006

, March

2003

22 Full details of 2006-09 Job

Network contracts can be found

at:

http://www.workplace.gov.au/wo

rkplace/Publications/Purchasing/

PreviousTenders/Employmentan

drelatedservicesguidelinesandagreements2006-

2009.htm

23 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp xxii,

June 2002

24 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, table

6.1, June 2002

25 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp 6.23-

6.25, June 2002

20

Paying for success

organisations offering only

Job Matching

services (see below for details). These new

licensed agencies share information on

vacancies and job seekers with the 109

full JN members, so the total capacity of

the job matching system was expanded

substantially. According to a National

Audit Office report in 2005, 250 localities

now have an employment office

where there was not one previous to

1998.

19

ESC3 continued the trend towards

market concentration. Existing providers

consolidated their position and got bigger

while outsiders found it increasingly difficult

to break in. After 2003, the top five

JN providers had 39% of market share,

and the top ten had 55%. The average

market share for those outside the top ten

was 0.5%.

20 The two largest JN members

were both community organizations: the

Salvation Army (with a 15% market

share) and Mission Australia (8%).

21 Notfor-

profit providers between them

accounted for 54% of Job Network members

(with a 50% market share), while

commercial providers made up 43% (with

a 47% market share). Following the closure

of Employment National, the public

sector shrank to just 3% (with 3% market

share).

A fourth round of contract tendering

was scheduled for 2006, but it never took

place. When ESC3 expired in 2006, all

existing contracts were extended for three

more years, except where performance

(measured by star ratings) was deemed

unsatisfactory.

This trimmed the number of JN members

from 109 to 103. Rolling local area

tenders have now been introduced so

poor performers can be replaced

throughout the extended contract period

at six monthly reviews. It is unclear

whether these arrangements will now

become permanent, or if another round

of open tendering will take place in 2009

when the current extension period ends.

22

Learning by experience

By the time the third round (ESC3) of

contracts took place in 2003, substantial

changes had been introduced into the

organization and management of the Job

Network. These followed the publication

in 2002 of an independent review by the

Productivity Commission (PC), a statutory

authority charged with analyzing and

evaluating the delivery of government services.

The PC review found that the ‘new

framework has many advantages and

should be retained.’

23 It thought the purchaser-

provider model made the objectives

of employment services providers clearer

(by setting out contractual requirements in

tender documents), and that incentives for

achieving these objectives had been

strengthened. There had also been cost

efficiency gains. The new system was

cheaper than earlier programs (like

Working Nation

), and it gets more

favourable feedback from job seekers (e.g.

a 1999 survey recorded a ‘strongly positive

view overall by job seekers about the JN’).

24

Employer satisfaction too was running

quite high (on balance, employers preferred

the new system to the old CES),

25

although only 20% of employers in 1999

had actually used the Job Network to

recruit labour. The PC also forecast that

outcomes would improve over time as poor

performers lost their contracts. It quoted

evidence that the best JN performers were

achieving outcome rates 12 percentage

points higher than the average. The star

ratings system meant they would increase

their market share over time, thereby driving

up the average level of performance of

the network as a whole.

Not everything was positive, however.

There was still a problem of ‘perverse

incentives’ with hard cases being ‘parked’

on benefits while agencies focused their

efforts on easier-to-place clients in order to

maximize outcome payments. There were

also substantial ‘deadweight costs’ since

26 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp xxviii,

June 2002

27 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp 5.20,

June 2002

28 Star ratings are issued every 6

months (at each ‘contract milestone’)

on a rolling 2 year basis.

70% of providers score 3 stars or

better (5% get 5 stars, 4% get 1

star, indicating ‘room for improvement’

(Department of Employment

and Workplace Relations,

Job

Network Star Ratings

, Australian

Government July 2007). Stars are

awarded based on job placement

and outcome data. Where there

are significant divergences in

stars awarded to different providers

within a single Employment

Services Area, business is redirected

from weak to stronger performers.

29 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp xxxiv,

June 2002

30 In 2007, initial job placements

attracted a fee of $165 - $385

(depending on duration of previous

unemployment). Intensive

Assistance recipients placed in

jobs lasting 13 weeks pay $550 -

$4,400, and in jobs lasting 26

weeks (a ‘final outcome’) they

attract an additional fee of $825 -

$2,200 (again depending on their

prior length of unemployment).

Where IA people are placed in

jobs which reduce but don’t terminate

their welfare benefits, fee

paid = $550 - $1,100. See

Department of Employment and

Workplace Relations, Job

Network Star Ratings, Australian

Government, pp 5, July 2007.

31 Senate Community Affairs

Committee,

A Hand Up, Not a

Hand Out

, Commonwealth of

Australia, pp 67, 2004

The experience of contracting out employment services in Australia

www.policyexchange.org.uk

• 21

many of the successful ‘outcomes’ achieved

by JN members would, in the view of the

PC, have occurred even without the intervention

of JN providers.

Nor was the PC impressed by the JN’s

record in getting unemployed people back

into work through Intensive Assistance

programs. The report accepted that active

labour market programs around the world

generally achieve little success, and that

Working Nation

had achieved little in this

regard either. Nevertheless, it concluded

that Australia’s new employment services

system was not having the impact that had

been hoped: ‘Job Network programs have

so far probably only had modest effects on

job seekers’ chances of gaining employment.’

26

It also took issue with DEWR’s

claim in its own second stage evaluation of

the JN that Intensive Assistance programs

were achieving a 10% net impact on

unemployment of participants. According

to the Productivity Commission, this estimate

was ‘significantly overstated’.

27

In the light of these problems, several

key changes were implemented in the

organization of the Job Network in time

for the third contract round (ESC3).

First, price competition was abandoned

as DEWR returned to the fixed price tenders

which had operated under

Working

Nation

. This change implicitly recognized

that some providers had been winning

contracts with low tenders, but had then

been maximizing their outcome payments

by focusing their efforts on job-ready customers

(who actually needed little assistance)

while neglecting the harder cases.

In 2003, the Department specified in

detail the services it wanted to buy, and it

fixed the price for each service, choosing

among tenders according to its judgement

of the quality of the service each agency

could provide. This, of course, favoured

existing providers who had already established

reputations and enjoyed strong star

ratings. Indeed, we have seen that the best

performers were issued with invitations to

treat and did not even have to subject

themselves to the competitive tender

process.

28

Secondly, fees-for-service and outcome

payments were re-weighted to offer higher

returns for sustained outcomes achieved by

long-term unemployed job seekers.

Commencement fees (paid when job seekers

were referred to a JN member) were

scrapped. Instead, JN providers are now

paid a fee when they accept someone onto

Intensive (and Customised) Assistance. If

the client is subsequently placed in a job

for at least 13 weeks, they get an ‘interim

primary outcome’ payment (a ‘full primary

outcome’ payment is made after 26 weeks,

and smaller ‘secondary outcome’ payments

are made when they place clients in education

courses or in part-time jobs where

they still draw some welfare benefits).

In ESC2, only 15% of commencements

resulted in a job lasting 13 weeks, and

another 8% resulted in an ‘interim secondary

outcome.’ Most (about 70%) of the

income of JN members therefore came

from non-outcome-based commencement

fees.

29 Since 2003, however, this balance

between fees and outcome payments has

shifted, and the rewards for work with

long-term unemployed clients have been

boosted.

30 Under ESC3, someone unemployed

for 3 years who gets a job lasting 26

weeks would earn his or her JN provider a

$6,600 outcome payment, which compares

with an average of $4,500 earned

over the previous 3 years in fee for service

and other (Job Seeker Account) payments.

31

As a result of this restructuring of fees and

payments, the balance of income between

JN providers are now paid a fee when they accept

someone onto Intensive Assistance... If the client is

subsequently placed in a job for at least 13 weeks,

they get an ‘interim primary outcome’ payment

fees and outcome payments seems to have

shifted (one of the leading non-profit

providers, CentaCare, operated by Catholic

Social Services, reports, for example, that

47% of its revenue in 2006 came from

placements and outcomes).

32 Fees paid in

respect of ‘Customised Assistance’ (offered

when claimants have been unemployed for

12 months) were also increased (in 2003-

04, 48% of all service fees were paid in

respect of customized assistance).

33

A third change made in 2003 was the

introduction of Job Seeker Accounts.

These consist of money set aside by

DEWR to cover expenditure incurred by

JN providers on behalf of their clients in

helping them get work. These accounts are

intended to cover things like purchase of

work clothing or equipment, payment of

travel costs, course fees or payment of subsidies

to employers (which again looks very

much like a return to the days of

Working

Nation

). This initiative was designed to

encourage JN members to put extra effort

into finding work for their toughest cases,

but we shall see later that it has generated

new problems, with JN members complaining

about the detailed level of scrutiny

their claims receive from DEWR, and

some suggesting that their rivals are ‘buying

jobs’ by blowing large sums on shortterm

employer subsidies.

Fourthly, to meet continuing concerns

about poor service quality, ESC3 introduced

an Employment Services Code of

Practice and built a Job Network Service

Guarantee into the Employment Services

Contract: ‘The Code and Service Guarantee

require that JNMs deliver a guaranteed set

of services in accordance with specified

principles and processes in a manner that is

sensitive to the job seeker's culture, circumstances

and background.’

34 For example,

the third Employment Services Contract

stipulated that Job Network members

should contact and meet face-to-face with

each job seeker once every fortnight during

their first period of

Customised Assistance .

This meant a total of twelve service contacts

were required in the course of a sixmonth

period of Customised Assistance.

Breach of this contractual requirement

could result in a provider losing star ratings,

and therefore being disadvantaged at

any later period of contract renewal.

However, stipulations like this can only set

a quality baseline (there is no incentive to

exceed the minimum quality standards),

and they depend on a high level of surveillance

to see if they are being followed.

A fifth change saw the introduction of

licensing for job matching agencies wishing

to link to the Job Network. ESC3

contracts for the first time required all JN

members to offer Customised Assistance.

The exclusion of agencies offering only

job matching functions was compensated

by these new licensing agreements under

which

Job Placement Only organisations

were given access to the government’s new

JobSearch database listing around 90,000

vacancies, and were paid a fee of up to

$550 if they succeeded in placing a job

seeker in work. In return, these organizations

were required to list all their nonexecutive

vacancies on the database, for

other providers to share. At the inception

of this scheme in 2003, 375 licenses were

awarded (including 109 to JN members).

35

The Active Participation Model

All these changes in 2003 were important,

but the most significant of all was the

adoption of an integrated ‘Active

Participation Model’ for managing job

seekers. This was key to the new rule that

32 Excluding payments for Job

Seeker Accounts – see Murray P,

“A Job Network for Job

Seekers”,

Catholic Social

Services Discussion Paper

, pp

25, November 2006

33 DEWR estimates that service

fees of $250 million were paid in

2003–04 for provision of

Intensive Assistance (customized

assistance), and that

this represented 48 per cent of

total service fees, quarterly payments

and one-off payments

(excluding outcome payments)

to JN members in that financial

year. Outcome payments for

intensive support job seekers

commencing and remaining in

employment or education for

periods of at least 13 or 26

weeks duration totaled a further

$171 million (Australian National

Audit Office, “DEWR’s Oversight

of Job Network Services to Job

Seekers”,

Audit Report , no 51,

pp 127, 2005)

34 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

pp 54, 2005

35 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, 2003; Wong P, “Reward for

effort: Meeting the participation

challenge”, Australian Labor

Party Discussion Paper,

November 2006

22

Paying for success

If they are still jobless after six months, FJNE job

seekers under the age 50 are required to participate in

a six-month

Work for the Dole project

job seekers must remain with the same JN

member throughout any single unemployment

episode. This not only made it easier

to monitor their progress over time, but it

also meant a single plan for case management

could be devised which all JN members

would have to follow. In principle,

this meant it should no longer be possible

to ‘cream off ’ the easy cases while ‘parking’

the difficult ones.

36 It also meant JobSearch

and

Intensive Assistance could run together

in a continuum of increasing intensity as

time passes. This new ‘service delivery

continuum’ is outlined in Figure 2.

There are two main classes of job seekers

who can access JN services:

37 the ‘Fully

Job Network Eligible’ (FJNE), who are

registered as looking for work and who are

receiving income support (all job seekers

aged 15 to 20 and not in full-time education

or training are also included in this

category)

38 ; and ‘Job Search Support Only’

(JSSO) job seekers, who are looking for

work but are not FJNE (this second category

might include, for example, single

parents with pre-school age children or

Disability Support Pensioners who are

seeking employment even though they are

not required to work).

39 Individuals in

both categories are eligible to receive

JobSearch Support services, which means

they get access to the Australian JobSearch

national vacancy database, where their CV

or ‘vocational profile’ is automatically

matched with available vacancies on a daily

basis. But only FJNE job seekers qualify

for the additional services offered in the

Active Participation Model

.

If an FJNE job seeker remains unemployed

after three months, they move into

Intensive Support.

This begins with a period of Job Search

Training that includes help with writing

job applications, interview skills, and confidence

building. Job search support continues

during this period, so clients continue

to search actively for employment.

If they are still jobless after six months,

FJNE job seekers under the age 50 are

required to participate in a six-month

Work for the Dole

project (or other Mutual

Obligation activity). Participation (which

normally takes up two days per week) is a

condition of continuing to receive income

support payments.

If they are still unemployed after 12

months, job seekers move into Intensive

Support customised assistance (ISca). ISca

is a six-month period when job seekers

receive substantial, intensive and person-

36 The CEO of Job Futures

noted at a recent conference

that keeping job seekers with

the same provider throughout

means providers have to pay

more attention to difficult cases

rather than just parking them.

Under ESC3 ‘providers who do

not successfully achieve this

goal not only find it difficult to

remain financially viable but also

find it increasingly difficult to

keep their service provision contract

with DEWTR’ (Dudley S,

Not Just Any Job

, Paper to

Australian Social Policy

Conference, University of New

South Wales, pp 3, July 2005).

37 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

38 FJNE Job seekers do not

receive income support until

they have attended their first

meeting with their Job Network

provider.

39 Since 2005, all DSP and PP

claimants have been allowed to

volunteer for JN services and

register directly with a JN

provider if they want to.

40 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

The experience of contracting out employment services in Australia

www.policyexchange.org.uk

• 23

Job Search

Training

Mutual Obligation Customised

Assistance

Job Search Support Intensive Support

Referral from

Centrelink

Month 1 Month 3 Month 6 Month 12

Service delivery continuum

Figure 2: Stages in the Active Participation Model

40

Source: ANO

Note: Job seekers who are the most disadvantaged in the labour market receive immediate access to ISca

alised assistance. It is tailored to individual

needs and includes training, work experience

in a subsidized placement, or referral

to a language or literacy and numeracy

training program. At this stage, JN

providers may also draw on the Jobseekers

Account for funds to support these various

activities.

Job seekers who are identified by

Centrelink as most disadvantaged skip the

first 12 months of this continuum and

move straight into ISca.

In the year ending June 2005, 144,300

job seekers participated in JobSearch

Training, 298,900 had Customised

Assistance, and 148,000 did a Mutual

Obligation activity, of whom 81,900 did a

Work for the Dole placement.

41

More employment outcomes at

less cost?

Not even the critics of the JN reform deny

that it has succeeded in one of its key

objectives - to reduce costs. DEWR’s 2001

Net Impact Study claimed that the JN

Intensive Assistance program had achieved

better net job outcomes (i.e. after factoring

out cases where people would have

achieved employment even without assistance)

compared with

Working Nation , but

this claim was later challenged by the

Productivity Commission, among others.

What was not challenged, however, was

the claim that the system was delivering

outcomes more cheaply than the

Working

Nation

program that preceded it.

According to DEWR, each person

placed in a job was costing between

$5,000 and $6,000, compared with

$10,000 to $16,000 under the previous

arrangements.

42 Each net employment

outcome from Intensive Assistance programs

was on average costing $22,000

using the JN, compared with $35,100

under the old system.

43 The methodology

used to calculate net outcomes may have

been suspect, but given that the same

methodology was applied to both the

‘before’ and ‘after’ data, the cost savings

were clearly real.

In its 2002 report, the Productivity

Commission noted that the aggregate cost

of labour market programs fell by half in

the first four years of the Job Network

(from $3.7bn to $1.3bn), and that this saving

was achieved with no apparent change

to unemployment levels.

44 Similarly, Tony

Eardley of the Social Policy Research

Centre accepts that, ‘The Network does

seem to have made efficiency gains compared

to earlier employment services in

terms of public expenditure,’ although he

immediately adds that the changes have led

to ‘only modest improvements, if at all, in

macro employment outcomes.’

45

DEWR continues to insist that the JN is

not only cheaper than its predecessor – it is

also delivering better employment outcomes.

For its 2005 Net Impact Study,

DEWR used a new methodology for estimating

net job impacts based on a complex

logistic regression modelling procedure

which it claimed was the one approved by

both the Productivity Commission and

OECD. This factored out compliance

effects (where jobseekers leave the welfare

system as soon as they are required to begin

some prescribed activity)

46 as well as deadweight

losses (people who would have

found work anyway) and substitution

effects (people who find a job but push

someone else into unemployment as a

result). And the results were impressive.

DEWR found that three months after

completing the relevant program, 55% of

those in JobSearch Training were in

employment, as were 46% of those who

did Customised Assistance and 32% of

those who did Work for the Dole.

47 Net

outcomes were calculated by comparing

these actual outcomes with those predicted

for people not having done these programs.

48

DEWR reported a positive 11%

net impact on employment outcomes for

those doing Job Search Training, a 10% net

41 Department of Employment

and Workplace Relations,

Customised Assistance, Job

Search Training, Work for the

Dole and Mutual Obligation – A

Net Impact Study, Department of

Employment and Workplace

Relations, report 1/2006, April

2006

42 Department of Employment

and Workplace Relations, Job

Network Evaluation Stage 3:

Effectiveness Report,

Department of Employment and

Workplace Relations, Report

1/2002, pp 4, 2002

43 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”, Audit Report , no 51,

2005

44 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp 5.24,

June 2002

45 Eardley T, “Outsourcing

Employment Services: What

have we learned from the Job

Network?” Paper to Centre for

Applied Economic Research

conference on the Economic

and Social Impacts of

Outsourcing, University of New

South Wales, pp 10-11, 4-5

December 2003,

46 Eardley T, “Outsourcing

Employment Services: What

have we learned from the Job

Network?” Paper to Centre for

Applied Economic Research

conference on the Economic

and Social Impacts of

Outsourcing, University of New

South Wales, pp 9, 4-5

December 2003. Suggests the

biggest portion of net impact

was compliance effect.

47 Department of Employment

and Workplace Relations,

Customised Assistance, Job

Search Training, Work for the

Dole and Mutual Obligation – A

Net Impact Study

, Department

of Employment and Workplace

Relations, report 1/2006, pp 7

table 1, April 2006

48 Department of Employment

and Workplace Relations,

Customised Assistance, Job

Search Training, Work for the

Dole and Mutual Obligation – A

Net Impact Study

, Department

of Employment and Workplace

Relations, report 1/2006, pp 8

table 2, April 2006

24

Paying for success

impact for those undergoing Customised

Assistance, and a 9% net impact for those

undergoing a Mutual Obligation activity

(7% in the case of Work for the Dole).

Customised Assistance participants were

also more likely than a comparable control

group to have left income support, and to

have done so more quickly.

Applying its new methodology retrospectively

to its own, earlier, JN net impact

studies, DEWR found that Intensive/

Customised Assistance had achieved a net

impact of just 0.6% in 2001, rising to

6.2% in 2002 and to 10.1% in 2005. It

claimed this dramatic improvement could

be explained by the adoption of the Active

Participation Model, including the new fee

structures and the Job Seeker Account.

The Department also compared these

outcomes with those achieved by roughly

comparable interventions overseas. It

found, for example, that the 10 percentage

point net impact of Customised Assistance

compared very favourably with the 5 percentage

point net impact achieved for similar

long term unemployed clients in the

UK who went through the New Deal.

49 It

concluded: ‘These impacts are…equal to

or better than those of high performing

programs internationally.’

50

Looking at the raw figures, in 2006-07

the Job Network placed 186,400 longterm

unemployed job seekers in jobs lasting

at least 13 weeks (all these were either

disadvantaged job seekers or people unemployed

for more than 3 months). Another

6,600 on Intensive Support got education

outcomes. The 2006-07 placements figure

is a new record compared to 2000, when

only 47,200 long-term/disadvantaged job

seekers were placed in jobs.

51

Problems and criticisms

Notwithstanding these impressive results

on cost efficiency and (it seems) on net job

impacts, the contracted-out employment

services system continues to attract criticism,

and there clearly are a number of

unresolved problems which will need to be

addressed in the future.

Consumer choice

The original intention that Job Seekers

should choose their service provider never

really worked – most simply get allocated a

JN provider by Centrelink after their needs

have been assessed. Part of the reason for

this may be inadequate information – the

National Audit Office found that

Centrelink offices were failing to give job

seekers enough information about different

JN members to allow them to make an

informed choice.

52 But it also undoubtedly

reflects the characteristics of the clients

themselves. DEWR’s core client group –

‘disadvantaged job seekers’ – are not people

who are used to making active choices and

decisions in their lives, and it always was a

faint hope that they would put time and

effort into selecting a JN provider, rather

than simply leaving it up to Centrelink to

give them one.

Not only do they fail to choose their

own provider, but since the introduction of

the Active Participation Model, job seekers

are not allowed to switch between

providers, except under very limited circumstances,

so dissatisfied consumers can

no longer ‘vote with their feet.’ All of this

undermines one of the core advantages of a

market model, which is that producers

have to compete to attract consumers. In

reality, even though unemployed clients

are still called ‘customers,’ the real customer

for JN members is and always was

DEWR.

The absence of real consumer sovereignty

in this quasi-market means there has

been a recurring problem of rewarding or

penalising the quality of the service being

provided to job seekers by different JN

members. When consumers do not choose

between providers, other, generally inferior,

ways have to be found to judge the

quality of service they are being given.

49 Department of Employment

and Workplace Relations,

Customised Assistance, Job

Search Training, Work for the

Dole and Mutual Obligation – A

Net Impact Study

, Department

of Employment and Workplace

Relations, report 1/2006, pp 9,

April 2006

50 Department of Employment

and Workplace Relations,

Customised Assistance, Job

Search Training, Work for the

Dole and Mutual Obligation – A

Net Impact Study,

Department of

Employment and Workplace

Relations, report 1/2006, pp 4,

April 2006

51 ‘Job network continues to

break records’ Media Release,

Minister for Workforce

Participation, 27 July 2007;

Karvelas P, “Agencies put More

Jobless into Work”,

The

Australian

, 16 January 2006.

52 The audit assessed the quality

of the information provided to

job seekers by Centrelink at four

centres, to see whether it was

good enough for job seekers to

make an informed choice of JN

member. It found: ‘The provision

of information and information

products at information seminars

and in information display areas

was variable, often poor, and did

not meet minimum requirements

specified in the Business

Partnership Arrangement. Many

information seminars were not

conducted prior to the job seeker

making a choice of their JNM,

and some job seekers did not

attend a seminar at all’

(Australian National Audit Office,

“DEWR’s Oversight of Job

Network Services to Job

Seekers”,

Audit Report , no 51,

2005).

The experience of contracting out employment services in Australia

www.policyexchange.org.uk

• 25

Sometimes this has been done by surveys

(DEWR maintains that job seeker satisfaction

levels are high, although this has been

disputed by critics); the number of complaints

can also be measured, although

there are doubts about how effective the

complaints procedures are in allowing

clients to express dissatisfaction.

53 Codes of

practice establish minimum standards, but

their effectiveness depends on how well

they are policed, and they fail to distinguish

varying quality standards above the

minimum level.

Increasing complexity and administrative costs

Given that the immediate consumers of

the service do not discriminate between

different providers, DEWR has to take on

this role itself. This has created a recurring

tension between the desire to give JN

providers autonomy to run their own businesses

and to innovate in response to varying

local circumstances, and the need to

monitor them from the centre to ensure

they are fulfilling their contractual obligations

and that public money is not being

wasted.

The CEO of one provider says there was

very little prescription from the centre in

the first 3 or 4 years of the Job Network,

but that criticisms from the Productivity

Commission and elsewhere led to more

DEWR control, so that today there is, ‘a

high degree of prescription of process combined

with an awful lot of detailed administration’.

54

This is borne out by Catholic

Social Services, which runs JN member

Centacare. It complains of micro-management

from DEWR, citing cases where tiny

claims for reimbursement from the Job

Seekers Account have been subject to

intense scrutiny. According to Catholic

Social Services, the old ‘bureaucratic mindset’

of the CES has re-emerged in recent

years.

55

Part of the administration burden carried

by JN members has been the cost and

time involved in preparing tenders,

56 but

this issue has to some extent been

addressed by scrapping the 2006 contract

round and renewing all existing contracts.

Nevertheless, a recent Labor Party review

of the Job Network claims feedback from

JN members is still raising concerns about

the time and money spent on administration,

and it also draws attention to the cost

of DEWR’s own administration ($411.5m

spent on administering labour market programs

in 2006 – 18% of its total budget

for these programs).

57 Similarly, Catholic

Social Services points to the apparent inefficiency

in having 1,200 DEWR staff in

Canberra overseeing local management in

just 1,100 offices.

58

Attenuation of competition

We have seen that by ESC3, it had become

very difficult for new entrants to win JN

contracts, for 60% of business was reserved

for existing providers and most of the

remaining 40% ended up with them too.

The advantages of incumbency were reinforced

by the decision in 2003 to merge

Intensive Assistance, job search training

and job matching in the new Active

Participation Model, for this knocked out

providers who could not offer IA services

(although the new licensing system did

bring in new suppliers of job matching

services). The result was a dwindling in

the eligible pool of service providers and a

concentration of business in a smaller

number of JN members. This can clearly

be seen by comparing the number of bids

received at ESC1 (5,300) with the number

received at ESC3 (2,100).

Coupled with the increasing direction

from the centre and the closing down of

effective competition in the tendering

process, this concentration of JN membership

suggests that ten years after the old

CES model was scrapped, the new system

has begun to look increasingly like the old

one. As Tony Eardley suggests: ‘The JN has

swung back to being highly regulated and

government-controlled and only open to

Paying for success

26

53 The 2002 PC review recorded

a ‘strongly positive view overall

by job seekers about the JN’

(Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp 6.6

table 6.1, June 2002), and found

complaints running at less than

0.1% (pp 6.15). However, the

National Audit Office report

found job seeker awareness of

the Code, Service Guarantee

and associated complaints

mechanisms remains ‘very low,’

and thought that this might prevent

them from complaining

about poor service (Australian

National Audit Office, “DEWR’s

Oversight of Job Network

Services to Job Seekers”,

Audit

Report

, no 51, pp 66, 2005).

54 David Thompson, CEO of

Jobs Australia, interviewed on

Counterpoint (ABC Radio

National) Transcript: “

Job

Network Burn Out?

”, 31 July

2006.

55 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

20, November 2006

56 Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp xxxiii,

June 2002

57 Wong P, “Reward for effort:

Meeting the participation challenge”,

Australian Labor Party

Discussion Paper

, pp 88,

November 2006

58 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

20, November 2006

new entrants to a limited degree. It now

makes even less sense than before to think

of it as a genuine ‘contestable market.’

59

Quantity, not quality

Part of the problem that DEWR has

encountered in monitoring and regulating

the performance of JN members is that

objectives such as speed, sustainability and

equity of service cannot easily be measured.

The result is that easily-measured outcomes

(the quantity of successful job placements)

are rewarded, while other objectives which

DEWR says it wants to encourage (particularly

those to do with service quality) are not.

In a recent, well-publicised and scathing

report, Catholic Social Services claimed that

although service quality is emphasized in JN

contracts, it cannot be measured and is

therefore not enforced. It claims that:

‘Ultimately the only real reward is for quantity

of outcomes – Government expectations

with respect to outcome quality and service

quality are platitudes… providers who pursue

[quality objectives] receive the same unit

outcome fees and star ratings as those who

give little attention to them… Job seekers

are frequently met by a one size fits all service

from providers focusing on quick fix and

process oriented solutions (such as outcome

buying) which often result in a mismatch

between a job seeker and a job.’

60

This complaint that quality considerations

are being neglected received support

from the 2005 National Audit Office

report which found that levels of contact

between JN providers and job seekers

rarely met contractual specifications. Job

seekers receiving Customised Assistance

are meant to meet with their service

provider once a fortnight, but the Audit

revealed an average of only 6.7 appointments

per job seeker over a 22 week period,

when eleven appointments were scheduled.

The report concluded: ‘The nature

and level of problems identified raises concerns

about whether assistance is actually

intensive and personalised’.

61

The Audit report went on to note that,

while the introduction of the Code of

Practice and Service Guarantee was a positive

step, these documents contain service

commitments that are ‘largely subjective.’

62

DEWR’s ‘Quality Key Performance

Indicator,’ introduced at ESC3, is based on

the Department’s satisfaction that services

have been delivered in compliance with the

Code and the Service Guarantee, but

according to the National Audit Office,

this assessment has to be based on ‘subjective

judgements by DEWR contract managers,

because most of the service commitments

in the Code and Service Guarantee

are not clear, measurable statements of

service requirements.’

A related problem is that DEWR’s

Quality Indicator takes the form of a simple

pass/fail hurdle. The default is that all JN

providers pass unless a clear reason has been

identified for applying a fail. The National

Audit Office found that this pass/fail system

did not allow DEWR to assess changes in

performance over time, nor to compare

variations among those who pass: ‘DEWR’s

ability to gain assurance that job seekers

receive high quality services from JNMs is

limited by the lack of objective and measurable

performance indicators relating to

DEWR’s specified service standards.’

63

Perverse incentives and unethical practices

From the outset, DEWR has struggled to

get the incentives right. The 2002

Productivity Commission report found

problems of ‘creaming’ and ‘parking’, and

although the Active Participation Model

attempted to resolve both of these problems,

these criticisms continue to surface.

www.policyexchange.org.uk

• 27

The experience of contracting out employment services in Australia

59 Eardley T, “Outsourcing

Employment Services: What

have we learned from the Job

Network?”, Paper to Centre for

Applied Economic Research

conference on the Economic

and Social Impacts of

Outsourcing, University of New

South Wales, pp 2, 4-5

December 2003

60 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

54, November 2006

61 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

pp 131, 2005

62 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

pp 55, 2005

63 Australian National Audit

Office, “DEWR’s Oversight of

Job Network Services to Job

Seekers”,

Audit Report , no 51,

2005

Catholic Social Services claimed that although service

quality is emphasized in JN contracts, it cannot be measured

and is therefore not enforced

It is regularly claimed by critics that

some JN members are short-circuiting the

system to maximize their payments, and

that more scrupulous providers are being

disadvantaged and are having to cut the

quality of their service just to stay in business.

These concerns were forcibly

expressed in 2006 by the Social Affairs correspondent

of the

Sydney Morning Herald

who claimed: ‘The experiment has gone

wildly wrong… rorts, unethical practices,

waste of taxpayers’ money and shortchanging

of the unemployed are endemic…

Competition is the wrong model if it

rewards the cynical and punishes the ethical.’

64

A report issued by Catholic Social

Services detailed some of the powerful perverse

incentives that still remain in the system

of payments. For example, if a JN

member fails to place a job seeker in work

in the first three months, it pays to minimize

further assistance until twelve months

have elapsed so as to qualify for the higher

outcome payments attaching to placement

of long-term unemployed clients.

65

Similarly, it pays to place a client in a

short-term position, knowing they will

soon return to unemployment, rather than

putting in extra effort to find a more sustainable

placement.

This report also identified a variety of

practices which are arguably fraudulent as

well as unethical. It claimed, for example,

that the drive to maximize outcome payments

was resulting in manipulation of

recorded outcomes (a claim that was also

made back in 2002 by the Productivity

Commission). It suggested that some

providers get an extra payment by starting

clients on a low level job and then having

them upgraded. Some JN members pay

employers when placements do not turn

up for work so as to maintain the continuous

record of employment that is needed

to prove a successful outcome. And some

are said to engage in ‘outcome buying,’

using money from the Job Seekers Account

to subsidise employers so they will create

short-term jobs that would otherwise not

exist and that will collapse once the subsidy

is withdrawn ($102m was spent in

2005-6 on subsidizing 40,000 placements).

66

It is impossible to tell how widespread

these practices are, and other JN agencies

have rejected these claims. The main industry

body (National Employment Services

Association) maintains that DEWR scrutiny

is very tight and there is ‘no evidence of

people working to perverse incentives.’

Similarly, the CEO of one of the for-profit

JN members says the participation

requirements of the Active Participation

Model mean it is now ‘impossible’ to delay

placing people.

67 But malpractice does still

occur, and it does not only involve the forprofit

agencies.

68 In 2006, even the

Salvation Army was ordered to repay $9m

after a DEWR investigation found they

had wrongly classified some of their clients

as needing Customised Assistance.

Undermining the autonomy and ethos of the

community sector

Some of Australia’s biggest religious charities

have become heavily reliant on government

financing as a result of their participation

in the Job Network. Public funds

make up half the turnover of the non-profit

JN providers, while commercial recruitment

firms rely on government for only

3% of their profits.

69 The Salvation Army,

Centacare (run by the Catholic Church),

Mission Australia and Wesley Uniting

Employment together now rely on JN contracts

for one-third of all their income. As

the

Australian Financial Review noted, JN

contracting ‘has been a key to the transformation

of the charitable sector into big

business enterprises under the Howard

government.’

This high level of financial dependency

has undoubtedly compromised the integrity

of the community sector, and this is

nowhere more apparent than in the repeat-

Paying for success

28

64 Horin A, “Jobless Just Pawns

in a Nasty Numbers Game”,

Sydney Morning Herald

, 16

November 2007 (‘rort’ is

Australian slang for fraudulent

practice). This article was

prompted by the Catholic Social

Services report which claimed:

‘Some providers are sacrificing

service quality for outcome volume

just to survive’, Murray P,

“A Job Network for Job

Seekers”,

Catholic Social

Services Discussion Paper

,

November 2006

65 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

36 and 38, November 2006

66 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

31, November 2006

67 Morris S, “Job Network

Agencies Split on System

Abuse’,

Australian Financial

Review

, 24 November 2006

68 Maiden S, “Millions Owed on

Jobless”,

The Australian , 13

February 2006. As we saw earlier,

disadvantaged job seekers

are referred immediately to customized

assistance under the

Active Participation Model. In

2005, responsibility for classifying

job seekers passed from

Centrelink to JN members themselves,

and this led to a spike in

special payments, triggering the

investigation.

69 Bruttel O,

Managing

Competition in a Public Service

Market: The Job Network in an

International Perspective

,

Centre for Labour Market

Research Discussion paper, no

3, pp 6, 2003

ed strains between the government and the

not-for-profit JN members over so-called

‘breaching penalties.’

70

If a jobseeker breaks the terms of his or

her Preparing for Work Agreement, their

Job Network provider is required to submit

a ‘participation report’ to Centrelink

which may then impose a financial

‘breaching penalty’ on the individual concerned.

71

Breaches can result in a reduction

of welfare payments, and repeated breaches

can lead to full suspension of payments

for up to eight weeks, or until the job seeker

complies. In the early years of the Job

Network, many thousands of people were

sanctioned,

72 but following inquiries by

the Ombudsman and the Productivity

Commission, procedures were changed

and the numbers have fallen.

73 Nevertheless,

the most recent figures (for the period

from October to December 2006) still

show nearly 4,000 people were suspended

for eight weeks for breaching the conditions

of their income support payment for

the third time.

74

Welfare organisations campaigned against

the breaching penalties system almost from

the outset, and in 2002 they even set up

their own ‘independent inquiry’ into

breaches and penalties.

75 It concluded that

the breaching system had operated in an

‘arbitrary, unfair or excessively harsh’ manner;

that ‘breaches are imposed too frequently’;

and that penalties are ‘often too

severe’ and cause ‘unjustifiable hardship’

76

It recommended that Activity Agreements

should be watered down, that Centrelink

should consider waiving penalties altogether

if they are likely to cause hardship, and

that no penalty should involve withholding

more than 25 percent of benefits or

should run for more than 8 weeks in total.

Although the federal government agreed

in 2003 to reduce the penalty for a first

breach, and set up a taskforce to ensure

that Centrelink enforces the rules ‘fairly,’

the welfare groups have persisted with their

demand that no penalty should last more

than eight weeks or exceed a 25% reduction

in payments.

77 If this were ever implemented,

it would bury the principle of

mutual obligation, for claimants who did

not wish to meet the requirements

imposed on them could simply settle for a

three-quarters payment, knowing that

nothing more could be done to force them

to comply.

The truth is that many welfare bodies

have never felt comfortable managing the

punitive aspects of their JN role. These are

organisations whose traditional rationale

has been helping people in need, and they

have continually resisted punishment of

non-compliance. The result is that they

weaken the compliance regime at the same

time as they compromise their own principles.

The 2002 Productivity Commission

report found that non-profit service

providers under-report breaches by 12 per

cent. This reflects their willingness to

indulge transgressors, rather than any overzealousness

on the part of other JN members.

78

As one sympathiser put it, ‘They

often push their contractual obligations to

the legal limits in order to avoid reporting

a client to Centrelink for breaching.’

79

In 2006, these tensions came to a head

when the government extended mutual

obligation requirements to single parents

whose children had reached school age.

The welfare groups fiercely opposed this

change,

80 and some (like the St Vincent de

Paul Society) refused to have anything to

do with it. Yet despite their opposition,

eighty organisations agreed to participate

in a new ‘financial case management

scheme’ designed to monitor families

where breaching penalties had been

imposed and to dispense special payments

where there was evidence of hardship

affecting children. Within a year, however,

twelve welfare organizations had pulled

out of the scheme, led by Catholic Social

Services, arguing that the policy of breaching

single parents was immoral and that

they wanted nothing more to do with it.

81

www.policyexchange.org.uk

• 29

The experience of contracting out employment services in Australia

70 Tingle L, “Charity Faces Notso-

Tender Test”,

Australian Financial

Review

, 24 September 2002. See

also Ramia G and Carney T, “New

Public Management, the Job

Network and Non-Profit

Strategy”,

Australian Journal of

Labour Economics

, 6:2, 2003

71 There are two ways in which

claimants may find themselves in

breach of the conditions governing

their payment: administrative

non-compliance (e.g. failing to

attend at the office of Centrelink

or a Job Network service provider

when required to do so, or failing

to provide information when

requested to do so); and activity

test breaches (e.g. a failure to

undertake an activity, such as

training or job search, laid down in

an Activity Agreement, or obstructiveness

in the process of finding

a job). Administrative breaches are

seen as less serious than Activity

Test breaches, and they attract

lesser penalties. I have discussed

breaching in more detail in

Saunders P,

Australia’s Welfare

Habit and How to Kick it

,

CIS/Duffy & Snellgrove, 2004.

72 Even though the total number

of unemployed claimants was

falling between 1997 and 2001,

the total number of breaches

rose by 220 per cent. Most of

these were first offences but

over 30,000 people were

breached for the third time in

two years in 2001-02 and were

therefore cut off from payments

altogether for eight weeks. See

Saunders P,

Australia’s Welfare

Habit and How to Kick it

,

CIS/Duffy & Snellgrove, 2004.

73 The 2002 investigation of

Centrelink and the Job Network

by the Commonwealth Ombudsman

identified ‘some deficiencies

in Centrelink procedures and

practice’ which resulted in mistakes

being made – McLeod RN,

Social Security Breach Penalties

– I

ssues of Administration ,

Canberra, pp ii, 2002

74 Peatling S, “Little Centrelink

Cheer for the Poorest of the

Poor”,

Sydney Morning Herald ,

18 December 2007.

75 Pearce D, Disney J, and

Ridout H,

Making it Work , Report

of the Independent Review of

Breaches and Penalties in the

Social Security System, 2002.

The inquiry was sponsored by

The National Welfare Rights

Network, ACOSS, the

Brotherhood of St Laurence,

Jobs Australia, Job Futures,

Mission Australia, the Salvation

Army, the Smith Family and the

CPSU.

Clearly, the welfare organisations feel

increasingly compromised by the longterm

relationship they have established

with the government. They have become

dependent on the government’s money,

but they do not want to dance to its tune.

Management of the hardest cases

The Job Network was set up when unemployment

in Australia was running at over

8 per cent. It has virtually halved since

then. This means there are fewer cases for

JN members to manage, and that most

people looking for a job can find one without

much assistance. The cases that remain

on JN members’ books tend to be a lot

more difficult and labour-intensive. This

has caused problems for all JN members

(reduced unemployment has forced some

agencies to lay off staff), and it has prompted

suggestions that the JN framework may

be ill-suited to delivering the sorts of services

and outcomes that are now required.

Caseloads have certainly got tougher.

Catholic Social Services reports that the

proportion of its clients with less than a Year

Ten education has increased since ESC3

from 19% to 25%.

82 The President of

ACOSS (the peak welfare body) reports that

64% of those on the Newstart unemployment

payment for more than two years have

a YearTen education or less. So too do 62%

of those with disabilities and 72% of single

parents claiming Parenting Payment. Nor is

lack of education the only problem, for

45% of sole parents on Parenting Payment,

30% of Disability Support Pension

claimants and 35% of long term Newstart

Allowance recipients have mental health

conditions.

83 These are the people JN

providers are increasingly trying to help. As

the CEO of Jobs Australia suggests: ‘A significant

number of the people left in the

queue have very complex needs, typically

mental health issues, housing issues, family

relationship issues, all sorts of things that

may make it difficult for them to comply.’

84

Some JN members now openly doubt

whether the JN system in general, or the

Active Participation Model in particular,

is appropriate for managing cases like

these. The Brotherhood of St Laurence,

for example, criticizes the emphasis on

‘rapid movement into any job without

ongoing support for career advancement

or skill development,’ and it claims the

system is not well suited to handling people

who are not job ready. It is a system

geared to fast throughput of job-ready

unemployed people, but these aren’t the

clients any more.

85

Sheriden Dudley (CEO of Job Futures, a

combined community groups JN member)

echoes these sentiments. He says the continuum

model that underlies Active Participation

is premised on the assumption that

people can follow a pathway into work, but

some cannot: ‘We know that many job seekers

are not able to follow this linear pattern

and that the reality for many people is they

move in and out of the system. This is particularly

true for those with a mental illness...

One of the many challenges facing JN

is how do we support people through periods

when they simply can’t work, when

employment outcomes seem at times to be

the sole driver of the system.’

86 He goes on to

argue for a system of rewards that acknowledges

non-economic outcomes – ‘many of

those who have been referred to these programs

in the past require a great deal of support

in dealing with personal issues before

they are ready to join an employment program.’

87

Under present arrangements, for

example, a JN provider can put a huge

amount of effort and resources into someone,

but if they then drop out of work before

13 weeks have elapsed, their JN provider

receives no payment.

The National Employment Services

Association (NESA) is another voice arguing

that the ‘work first’ ethos now needs

changing. It says there should be more

emphasis on ‘proper’ skills training rather

than on rapid placement, and that this

could make a positive contribution to

Paying for success

30

76 Pearce D, Disney J, and

Ridout H,

Making it Work , Report

of the Independent Review of

Breaches and Penalties in the

Social Security System, paragraphs

18-21, 2002

77 Senate Community Affairs

Committee,

A Hand Up, Not a

Hand Out

, Commonwealth of Australia,

recommendation 14, 2004

78 The Productivity Commission

found (Productivity Commission,

“Independent Review of the Job

Network”, report no 21, pp 6.18,

June 2002) that for-profit JN providers

had higher breaching rates

(12 percentage points higher) than

not-for-profits. This is because they

aremore loath to report clients (6.20)

79 Kinnear P, “Putting Obligation

in its Place”,

Impact , pp 9,

February 2002. Kinnear is a former

branch manager in the

Australian public service and

Research Fellow at the left-wing

Australia Institute.

80 The Salvation Army complained

that ‘vulnerable groups

within the community will almost

certainly be adversely affected by

this policy’ (

The Australian ,“Salvos

pull out of welfare to work”, The

Australian, 31 October 2006.

81 The Australian, “Twelve groups

pull out of welfare to work”,

The

Australian

, 16 February 2007.

82 Murray P, “A Job Network for

Job Seekers”,

Catholic Social

Services Discussion Paper

, pp

15, November 2006

83 Davidson P,

Strengths and

Weaknesses in Australian Welfare

to Work Policy

, Paper to

Australian Social Policy conference,

University of New South

Wales, July 2007. These cannot,

presumably, be serious mental

health problems, otherwise these

claimants would all be on DSP.

84 ABC Radio National

Transcript,

Job Network Burn

Out?

, 31 July 2006.

85 Brotherhood of St Laurence,

“Brotherhood Welcomes Labor

Call to Overhaul Job Network”,

Brotherhood of St Laurence

Media Release

, 25 October

2006. See also Nicholson T,

“Social Inclusion the Path to

Prosperity”,

The Australian , 23

November 2007.

86 Dudley S,

Not Just Any Job ,

Paper to Australian Social Policy

Conference, University of New

South Wales, pp 5, July 2005

87 Dudley S,

Not Just Any Job ,

Paper to Australian Social Policy

Conference, University of New

South Wales, pp 5, July 2005

meeting growing skills shortages in the

economy.

88 Whether people with mental

health and other problems, who have failed

to complete a Year 10 education, are actually

capable of being trained to fill skilled

vacancies is, however, an issue that these

commentators rarely address.

89

Before it lost office, the Howard government

made clear it was aware of some of

these problems and that it intended to

address them by further reforming the JN

system at the 2009 contract round.

90 The

new Rudd government has also swiftly signalled

its intention to change fee structures

in order to reward those dealing with the

hardest cases, probably by strengthening

interim payments.

91 Whether this will be

enough to answer the concerns of the JN

providers is, however, doubtful, for there

appears to be a fundamental problem in

measuring non-specific outcomes like getting

someone off drugs or building their

self-confidence to a point where they can

face going to a job interview. After ten years

of wriggling within the JN system, the notfor-

profits seem now to be suggesting that

the whole system needs fundamentally

rethinking, and at the time of writing, the

new Rudd government has announced a

review which will look into these concerns

prior to the scheduled 2009 contract round.

Conclusions

Nearly ten years after employment services

were contracted out to a new Job Network,

there have clearly been significant economies

and cost savings for the Australian

taxpayer. There is also some evidence that

placement of unemployed people into jobs

has improved as compared with the outcomes

achieved before 1998, and that the

purchaser-provider model is now generating

positive net impacts for most categories

of job seekers that are as good as any in the

OECD.

Yet having recognized this, there have

been recurring concerns that savings have

been achieved at the expense of the quality

of service offered to the most disadvantaged

job seekers. To some extent, these

claims reflect the anti-market and anticompetitive

prejudices of many of the

journalists, academics and not-for-profit

JN providers who comment on these matters,

for they instinctively prefer a cooperative,

public sector model to a competitive

private sector one. However, there is also

some real substance to these claims, for

some JN service providers have cut corners,

and some (including religiouslybased

not-for-profit contractors) have been

guilty of unethical or fraudulent practices.

An incentivised system like the Job

Network will always run the risk that service

producers will sacrifice quality and look

for the easiest returns. In some cases,

unethical and fraudulent practices are

motivated by greed (a desire to maximize

outcome payments); in others they may

have been motivated by shrinking margins

and the intensified struggle to keep their

heads above water as a result of a declining

client base and the increasing difficulty of

placing the marginal clients who remain

on their books. But whatever the immediate

reasons, the root of the problem is

structural, for this is a ‘market’ where consumers

enjoy little or no sovereignty.

Job Network members cater to people

who are not paying for what they receive

and who have limited power to switch

between providers if they are unhappy

with what they are getting. The Australian

experience suggests this is probably

unavoidable, for much of the client base

lacks the experience, capacity or desire to

act as rational and discriminating consumers.

This failure of the ‘customer

choice’ ideal has inevitably led to a tightening

of Departmental control, monitoring

and regulation of JN providers as the only

effective way of ensuring service quality.

This has in turn resulted in increased

administrative costs, both for DEWR and

for JN members. It has also subverted one

www.policyexchange.org.uk

• 31

The experience of contracting out employment services in Australia

88 National Employment

Services Association,

Workforce

of the Future

, NESA (South

Melbourne), pp 4, 2007,

89 Saunders P, “What are low

Ability Workers to do When

Unskilled Jobs Disappear?”,

Issue Analysis (The Centre for

Independent Studies

), no 91, 6

December 2007

90 Karvalas P, “Job Seekers to

Face Radical Shakeup”,

The

Australian

, 21 July 2007

91 Karvalas P, “ALP Eyes New

Job Network system”,

The

Australian

, 18 December 2007.

See also Thomas M, “A Review

of Developments in the Job

Network”,

Parliamentary Library

Research Paper

, no 15, 24

December 2007

of the original aims of the reform, which

was to give service providers the flexibility

to innovate and to free them from the

stranglehold of the central bureaucracy. As

things have turned out, increasing central

control has curtailed flexibility and has to

some extent reproduced the old top-down

system of bureaucratic management.

Increasing central control has also exacerbated

the tensions between the

Department (the final and arguably ‘real’

customer for their services) and the notfor-

profit service providers. This tension

has been present right from the start, as is

apparent from the long-running war of

attrition over breaching penalties. As the

mutual obligation policy has been extended

to increasing numbers of welfare

claimants (and to new categories of

claimants, such as single parents), so these

strains have become worse, culminating in

a number of providers reneging on their

agreements to participate in the new

‘financial case management scheme’ for

single parents.

Many of the not-for-profit JN members

are lukewarm (at best) about mutual obligation

and they dislike the ‘Work First’

principle around which the JN system has

been constructed. They feel their mission

has increasingly put them at odds with

what their government masters are telling

them to do. By 2006/07, some of them

were openly campaigning to get the whole

system scrapped, or at least radically overhauled.

This tension at the heart of the Job

Network has arguably been bad for the

not-for-profit sector (whose autonomy and

defining purpose have been compromised),

and bad for the government and

the Department (which has struggled to

have its policies implemented in the way

that it intended).

The basic problem, therefore, is that this

is not a ‘market’ in any recognizable sense

of the word. Unemployed clients are called

‘customers,’ but most of them do not even

choose their service provider, let alone pay

them.

92 As for the supply side, the JN

providers are paid by results, but they can

hardly be said to be competing for business

any more, given that 97% of business allocated

at the 2003 contract round went to

existing JN members, and the 2006 round

was scrapped as existing contracts were

rolled over for another three years.

Provided they meet minimum quality

standards and maintain an adequate level

of job placement outputs, JN members are

now in little danger of being usurped by

new competitors.

The real danger to their business is not

competition from other suppliers, but government

financial stringency.

The not-for-profits, in particular, have

been active in campaigning for a change to

the funding formula, arguing that the existing

system of fees and outcome payments is

unfair and outdated now that most of their

cases consist of ‘disadvantaged’ clients.

They want ‘Work First’ scrapped and more

generous (and less conditional) payments

introduced so that they can work long-term

with disadvantaged clients in highly intensive,

one-to-one, supportive relationships.

Rather than concentrating on getting these

people into jobs, the not-for-profits want to

be paid for helping them overcome their

‘barriers to work’ and for getting them fully

‘job-ready.’

The push is therefore on to transform an

employment services system with an economic

rationale into a social services system

with a social work rationale, and with

a change of government in Canberra, it is

clear that the Job Network model has

reached a critical fork in the road.

Paying for success

32

92 They might become genuine

customers if they relied on personal

Unemployment Insurance

or ‘Temporary Earnings

Replacement Accounts’ rather

than government welfare benefits

– see Feldstein M and

Altman D,

Unemployment

Insurance Savings Accounts

,

National Bureau of Economic

Research, December 1998;

Brunner L and Colarelli S,

“Individual Unemployment

Accounts”,

The Independent

Review

, no 8, pp 569–585, 2004;

Saunders P, “A Welfare State for

Those Who Want One, Opt Outs

for Those Who Don’t”,

Issue

Analysis (Centre for Independent

Studies)

, no 79, January 2007

Rather than concentrating on getting these people into

jobs, the not-for-profits want to be paid for helping them

overcome their ‘barriers to work’ and for getting them

fully ‘job-ready

As for whether a country like the UK

would be well advised to follow in

Australia’s footsteps, the lesson seems to

be that the purchaser-provider model

works well if the desired outcomes are

kept simple. If the clear aim is to get welfare

claimants into work, then a system

like the Job Network (coupled with

appropriate reforms to the conditions

attaching to receipt of welfare payments,

and a tough sanctions regime for when

these conditions are breached) can perform

a lot better than a public sector

bureaucracy. But if other objectives get

tacked onto this, or the aim gets watered

down or subverted (e.g. by moving away

from a Work First policy), then the purchaser-

provider model is likely to become

less effective and manageable. The more

difficult it is to measure outcomes, the

less attractive a Job Network model is

likely to be.

It is a case of horses for courses. A quasimarket

in employment services will deliver

lower costs and somewhat better job outcomes

(although no labour market program,

public or private, will generate

strong net outcomes). But the Job

Network is not a system designed or suited

to delivering social work support to people

with mental health problems, those who

never finished school, drug and alcohol

abusers, or those who have never become

habituated to the routines of working. It is

for the government to decide how it wants

to manage these ‘hard cases,’ and if it wants

to adopt a ‘therapeutic’ or ‘treatment’

approach, a profit-driven, contracting-out

model is probably not the best option for

managing it.

www.policyexchange.org.uk

• 33

The experience of contracting out employment services in Australia

93 An estimated figure; Central

Intelligence Agency (2008)

The

2008 World Factbook

(USA:

Central Intelligence Agency).

94 Australian Bureau of

Statistics (latest relevant year)

Labour Force Survey

(Australia:

Australian Bureau of Statistics).

95 Australian Bureau of

Statistics (latest relevant year)

Labour Force Survey

(Australia:

Australian Bureau of Statistics).

Plus author’s calculations.

96 Australian Bureau of

Statistics (latest relevant year)

Year Book Australia

(Australia:

Australian Bureau of Statistics).

97

Ibid .

98

Ibid .

99

Ibid .

100 Australian Bureau of

Statistics (latest relevant year)

Labour Force Survey

(Australia:

Australian Bureau of Statistics).

Plus author’s calculations.

101

Ibid .

102

Ibid .

103 Australian Bureau of

Statistics (latest relevant year)

Year Book Australia

(Australia:

Australian Bureau of Statistics).

104

Ibid .

105 Australian Bureau of

Statistics (latest relevant year)

Labour Force Survey

(Australia:

Australian Bureau of Statistics).

Plus author’s calculations.

106 Australian Bureau of

Statistics (latest relevant year)

Year Book Australia

(Australia:

Australian Bureau of Statistics).

107

Ibid .

108 Australian Bureau of

Statistics (latest relevant year)

Labour Force Survey

(Australia:

Australian Bureau of Statistics).

Plus author’s calculations.

109 Figure refers to Intensive

Assistance off-benefit outcomes

compared to

Working Natio n

programs (1995-96) at constant

2000 prices. Author’s calculation.

110

Ibid .

Australia

GDP , 2007: $890 billion 93 .

Population, 2005/6: 20.6 million 94 .

Number of people in the labour force, 2005/6: 10.6 million 95 .

Average weekly wage among adults in full-time work: $967.9 96

Total spending on welfare, 2005/6: $42 billion 97 .

Total spending on unemployment benefit, 2005/6: $4.4 billion 98 .

Rate of per week unemployment benefit, 2005/6: $182.50 99 .

Number of people unemployed, 2005/6: 514,000 100 .

Number of unemployed people in 2005/6 out of work for one year or more: 264,000 101 .

Number of days formerly unemployed people must be in work for their assistance to be considered

successful: 91 until an interim period, 182 until final assessment

102 .

Total spending on incapacity benefit, 2005/6: $7.3 billion 103 .

Rate of per week incapacity benefit, 2005/6: $222.20 104 .

Number of people on incapacity benefit, 2005/6: 712,000 105 .

Total spending on lone parent benefit, 2005/6: $4.3 billion 106 .

Rate of per week lone parent benefit, 2005/6: $220.20 107 .

Number of people on lone parent benefit, 2005/6: 433,000 108 .

Average cost of successful placement in the private or voluntary sectors, 2005/6: $19,750 109 .

Average per-placement saving from use of the private and voluntary sectors, 2005/6: $11,639 110

3

The experience of

privatization of

welfare services in

Wisconsin

by Jason Turner

“?e welfare system as an institution is

abhorred by society because it separates the

receipt of income from the need to work.

But why do we think of work as so necessary

to legitimize income? In its unique

capacity to enable individuals to have the

opportunity to serve others by producing

valuable goods and services, work fulfills a

basic human need.Work connects individuals

to larger society –and in order for

welfare’ destructive influence to finally

end, work and income must be permanently

rejoined.”

These words, written in 1995, laid out a

fundamental premise of what was to

become

Wisconsin Works , a welfare reform

notable not only for its departure from the

existing welfare system of income support,

but also in that it was devised from scratch

without reference to any existing law. I was

part of the changes, so give some insider’s

insights during the following account of

the changes.

In 1994 and 1995, the years when

Wisconsin Works

was being developed, the

concerns of academics and policy makers

about the rise of welfare dependency and

its intractability were paramount. Since

the onset of President Lyndon Johnson’s

Great Society welfare dependency had

grown and grown, sometimes pausing,

never permanently retreating.

Various reform efforts had been tried.

These included experiments with versions

of a negative income tax; required registration

for job search; additional funds for

education and training – all of which had

failed to stem the rising tide of dependency.

The challenge to the designers ofWisconsin

Works was to devise a plan so powerful in its

effects that it would be capable of stopping

and reversing this trend.

Wisconsin and the national income

support system

Government income support programs in

America can be grouped into three categories

– unemployment insurance, disability

insurance and welfare.



Unemployment insurance provides temporary

income for individuals whose

positions have been eliminated. Those

fired or let go for good cause are not eligible.

The amount of the benefit is set

by the state up to a maximum and is

based on the claimant’s work history and

prior contributions to the fund through

his employer. The maximum duration

of benefits is typically sixmonths.

34

1 A handful of states provide for

“general assistance”, usually

very low benefits available to

singles, often concentrated

among those with mental health

or substance abuse problems.

The experience of privatization of welfare services in Wisconsin

www.policyexchange.org.uk

• 35



Disability insurance provides federally

issued payments to individuals whose

incapacity has been determined by the

state to make the claimant incapable of

providing for himself through earnings

(parents may also claim disability payments

on behalf of their children). The

amount of these payments is not high,

but is more than obtainable through

welfare.



Welfare is the term Americans use for

the general income support program

for low income families (named

Aid to

Families with Dependent Children

(AFDC)

until 1996, thereafter

Temporary Assistance to Needy Families

).

Eligibility is limited to families in

which parents are living with their

dependent children. Unlike parts of

Europe, a young man or woman out of

school with no dependents and no

work history cannot walk into an office

and ask for income support (although

job centers offer low-cost or no-cost job

training and education, plus help finding

work)

1 . As a practical matter, the

overwhelming proportion of welfare

recipients are lone mothers with one or

two children, sometimes more.

Monthly cash benefits usually range

between $400 and $600 per month,

with food stamps bringing the total up

to $$650 to $800 per month.

Wisconsin’s Governor Thompson was elected

in 1986 on a platform of reforming welfare,

and won an unexpected victory. Over

the subsequent five years from1987 through

1993 Thompson proposed changes to the

welfare system almost once a year. These

changes came in the form of experiments,

called “waivers” of federal program rules.

These programme change requests to the

federal government would mostly be seen as

modest by today’s standards, but they all

struck a similar and consistent theme, namely

that welfare recipients should work and

accept personal responsibility.

The state legislature, controlled by the

opposition Democrat party, grew increasingly

frustrated by the support for reform

that the Governor had created through his

series of proposals. Finally, the legislators

struck back by passing a law which would

completely abolish the existing

AFDC programme.

The law provided that in its

place, the Governor must propose a workbased

alternative. Would the law calling

for abolition of the entire cash safety net

for the poor be vetoed by the Governor? If

so, reasoned some of the legislators, the

opposition could take away his claim as the

agent of reform, and they would be free to

make proposals of their own.

Instead, Governor Thompson accepted

the opportunity to design a work-based

program from the ground up, unconstrained

by existing law. He then set about

his task in earnest, assembling a group of

his staff to develop a proposal.

The philosophical underpinnings of

the Wisconsin approach to welfare

reform

The 1995 proposal resulting from the

Governor’s planning group was unprecedented

in two ways. First, it was a complete

change from the existing approach

rather than an attempt to work around the

edges of existing law. As a result, the program

was generated from a set of consistent

philosophical principles which were mutually

reinforcing. Some of these principles

and their rationales are summarized below.

1. For those who can work,

only work should pay.

There are both economic and practical reasons

for tying income to work. First,

experience shows that entitlements to

income without work have unwanted

effects on dependency. In addition, it is

essential that parents understand they will

always be responsible for supporting themselves

and their families through work:

36

Paying for success

this influences behavior and motivation in

ongoing constructive ways. Finally, experience

shows that individuals without extensive

work history are usually in a stronger

employment position after one or two

years of actual work (at any wage) than

after a comparable period of work preparation

through education and training.

2. Begin with the assumption that everyone is

capable of some kind of work.

The best way to help an individual out of

work get back into the labor force is to provide

an actual work opportunity which

matches their capabilities. This is contrary

to many government subsidized “helping”

programs which seek to identify barriers and

limitations to work, and in so doing categorize

and place individuals out of the reach of

the workplace where they might very well

have succeeded if given the opportunity.

Only by testing the suitability of work

through actual attempts to work can any true

limitations which prevent full participation

in the labor force be identified and resolved.

3. Strengthening the ability of parents to provide

for their children is a better approach

than having the government intervene directly

on their behalf.

In well-meaning attempts to look after the

interests of children, government has, over

time, participated in many of the roles that

were previously the exclusive responsibility

of parents.

There are many calls for government to

take on still further responsibility for assuring

the well-being of children. However,

government cannot raise children, only parents

can. Government can do the most by

helping to put parents in a position to meet

their responsibilities, not by taking away

these responsibilities for itself.

4. Measure the fairness of the new system by

comparison with working families

It is sometimes argued that a work-based

welfare system will be unfair unless it can

be shown that those formerly dependent

on various benefit programs will continue

to receive a comparable package while

working. Others argue that it is unrealistic

to expect work for wages unless such

wages will guarantee a high enough standard

of living to make work seem worthwhile.

But self-sufficiency through work

should be seen as an end in itself, quite

apart from the package of benefits gained

or lost as a result. More important is the

relationship that those who are receiving

welfare benefits have with comparable

individuals who are working to support

themselves and have not asked for assistance.

5. Look to non-government organizations to

deliver the program.

It is axiomatic that government programs,

authorized by legislation, must be overseen

by government as an agent of the public

interest. However, for too long government

has been the assumed operator of the

programs it devises. A more effective

model is almost always for the government

to set the ground rules and then let nongovernment

entities actually operate programs

under public oversight.

The Wisconsin-Works program (or W2)

Under

W2 there is no entitlement to

cash assistance based on income alone.

When an individual without work

applies for help at a

W2 agency, their

access to cash benefits is dependent upon

their actions to help themselves become

economically self-sufficient through private

employment. All individuals participating

in the program “earn” their

income (cash assistance) through participation,

measured by the hour, in one of

four tiers of employment in private or

public settings. These four are from

highest to lowest, which make up an

employment “ladder”.

The Four Tiers of the Ladder:

1. Unsubsidized Employment

Individuals entering

W2 should always be

guided to the best available immediate job

opportunity in the private sector. The

agency is geared and focused on matching

every participant’s capabilities with the

best work option available when they

arrive, rather than diverting them to

extended education and training.

Unsubsidized employment pays the

market wage (currently about $7.00 -

$8.00 per hour) along with the earned

income tax credit (EITC) which contributes

up to $4000 per year depending

upon family size and income.

2 Subsidized Employment (Trial Jobs)

Where an individual could succeed in private

employment but lacks work experience

or, in some instances, skills, the

W2

agency can provide wage subsidies to private

employers for a temporary period in

order to offset some of the additional costs

of integrating a new employee into the

worksite. In practice, Trial Jobs are rarely

used because employers say that the economics

favour hiring even unskilled workers

directly without the modest Trial Job

wage subsidy, and they prefer to stay away

from the administrative tasks of collecting

the subsidy.

3. Community Service Jobs (CSJs)

If an individual tries and cannot find private

employment, the next option is to

work in exchange for benefits, in either a

government or non-profit organization

which serves the public. Examples include

simple office work or outdoor maintenance

for government. These jobs are

intended to be 30 hours per week, to be

useful even with minimal training or background,

and to offer the opportunity for

individuals without a work background to

learn-by-doing, i.e. to get them experience

in supervised work and task orientation in

an employment setting. An additional ten

hours can be used for education and training,

plus job search.

In order to replicate the circumstances

of the workplace, the W2 cash benefit of

$673 per month is reduced (by a factor

equal to $5.85, the minimum wage) for

each hour of scheduled work missed.

CSJs are intended to be temporary. Each

assignment is generally not to exceed six or

nine months. The by-product of labour in

such a setting is intended to contribute to

the community and fulfill the essential

civic role of work – giving to others in

exchange for wages.

4. Transitional Jobs

For those unable to perform independent,

self-sustaining work even in a CSJ because

of limitations such as mild disability or

substance abuse, Transitional Jobs are

available for participation in work or vocational

training and other activity such as

treatment, consistent with an individual’s

capabilities. The grant amount is $628

(less than that of a CSJ) for up to 28 hours

of eligible activity, and up to twelve hours

of additional education and training.

Summary of Incentives for Participants to go

toWork

In order to receive cash assistance, an individual

enrolled in

W2 faces approximately

the same number of hours dedicated to a

community service job or a transitional

job, as they would in full-time private

employment. Leisure without obligations

is no longer an option.

At each step up the work ladder, from

Transitional to unsubsidized employment,

The experience of privatization of welfare services in Wisconsin

www.policyexchange.org.uk

• 37

In practice, Trial Jobs are rarely used because

employers say that the economics favour hiring even

unskilled workers directly without the modest Trial Job

wage subsidy

2 The situation among counties

outside of Milwaukee was much

better, with most county agencies

embracing the mission of

economic self-sufficiency for its

welfare population. But some

objected to the state’s preferred

“work-first” approach to achieving

this objective rather than the

traditional education and training

model. The designer’s explanations

and exhortations favoring

the work-first approach and

explaining its rationale, including

the research evidence of its efficacy,

were most influential when

falling on willing county ears.

However, even there the state

had made progress in this

regard by the introduction of

“Work-First” pilots. These pilots,

in which applicants for assistance

looked for work even while

their application was pending,

proved successful in achieving

early employment outcomes.

Even better, the success of

“work-first” was touted by the

pilot counties themselves, leaving

them to sell the idea rather

than the suspect state.

38

Paying for success

the net after-tax income (which includes

the earned income tax credit for those in

private employment) increases. Therefore,

participants have every reason to accept the

highest employment option they qualify

for, starting with unsubsidized employment

if available, or if not to move up the

ladder when the option presents itself.

Supportive services such as subsidized

child care or free medical care are no longer

reserved for those enrolled in the welfare

system, but rather to anyone on the

income scale. Therefore, there is no longer

an advantage to enrolling in welfare to just

to receive these extra benefits.

The Operational Considerations

Driving Program Design and the

Privatization of Serviced

When implementing the work-based system,

the

W2 designers were faced with a

dilemma. The organizational requirements

of

W2 are higher than that of running an

income maintenance agency where the primary

task is determining eligibility based on

income (along with making referrals to separate

job training or employment agencies).

Previously, welfare operations were divided

into two parts: the eligibility determination

process on the one hand, and all other

services such as job placement, training and

subsidized child care on the other. County

government always provided eligibility

determinations directly, and would perform

the other services either directly or through

contracts to private service providers.

The county-run welfare system could

function satisfactorily where its central task

was performing routine eligibility determinations.

However, for more ambitious

tasks the government has well-known limitations:



It usually manages by process rather

than outcome, i.e. projects are administered

according to short-term needs

rather than long-term goals.



It lacks accountability due to the diffusion

of responsibility;



Its performance compromised by decisions

subject in part to political considerations;



It loses mission focus as energy is sunk

into attempting to coordinate the multiple

organizational units operating a

given program (e.g. the state policy

making function, the county administrative

function, and the non-profit

service delivery function);



It has an inability to shed non-functioning

operational units.

In particular, Milwaukee, Wisconsin’s

largest county (population one million),

showed resistance to mission change or

operational improvement. Like many large

cities, Milwaukee’s welfare agency had

weak management and a labor force rarely

challenged to perform. In the period leading

up to

W2 , the state had attempted to

get the welfare agency to properly refer

welfare recipients to private agencies for

work or training; and when not participating

in such training, to reduce cash benefits

until recipients complied. The county

agency exhibited limited bureaucratic

capacity to carry out such multi-step

processes. Furthermore there was not

much interest among top management in

the objective itself.

2

In any event the requirements for

W2

went beyond the task of eligibility determination

and referral for employment. An

agency would have to act in such a way as

to limit its own size and influence in the

lives of participants and instead to empower

them to achieve economic self-sufficiency.

Through contract incentives, its designers

believed they could achieve this.

The two parts eligibility and job placement,

were merged into one so that there

would be a single organization wholly

accountable for results. This organization,

Wisconsin Works, owns the Job Center,

provides eligibility determinations for cash

The experience of privatization of welfare services in Wisconsin

www.policyexchange.org.uk

• 39

benefits and gives work support, such as

subsidized child care or “job access loans” (

cash to help with enabling employment,

e.g. for repair of an auto so the participant

can drive to work). Most importantly, the

role of the

W2 agency is to help applicants

find the best available job opportunity at

the time of application, and provide such a

job itself as a last resort.

Helping individuals with marginal work

histories required closer connections

among case-workers, employers and participants.

W2

case workers were paid higher

salaries and carried far lower caseloads than

traditional caseworkers (about 75 instead

of around 300). They could be recruited

from among the best of the existing case

workers, but also from the outside.

Personality characteristics were judged to

be more important than longevity or a specialized

education.

Finally,

W2 agencies were designed to

experience the maximum latitude to find

their own solutions to achieving the desired

outcomes; namely, employment and caseload

reduction. In this regard state policy

makers had struggled with some of the

counties (not others) over the years before

the implementation of

WisconsinWorks .

Competition for vendor selection

In order to maximize the likelihood of

Wisconsin Works

succeeding, its designers

envisioned a competition for program

operators, open to any and all organizations,

county government included. As

potential

W2 agencies, three of the four

types of potential

W2 operators had different

strengths:



County government, particularly in

smaller or rural counties, was in certain

places the only organization with the

infrastructure ready to go. Looking forward,

in many instances counties had

dedicated staff and supportive elected

officials.



Non-profit organizations were sometimes

well established and were already

providing the kinds of services required

under

Wisconsin Works – particularly

those that were likely to be expanded,

such as community service jobs, which

rehabilitation agencies such as

Goodwill already provided on a relatively

large scale.



For-profit businesses were already providing

employment and training services

and could be expected to offer

dynamic energy and be more capable of

assuming risk. However, in the period

leading up to

W2 , for-profit organizations

were only a modest factor in the

overall inventory of operating providers

so this sector would need to be developed.



Quasi-government providers, in particular

the “private industry councils”

with governing boards appointed by

the counties along with volunteers

from the local business community

were the least appealing as agents of

change. They were usually highly

politicized organizations that made

grants to employment and training

vendors, and were hobbled by internal

conflicts on their boards and in no

position to lead a dynamic in-house

operating agency. Consistent with our

open competition, they were not

excluded from the RFP process.

In an attempt to cajole the incumbent

service providers into a force for change,

their freedom of action was maximized to

provide the clearest possible incentives for

success.

In the past, multiple organizations

combined into consortia diffused responsibility,

and required consensus to act.

Poor performing partners could not be

expelled because they were part of the

management team. Further, states would

ask for a multiplicity of happy results –

but the achievement of one would often

compromise the fulfillment of another.

3

Under

W2 the state’s objectives were clear

– to maximize family economic self-sufficiency

through employment and to

reduce the corresponding cash assistance

caseload. Partnerships were permitted,

but only ones with prime- and sub-relationships

so that leadership roles would

remain clear.

Another consideration was size. A phenomenon

was noted: the smaller the county

agency, the higher the employment

rate.

4 Of course, the welfare population in

small counties is generally easier to serve,

and the culture of self-reliance higher. But

there were other differences too, having to

do with span of control. In a big city welfare

department a recipient might not see

the same caseworker twice, something

which leads to anonymity. Follow-through

is less likely to occur face-to-face and more

likely through a computer tracking program.

Responsible recipients looking to

connect with the department for help

often will not get through to caseworkers

by telephone, with voicemails piling up.

Managers and supervisors manage by

numbers, paper files and adherence to regulations,

not through the exertion of personal

leadership.

For this reason Milwaukee was divided

into six regions of about 6,000 welfare

cases each, so that the state would contract

with multiple vendors. Each region

was drawn so that it would have, to the

biggest degree possible, recipients of similar

general characteristics. In addition to

the expectation that smaller vendors

would perform better, the scheme’s

designers hoped that multiple vendors in

Milwuakee would reduce the state’s risk,

and that low performing vendors could

be replaced with less disruption. Finally,

they also hoped that smaller vendors

becoming identified with their surrounding

neighborhoods. Prospective vendor

agencies were permitted to bid on more

than one, and in the event one of the

applicant vendors (Goodwill) was awarded

two regions, each with its own agency

office.

Contract Incentives

Rather than replacing the old

AFDC program

with another one operated on the

basis of the same regulatory “command

and control” mechanism, the programme

designers were looking to create powerful

contract incentives which would be in

alignment with the incentives that the participants

themselves would experience.

In the period prior to

W2 there was an

experiment with a simple form of performance

incentives for job placement and

training agencies which had functioned

better than expected.

5 The vendors earned

part of their allocations based on their job

placement success and they went earnestly

to work, increasing placements by 29% the

first year. But what was equally remarkable

at the time was the degree to which vendors

had been misallocating effort and

resources prior to the introduction of this

outcome-based payment system. One vendor

director said “I had thought we were

supposed to be getting recipients general

equivalency degrees” (remedial education

degrees). He said this despite the fact that

the state had been exhorting the vendors to

change their emphasis to employment for

some time. It thus seemed that words were

deficient and that the right tools had finally

been adopted.

The initial contracts from September

1997 through December 1999 were structured

so that reductions in the caseload

resulting from movement off

W2 cash

assistance into employment would reduce

costs which would then be shared with

vendors as follows:



The initial contract amount was set by

county region by calculating the current

total welfare expenditures in the

most recent period (including cash

3 For example, many states

would ask their welfare training

vendors to simultaneously

increase exits due to employment

and to maximize average

wages at exit. These are both

worthy objectives, but maximizing

participant employment

exits, including those with limited

work experience, will depress

average wages at exit (although

not necessarily in the long run,

as those in the labor market

increase their wages over time).

In this example it would be better

for the state to give one

assignment to welfare-to-work

vendors (to get as many as possible

into the labor market) and a

second assignment to education

and training vendors (to improve

wages though skills upgrades

among both the working and

non-working population). The

success measurements for each

will differ, as will the corresponding

strategies.

4 For example, for every 100

welfare cases in Milwaukee,

there were 15 entered employments

over a year, while the

median mid-sized county

obtained 26 and small counties

33.

5 In Milwaukee, the six job

placement and training vendors

were grouped into two teams, A

and B. Each team had a lead

vendor, and the proportion of

referrals from the state to the

respective teams was exactly

proportionate to their respective

total budgets for services. Since

vendors from Team A had twothirds

of the total job placement

and training budget from the

state, they were referred to all

individuals with social security

numbers whose last three digits

were between 001 and 666, with

the balance to Team B. This

system of referrals was easy for

desk clerks to learn, and at the

end of the competitive period

the state could easily determine

employment outcomes by using

the social security numbers to

match against quarterly wage

payments already present in the

state data file.

40

Paying for success

benefits, employment services and

administration), and reducing this

amount by twenty percent. This total

amount could be allocated by the

agency according to its needs, after cash

benefits were first paid to eligible participants.



Agencies generating caseload reductions

which generated savings beyond

the total budgeted amount for the period

could keep the first seven percent of

the savings in the form of unrestricted

income (or profit). Thereafter additional

savings would be divided three

ways:

1. Forty-five percent would revert to

the state in the form of budget

savings

2. Forty-five percent could be

allocated by the

W2 agency to their

local community for expenditures

in general support of low income

families, with approval of these

expenditures by the state;

3. Ten percent of additional savings

would revert to the

W2 agency in

the form of unrestricted income

(or profit).



Agencies whose expenditures during

the contract period exceeded the total

allocation from the state would be obligated

to provide the difference.

The Contracting Process

When the initial

WisconsinWorks plan was

made public in April 1995, it met with

great interest. However, early discussion

revolved around the provision which

would open

Wisconsin Works contract

opportunities to any potential service

provider – county, non-profit or for-profit.

Since all state legislators have constituents

employed in county welfare departments,

almost all legislators heard from county

employees concerned about the future of

their jobs. From the perspective of the state

welfare department, many or most of

Wisconsin’s 72 county governments, especially

in rural areas, were likely to do a

good job administering

W2 , and the

scheme’ designers did not want to jeopardize

the overall future of the plan due to

objections over which were unlikely to prevail.

Looking to make the best of the situation,

the designers created a right of first

refusal for county governments which

wished to operate

W2 and met certain performance

objectives in the twelve months

prior to contract selection. The performance

objectives selected were directly related

to ones which would make the

W2

agencies successful in helping their participants

gain employment once the program

went live in September 1997.

6 The

response upon the publication of these

measurement elements by county management

and employees was electric. County

elected officials and managers began in

earnest to work on achieving the right of

first refusal, setting up their measurement

systems and organizing their agencies

along the lines required. At the end of the

measurement period all but about half a

dozen counties had succeeded in meeting

the requirements, with the most notable

and expected exception of Milwaukee

(where county elected officials had in any

event by then decided not to compete for

W2

, reasoning that the fiscal risks outweighed

the rewards).

7

The state next contacted prospective

vendors located outsideWisconsin in order

to have a robust and competitive bidding

market, especially within Milwaukee. At

that time several big for-profit corporations

specializing in information technology

were actively considering entering the

6 These performance objectives

included:



Reducing the welfare caseload

by ten to twenty-five percent

depending on prior results;



Placing greater numbers of

recipients into unsubsidized

employment of at least 20

hours per week, increasing

over three measurement periods;



Placing those not working in

private employment into the

equivalent of community service

or other jobs, increasing

over three measurement periods;



Reducing expenditures for

cash assistance;



Credit given to counties which

had cooperated with the state

and performed well in the

past.

7 The right of first selection

process showed that in certain

circumstances government entities

are motivated by financial

incentive structures as well as

private vendors are, and that the

resulting improvements in operations,

if any, should not be automatically

assumed to derive

exclusively from privatization.

The experience of privatization of welfare services in Wisconsin

www.policyexchange.org.uk

• 41

A phenomenon was noted: the smaller the county

agency, the higher the employment rate

welfare-to-work marketplace. They reasoned

that their profitable IT businesses,

already serving state human service agencies

throughout the country, would be natural

partners in gaining entry wherever

they received contracts as welfare-to-work

vendors. Companies considering such line

extensions of their business at that time

included Electronic Data Systems (EDS);

Lockheed Martin IMS; Affiliated Computer

Services (ACS); Deloitte & Touche;

and IBM. However, although some of

these companies already had welfare-towork

contracts elsewhere, for various reasons

none of these giants elected to bid on

Wisconsin Works

in Milwaukee or in the

state (EDS partnered with Goodwill, an

eventual Milwaukee vendor, but provided

only IT services).

It is possible that they were unnerved by

the unusual state contract, in which vendors

would be liable for making up shortfalls

over the state budgeted amount

(including shortfalls in cash assistance

amounts) in the event they were not successful

(smaller vendors, especially nonprofits

agreeing to sign the state contract,

perhaps reasoned that were they poised to

go under, the state would have to bail them

out or take over the program, which in fact

was true although it never happened).

One large for-profit that did submit a

bid for several regions in Milwaukee was

Maximus, a corporation which had pioneered

the human service operations business

in Los Angeles in the 1980s. Some

smaller for-profits also submitted bids in

Milwaukee and elsewhere in the state.

After the RFP process contracts were

awarded in Milwaukee to the following:



Employment Solutions, a for-profit

subsidiary of Goodwill Industries, a

major provider of welfare-to-work services

in Milwaukee and a long-time

vocational rehabilitation agency with

national presence. This agency was

awarded two Milwaukee regions.



Opportunities Industrial Corporation

(OIC), an African-American community

vendor which had provided welfare-

to-work services in Milwaukee and

was part of a national organization.



United Migrant Opportunities Society

(UMOS), a Hispanic community vendor

which had provided welfare-towork

services in Milwaukee.



YW-Works, a for-profit subsidiary of

the Milwaukee YWCA and two other

organizations which had provided services

in Milwaukee.



Maximus, a for-profit corporation

without previous contracts in

Wisconsin.

Eight counties other than Milwaukee were

served by five private agencies in the initial

implementation contracts.

The program results from the implementation

of

Wisconsin Works

As September 1997

W2 start date was

awaited, the programme’s designers

believed there would never be a more propitious

set of circumstances boding for the

experiment’s success:

?e plan was about to open its doors “n

the street”almost exactly as planned, with

virtually no significant design compromises

along the way; the state economy was

strong and general unemployment was

going down; certain elements of the program

had already been put in place in

advance of implementation and the caseload

was already moving in the right direction;

the Right of First Refusal had organized

the counties which would run the program

around the program design; the

Wisconsin public was well informed by the

Governor and the media about the plan

and was with it all the way; its natural

opponents among foundation-funded advocacy

organizations and academics at the

University ofWisconsin were temporarily

42

Paying for success

subdued (even if not supportive they

acknowledged the plan’s comprehensiveness

and internal consistency); welfare recipients

themselves had been exposed to and

absorbed several years of media and public

discussion about the importance of work;

soon work in some fashion was to be the

only option for receiving cash assistance;

and for county and vendor operators alike

the stakes were exceedingly high on both

the upside and the downside.

Events had created a “perfect storm”.

The results were more powerful than

anyone, including its most optimistic planners,

had anticipated. Immediately after

Wisconsin Works

opened, the welfare caseload

began to collapse. In the year prior to

W2

, Wisconsin had about 55,000 welfare

cases statewide – this dropped to 11,000

cases in the first thirty-six months of the

program (thereafter rising slowly and then

falling back to 11,000 in 2005)

8

At the end of the second year the state

looked back at all of the

Wisconsin Works

cases which had been enrolled in the program

at some point and were now closed

(32,000 cases or 81% of all who had

enrolled). Of these, fully 76% had closed

for earnings and income (9% had chosen

not to roll over into the new

W2 program

from the old one, 8% had enrolled but

then closed for failing to comply with

W2

program requirements such as attending

work assignments, 4% no longer met basic

eligibility requirements and 2% closed for

other reasons). Among those working,

about half were earning between $12,000

and $18,000 per year (before additional

refundable tax credits), about a third were

earning less and about a fifth were earning

more

9 (the 1998 poverty threshold was

$13,001 for a family of three).

As would be expected with large numbers

entering the labor force, poverty

dropped substantially in both Milwaukee

and the rest of the state.

The child poverty rate (a more sensitive

measure than adult poverty) peaked at

34% in Milwaukee in 1993, declining in

the period before

W2 implementation, and

then, in the first single year afterward,

dropped a full six percentage points to

20%. Thereafter it rose slowly along with

the weakening of the national economy

around 2002; by 2006 after the beginning

of the recovery it had given back about half

of the drop from the top (the state and

national trends were much gentler, but also

followed a similar curve).

10

The Critics of Wisconsin Works

WisconsinWorks is about ten years old, and

has almost certainly been the most studied

and analyzed program of welfare reform in

the U.S. (in just the first three years the

Urban Institute counted 53 studies completed

or underway).

11 There are numerous

critics of

W2 and its work-first approach. 12

Criticisms fall into two categories: shortcomings

in program implementation, particularly

in Milwaukee, and the continuation

of poverty as a social problem. Issues

related to the first of these criticisms will be

discussed at greater length below.

Wisconsin’s most vocal critics at first

warned of serious consequences which

could be anticipated from large numbers

who would be unable to cope with the

work requirements of

W2 , and so would

drop- out or never apply. Many would end

up homeless, resorting to crime or, worse,

the neglect or maltreatment of their children.

None of these alarming predictions

have come to pass. Instead, the rate of

homelessness has remained flat

13 , crime is

down 12% in the state since program

introduction

14 , and incidents of child

abuse and neglect have fallen inWisconsin

as they have nationally.

15

Of course, poverty has not been stricken

from the face of the Wisconsin prairie.

Even if every individual who enrolled in

W2

had found full-time work right away

and kept their jobs forever, many of those

8 Wisconsin Department of

Workforce Development figures.

Note that 9000 welfare cases

without an adult (child-only) are

excluded from both figures.

9 Wisconsin Department of

Workforce Development, Case

Closure Study

, Wisconsin

Department of Workforce

Development, 2000

10 U.S. Census Bureau, see

http://www.census.gov/

11 Urban Institute,

Overview of

Research Related to Wisconsin

Works

, Urban Institute, March

2000.

12 As an example see University

of Chicago Chapin Hall Center

for Children,

Issue Brief #107 ,

May 2006.

13 Reliable statistics are difficult

to obtain; anecdotal reports from

author’s interviews with the

director of Hope House,

Milwaukee’s largest shelter, indicates

that the total number of

overnight stays has remained

relatively constant since

Wisconsin Works

was introduced;

fewer individuals are

entering the shelter but this is

offset by an increase in average

length of stay. Also see

Milwaukee Continuum of Care

Steering Committee,

Homelessness in Milwaukee

,

July 2007 for a point in time survey.

14 Wisconsin Office of Justice

Assistance,

Crime and Arrests

in Wisconsin 2006

, Wisconsin

Office of Justice Assistance, pp

105, 2006

15 See Urban Institute,

Welfare

Reform’s Effect on Child Welfare

Caseloads

, Urban Institute,

February 2001; University of

Chicago, Chapin hall center for

Children, Issue Brief #107, table

5, May 2006.

The experience of privatization of welfare services in Wisconsin

www.policyexchange.org.uk

• 43

starting in entry level jobs would go

through a period of income below poverty

on the presumed way to wage increases

over time. Yet wage growth has been

stronger than academics predicted. An

early study from the University of

Wisconsin reported:

In part because of the substantial caseload

reductions that preceded the implementation

ofW2, many of the first participants

inW2 had low levels of education, substantial

family responsibilities, and a history

of reliance on welfare. Notwithstanding

these barriers, we find higher levels of

employment than have been found in other

states, and substantial growth in employment

and earnings over the short period

considered. Average family income…

increased, rising from about $12,000 in

1998 to nearly $15,000 in 1999, and the

poverty rate [among participants] fell from

77 percent to 67 percent

16 .

Looking over a longer period, for those

who left

W2 at the end of 1999 and had

full or part time employment in each of

the following four years, average annual

income increased by 22%. Of this group

37% had exceeded poverty based on

income alone, while 57% were above

poverty after tax credits.

17 18

Privatization After Implementation

While traditionally about half of

Wisconsin’s welfare population lived outside

of Milwaukee, after the sharp caseload

reductions more than four fifths of the

remaining small number of cases reside in

the county, which is fully privatized, so

that will be the focus of this section.

However, it should be noted that in the

balance of the state, the numbers of counties

which have elected to privatize has

steadily increased, from eight in the first

contract, to 21 in 2005. Of the privatized

counties, one is a medium sized city, three

are suburban Milwaukee, and the other 17

are rural.

Within the rural areas ofWisconsin, the

growth in the privatization of

W2 makes

sense in part because there are so few

remaining cases, and some counties no

longer think of welfare as one of their main

lines of business (superseded by foster care

and adoption, medical assistance, distribution

of food stamps, subsidized child care

etc.). In the early years of

WisconsinWorks ,

in which funds were plentiful because of

caseload reductions, many counties

merged their related programs into “onestop”

job centers with modern offices and

equipment.

Among the five contract vendors the

state selected for Milwaukee, one might

consider three of these high-performing

(one of these got off to a bad start and

recovered), one average, and one poor (the

last is no longer in business).

19 The transition

between the old program and the

onset of

Wisconsin Works under the new

privatized agencies, from those who experienced

it, can best be described as an intensive,

compressed and creative fervor.

20

The new private agencies were not only

operating under a completely new set of

contract provisions, but also under a new

mindset. Competition for good operations’

directors was pronounced and in addition

agencies responded by looking for line staff

outside the traditional social work background.

Some agencies advertised in sales

and marketing magazines and sites because

they were looking for employees comfortable

interacting with businesses in a more

professional environment and willing to

accept contingent compensation based on

performance.

In one high-performing agency the ratio

of new hires to transitioned staff was high

- about three to one. In others agencies it

was lower. Of the older staff who had

worked in county government, some transferred

to other county human service jobs,

some retired voluntarily, and some were

Paying for success

44

16 University of Wisconsin,

Institute for Research on

Poverty,

Child Support

Demonstration Evaluation, Phase

I Final Report

, pp 2, 2001

17 State of Wisconsin,

Legislative Audit Bureau,

Evaluation of the Wisconsin

Works Program

, table 27, April

2005

18 Another criticism is that

Wisconsin’s work-first, or labor

attachment model, would benefit

from the addition of more hours

of education and training, or

even that education and training

should substitute for community

service work hours (note that

non-work activities including

training have been increasing as

the program matures, but is

intended to be an adjunct not a

substitute for work). However,

education and training as an

intervention for the welfare population

has been exhaustively

studied over thirty years, including

using extensive random

assignment experiments, and

has consistently been demonstrated

to have barely detectible,

or no detectible impact on

wages or employment (one

experiment in Portland Oregon

with mixed work and training

emphasis showed some

impacts).

19 This categorization is based

on the judgment of the author of

this paper, taking into consideration

general performance over the

entire contract periods, reputations

within Milwaukee and the

state, and the author’s own

knowledge. The three high performers

have been Goodwill

(Employment Solutions), YWorks

(YWCA lead agency); andMaximus.

The average performer has been

United Migrant Opportunity

Society (UMOS) and the poor

performer was Opportunities

Industrialization Corporation (OIC)

which is now out of business. The

high performer which got off to a

bad start and recovered is

Maximus. The organization hired

a poor director who was fired

after a scandal, after which operations

improved markedly. As of

the date of this paper, the state

has added new vendors and

organized the contracts differently,

which is not taken into consideration

here.

20 The descriptions which follow

are based on interviews in

January and February 2008 with

Milwaukee agency directors and

managers who were present at

that time, and the author’s own

recollections.

hired by the new agencies as at-will

employees. With competition for good

staff, salaries increased. Former workers

earned a salary of around $28,000 per year

(1997 dollars) with sizeable benefit packages;

new workers in one agency earned

$35,000 to $38,000 with annual bonus

opportunities of three to five thousand

dollars, albeit with lower benefits. All

agencies had their employees sign noncompete

contracts, as they were concerned

that the expense of training on this new

program would be lost to competitors (in

the event, no enforcement of these contracts

ever occurred).

In addition to hiring from the outside,

agencies also directed their relationships to

employers. All agencies paid special attention

to assuring their job developers had

solid connections with employers and

access to jobs. One agency created a new

title called “business service representative”

which did no casework but whose

job it was to take orders from employers

and act as their representative within the

agency in order to find the best employee

fit. Business service reps would interact

with caseworkers, each with their own

bonus structure and incentives for job

placement, but with differing internal customers.

As pressure mounted prior to the start

date of

W2 , managers and new staff

worked late and the state helped by keeping

its caseload computer system open

nights and weekends. Each case transitioned

on the computer from welfare to

W2

would take two hours; there were

thousands of them to be changed. One

agency set up a separate room with 20

computers and a knowledgeable programmer

to allow case workers to have quiet

time for the transition. All this was occurring

as new offices were being built and fitted-

out (one agency built a new professional

office from the ground up in the

heart of a district which had once seen race

riots).

Finding good middle managers is always

key in government and human service

organizations (and experience shows almost

always more difficult than finding good

agency directors or good line staff), and

this task was made more difficult because

new middle management hires were not

familiar with the technical aspects of the

job, nor the welfare rules, which had to be

understood in order to explain to staff how

to operate in the new environment. The

absence of quality middle managers has

been a major shortcoming of agencies

which performed below expectations.

21

In addition to their internal pressures,

agencies had to go outside and to the public

to assure that existing welfare recipients came

into the offices and changed their enrollment.

All agencies made special efforts, using

door hangers, going to churches, being interviewed

on television, and in some cases doing

home visits if individuals did not respond to

multiple letters. In the end, about 30%of the

former welfare recipients declined to enroll in

the new program (some were already working

off the books, others might not be eligible,

still others did not want to participate

under the new work requirements).

Work sites had to be prepared, and some

agencies showed creativity here too.One purchased

a plastics fabrication plant in order to

provide easy work which would be fiscally

self-sustaining, another used its own packaging,

used clothing store, and commercial

laundry service, still others used the county’s

existing program with many outdoor assignments

such as keeping parks maintained.

22

Competition among vendors during this

period was constructive. Each had its own

geographic region, so in a sense they were

not competing for “customers”. Every

agency had its own performance goals and

financial targets, but at the same time they

did not want to be perceived as lagging.

Once a month the five agency executive

directors would meet, to hammer out common

concerns (and, to a degree, to act as a

counterweight to the powerful state agency).

www.policyexchange.org.uk

• 45

The experience of privatization of welfare services in Wisconsin

21 Good middle management is

more important in government

and quasi-government than in

the private sector. There are

more rules which must be

observed, more direct supervision

needed below because

compensation is not directly tied

to achievement, and more complex

processes occur between

top management directives and

line staff implementation.

22 However, the existing community

service job inventory in

Milwaukee operated by the

county, which had been set up

to accommodate single men and

women under the recently terminated

“general assistance” program,

was insufficiently utilized

by

W2 agencies.

Inter-agency work groups were formed

around subject areas such as transitioning

cases from one program to the other.

The Successive Contracts

During the first contract period the savings

far exceeded the most optimistic expectations

of the program’s designers. In

Milwaukee, $319 million had been allocated

for all expenditures including cash benefits.

Of this amount 84% was spent, leaving

$26 million for agency profits, $13 million

for reinvestment in the community

and $13 million to the state in the form of

savings, just as provided for in the contract.

Certain critics of

W2 have said that the

first round of contracts did not contain performance

criteria, but its designers certainly

did not view it this way, nor did the vendors.

TheseMilwaukee vendors were taking

substantial risks in a completely unknown

environment. Their performance would be

measured by their employment success leading

to caseload reductions, while leaving

them with the operating room to get there

in the best and most innovative way.

Critics also claimed that agencies could

simply reduce costs by denying service to

applicants, or arbitrarily categorizing them

as job-ready, thereby excluding access to

community service jobs.

This objection too, was unfounded.

Agencies created procedures to move applicants

through their system, and while individual

cases might not be processed properly,

no agency would risk denying service

with the stakes so high (in addition, the state

could penalize an agency $5000 for each

instance of denied service, although it never

found it necessary to invoke such a penalty).

Nevertheless there were significant

problems with vendor implementation.

Two of the high-performing agencies billed

hundreds of thousands of dollars improperly

to the

W2 program as they chased new

business outside the state and billed

W2

for employee work there.

23 Both these

agencies reimbursed these disallowed costs

and made additional payments in compensation.

However, one of these two agencies

declined to bid on a third contract period

as a result. Its loss was to be a great detriment

to operations in Milwaukee.

24 25

In the face of bad publicity over the misallocation

of funds, the state agency overreacted.

In the third contract period the state

added a surfeit of performance goals. It

sharply reduced operating funding levels to

below what was necessary, and permitted

any performance bonuses to be earned

only as a reimbursement for funds the

agency had already expended, putting

these agencies in a very serious financial

risk were they to fail to meet the standards

after the fact. In short, the state had shifted

to the agencies almost all risks but without

any opportunity for rewards.

In addition to pressing its vendors beyond

what was necessary for good management,

the state made a second mistake. After the

exit of the high-performing agency which

had misallocated funds, there remained two

of six regions without an operator. The state

had failed to cultivate other potential

replacement vendors from outside

Milwaukee and so doubled the contracts of

two of the existing Milwaukee vendors,

which was acceptable as far as this went. But

in the subsequent fourth contract period the

state gave three of the six regions to the lowest

performing vendor, reshuffling the deck

once again and in a way which proved most

unfortunate.The winning vendor’s executive

director and others with whom he had ties

were indicted for kickbacks in 2004 and sent

to prison.

26 The agency folded soon after.

The Milwaukee operations are recovering

from these setbacks. In the most recent

contract period the state has at last brought

in fresh vendors from outside the county,

increased the contract responsibility of

incumbent strong vendors, and management

has significantly improved. In an

indication that the state intends to devote

more of its attention to

WisconsinWorks , it

Paying for success

46

23 The agencies were Maximus,

a for-profit vendor, and

Employment Solutions, a forprofit

subsidiary of Goodwill

Industries of Southeastern

Wisconsin.

24 The agency was Employment

Solutions, which had contracts

in two regions and performing

exceptionally well.

25 It should be noted that

improper expenditures are not

the exclusive province of the private

sector. The state routinely

audits county government

expenditures and finds improper

expenditures requiring reimbursement

(for example a state

audit of the Milwaukee County

Hospital discovered such a high

level of improper expenditures

that the county resorted to selling

the hospital, i.e. privatizing

it). However, unlike government

misallocations, private sector

transgressions are considered

more serious violations of the

public trust by all concerned,

and probably should be.

26 The agency was

Opportunities Industrialization

Corporation of Greater

Milwaukee, now defunct.

has dedicated a new agency to the function.

The

W2 caseload is stable and low,

and participant exit for employment continues

at a high rate (though understandably

slower than in the first early period

after implementation).

Lessons from the Wisconsin Works

Privatization and Contract

Management Experience

Looking back from the vantage point of ten

years, one sees that

Wisconsin Works

unleashed a wave of change on a scale unanticipated

and unprecedented. Dependency

was reduced far more than expected to the

point that it is now considered only a secondary

public policy issue. Former welfare

recipients proved far more resilient than

believed, took available jobs in large numbers,

increased their wages over time and

reduced the corresponding poverty rate. The

state saved enormous sums as benefit payments

to the formerly dependent were

replaced by wages. The state legislature has

re-allocated these funds in a variety of activities

including programs for youth, literacy,

nutrition, and domestic violence prevention.

27

While the newly available funds were a

welcome indication of program success it

created a challenging political dynamic,

with critics denouncing the profits earned

by the private agencies. The state should

have been better prepared to forthrightly

make its case that program savings were

only available because families were newly

self-sufficient, and that a portion of the

savings were being plowed back into the

community through the reinvestment provisions

or through state reallocations.

The first lesson here is that program

changes on the scale of

W2 , combined

with privatization and new vendor contract

incentives, will require swift iterative

actions on the part of each actor, state and

vendor community, in order to maintain

an equilibrium and manage through the

learning process.

In addition, it is evident that the administration

which took over after the election of

2002 (Governor Jim Doyle, Democrat) lost

focus on the program. In a familiar turn of

events in every democracy, newly elected

officials must stake out their mark distinct

from their predecessor’s, and Wisconsin

Works was indelibly linked to Governor

Thompson, the previous post-holder.

The new administration brought its

own philosophy to governing, but in a way

that was inconsistent and reactive. In

2003 the state declared that the program

should be participant-friendly and explicitly

offer a greater array of services. It

instructed the vendors to assure that all

barriers to participation in the program be

identified and resolved before reductions

in benefits due to non-participation were

taken, partly in response to program critics

(due to the new rule’s ambiguity, vendors

sometimes allowed inactive participants to

receive cash benefits). Then, not long

thereafter the state reacted to a resulting

increase in the

W2 caseloads by again

emphasizing early employment and work,

leading to confusion on the part of agencies

and vendors.

28

The second lesson, then, is that the governing

agency must maintain an interest in

the state of the vendor marketplace and in

the incentive signals it is sending. Vendors

do not operate on autopilot, and will feel

comfortable taking risks where they feel

their footing is secure. Frequent significant

changes in stated program objectives

reduce performance; smaller changes at

first are more readily absorbed.

The state initially selected good vendors

in Milwaukee (along with at least one poorperforming

one) but it did not tend to the

creation of a vibrant marketplace for the

growth of competitive services there.

People often take for granted that there will

always be competitors and options in the

private sector marketplace for goods and

services. However the competitive marketplace

environment for human service deliv

www.

policyexchange.org.uk

• 47

The experience of privatization of welfare services in Wisconsin

27 Department of Workforce

Development,

Letter from

Secretary to State Auditor

,

Department of Workforce

Development, March 31 2001.

28 State of Wisconsin,

Legislative Audit Bureau,

Evaluation of the Wisconsin

Works Program

, pp 98, April

2005

29 The Netherlands has done

this, creating a new vendor community

for job placement of several

hundred.

30 As an example of process

measures that the initial contract

did not measure but should

have, is the weekly average

number of work hours assigned.

Lack of attention to this measure

is in part responsible for its

decline from 26.5 average weekly

work hours in 1998 to 17.7 in

2004. See State of Wisconsin,

Legislative Audit Bureau,

Evaluation of the Wisconsin

Works Program

, table 37, April

2005

31 Performance standards and

measurements included required

caseload ratios, caseworker training

requirements, customer satisfaction,

new required basic skills

training for participants, wage

increase measurements, job

retention, full or part-time employment

measures, among others.

32 For instance, agencies allocated

funds among program

components differently, had variations

in sanction rates, job

placement and retention rates,

performed differing participant

assessments, used job access

loans at different rates

33 An estimated figure; Central

Intelligence Agency (2008)

The

2008 World Factbook

(USA:

Central Intelligence Agency).

34 DeNavas-Walt, C.; Proctor,

B.D.; and Smith, J. (2007)

Income, Poverty, and Health

Insurance Coverage in the

United States: 2006

(United

States: US Census Bureau).

ery remains insufficiently developed. The

third lesson then, is that the state itself must

actively create and nurture a competitive

marketplace environment. It should recruit

potential vendors from outside its borders

even when no bids are active, it should conduct

annual meetings with prospective vendors

to discuss the program state of affairs,

and it should consider setting aside a certain

portion of each contract for new entrants

into the marketplace.

29

What about the nature of contract performance

criteria themselves? The initial

contract incentives in which agencies shared

in reduced expenditures was powerful and

outcome-based but did not give sufficient

information about ongoing program activity

levels such that thorough reports could be

made to the public and policy makers.

30 On

the other hand, in the third contract period

the state created so many measurement

standards that taken together they did not

drive agency performance toward an understandable

or sufficiently narrow mission

objective.

31 The fourth lesson, then, is that

the state should determine its most important

policy objectives, organize its performance

payments for these using outcome

based measures (but a limited number of

process measures too), and refrain from trying

to achieve all conceivable desirable

objectives through one contract.

The fifth and final lesson from the

Wisconsin experience is that the energy

and creativity generated by private vendors

in conjunction with powerful contract

incentives were together essential to

achieving the program success. During the

most intensive and creative period of the

Wisconsin Works

transition, the new

Milwaukee vendors, the other county

agencies and the state worked cooperatively

at a breakneck pace to get ready. Each

organization knew its responsibility and

mission objectives. Once operations began,

each Milwaukee agency approached its

objectives by operating their programs in

different ways with differing emphases.

32

And when all is said and done, including

all the programs avoidable and unavoidable

mis-steps, the lives of Wisconsin’s

poor have been permanently improved.

Paying for success

48

35 United States Department of

Labor, News: The Employment

Situation: December 2006

(http://www.bls.gov/news.release

/archives/empsit_01052007.pdf).

36 DeNavas-Walt, C.; Proctor,

B.D.; and Smith, J. (2007)

Income, Poverty, and Health

Insurance Coverage in the

United States: 2006

(United

States: US Census Bureau).

37 Social Security

Administration (2002)

Social

Security Bulletin, Statistical

Supplement 2002

(United

States: Social Security

Administration).

38

Ibid

39 US Department of Labor

(2006)

Evaluating State

Unemployment Insurance (UI)

Tax Systems Using the

Significant Tax Measures Report

(United States: US Department

of Labor).

40 United States Department of

Labor, News: T

he Employment

Situation: December 2006

(http://www.bls.gov/news.release

/archives/empsit_01052007.pdf).

41

Ibid.

42 Social Security

Administration (2002)

Social

Security Bulletin, Statistical

Supplement 2002

(United

States: Social Security

Administration).

43 Author’s calculations from

Social Security Administration

data

(http://www.ssa.gov/OACT/Prog

Data/icp.html).

44 Social Security

Administration

(http://www.ssa.gov/OACT/Prog

Data/icp.html).

45 US Department of Health and

Human Services, TANF Financial

Data:

http://www.acf.hhs.gov/program

s/ofs/data/2006/tableF_2006.ht

ml.

46 US Department of Health and

Human Services (2006)

Temporary Assistance for Needy

Families Program (TANF):

Seventh Annual Report to

Congress

(United States: US

Department of Health and

Human Services).

47 US Department of Health and

Human Services

(http://www.acf.hhs.gov/program

s/ofa/caseload/2006/2006_1pare

nt_tanssp.htm).

United States



GDP , 2007: $13.8 trillion 33 .



Population, 2005/6: 296.4 million 34 .



Number of people in the labour force, 2005/6: 152.7 million 35 .



Average weekly wage among adults in full-time work, 2005/6: $735 36 .



Total spending on welfare , 2005/6: $2.6 trillion37



Total spending on unemployment benefit, 2005/6: $46.1 billion 38 .



Rate of per week unemployment benefit, 2005/6: $275 39 .



Number of people unemployed, 2005/6: 6.8 million 40 .



Number of unemployed people in 2005/6 out of work for one year or more: 1.3 million 41



Number of days formerly unemployed people must be in work for their assistance to be considered

successful: varies by state.



Total spending on incapacity benefit, 2005/6: $52.9 billion 42 .



Rate of per week incapacity benefit, 2005/6: £237.21 43 .



Number of people on incapacity benefit, 2005/6: 812,000 44 .



Total spending on lone parent benefit, 2005/6: $11.3 billion 45



Rate of per week lone parent benefit, 2005/6: $82 46 .



Number of people on lone parent benefit, 2005/6: 1 million 47 .

4

The labour market

reform in Germany

and its impact on

employment services

by Hilmar Schneider

Introduction

The German Labour Market Reform moved

through several steps between 2003 and

2005. It accompanied many changes in all

areas of active and passive labour market policy.

One of the major ideas of the so-called

Hartz-commission, which was commissioned

by the German government in 2002 to develop

reform proposals, was to reduce unemployment

by cutting the amount of time people

spent out of work. It proposed placement

procedures andmeasures to impair the receipt

of unemployment compensation.

Since many changes took place at the

same time, it is difficult to disentangle the

contribution of each of them. However,

experts agree that the refoms, as a whole, significantly

contributed to the sharp decrease

in unemployment since 2005, although this

still has to be proved in terms of econometric

evidence. The number of people out of

work dropped by one million between 2005

and 2007, the biggest fall in Germany’s postwar

history (see Figure 1).

The German system of

unemployment benefits and welfare

Before 2004 there were three benefit levels:

unemployment support (Arbeitslosengeld),

www.policyexchange.org.uk

• 49

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

reunited Germany

West-Germany

East-Germany

Figure 1: Registered unemployment in Germany (thousands)

Source: Federal Labour Agency

unemployment aid (Arbeitslosenhilfe), and

welfare (Sozialhilfe). Since 2005, unemployment

aid has been abolished. Welfare

is now called Arbeitslosengeld II.

Workers (but not the self-employed or

so-called ‘minijobbers’) are required to

contribute to public unemployment insurance.

The Federal Labour Agency (FLA)

administers the scheme. They are entitled

to receive support when out of work. The

maximum duration of unemployment

support is one year, depending on the

number of months employed in the preceeding

time period.

For the elderly, the maximum duration

of unemployment support is gradually

extended. Until January 2006, it lasted for

up to 32 months for job-seekers above the

age of 57. But this was frequently used as

an early retirement device. Since February

2006, the maximum benefit period has

been 18 months. From 2008 on it will

again be 24 months.

The level of unemployment support is

not means tested and is only related to previously

earned income. For job-seekers living

without dependent children, it

amounts to 60% of previous remuneration.

For job-seekers living with dependent

children, it is 67%.

Up to 2004, job-seekers coming to the

end of their unemployment support automatically

qualified for unemployment aid.

Although means tested, the latter was not

subject to a time limit. Its maximum level

was also attached to previously earned net

income.

For job-seekers living without dependent

children, unemployment aid amounted

to 50% of previously earned income.

For job-seekers living with dependents, it

came to 57% of previous earnings .

Unemployment aid was paid by the FLA,

but funded by federal taxes.

Job-seekers without other sources of

income are eligible for welfare. It is currently

fixed at 347 euros per month

nationwide (plus coverage of housing

costs, which may vary regionally), for a

single person. On average, this means

around 650 euros per month for a single

person and around 1,800 euros per month

for a four-person household.

Income from employment is largely

deducted from welfare claims, something

which causes a classic welfare trap for lowskilled

workers by generating an implicit

minimum wage. For a single worker it is

around 10 euros per hour.

In all, Germany is currently spending

about 1.6% of its GDP on unemployment

support and welfare. This figure doesn’t

include spending on active labour market

policies, which account for another 0.7%

of GDP.

Job-seekers subject to unemployment

support have to notify their local office of

the FLA. The same was true for job-seekers

eligible for unemployment aid.

Themunicipalities are responsible for welfare

claims. Up to 2004, they had, in principle,

to cover welfare costs on their own. In

cases of financial weakness, however, they

were supported by their federal states.

Since 2005 joint offices of the FLA and

local municipalities have been established

(Arbeitsgemeinschaften) – a change that

was meant to eradicate antagonism

between local welfare authorities and the

FLA (which had led to useless cost-shifting).

Previously, municipalities gained by

sending their clients to public employment

programs for one year rather than investing

in placement or training. In doing so, the

workers gained sufficient eligibility for

unemployment support during that year,

and the municipalities moved them off

their books for a while.

The change was heavily opposed by the

municipalities from the very beginning.

They were upset because the government

eliminated the former cost-shifting opportunity

at the same time. Moreover, the

municipalities feared losing even more

autonomy by being forced into a joint

operation with the FLA.

50

Paying for success

The labour market reform in Germany and its impact on employment services

www.policyexchange.org.uk

• 51

The resistance of themunicipalities led to

a compromise during the legislative process:

69 of them were exempted from establishing

a joint office. However, the performance

of both organizations was to be evaluated

before a final decision had to be made

(experimental clause, § 6c SGB II).

Meanwhile, the constitutional court

decided that joint operations of federal

institutions and municipalities was not in

accordance with Federal Law so the change

has to be abolished by 2010. The government

now has to decide whether responsibility

for welfare is to be completely given

to the Federal State or the municipalities.

The most likely outcome is a form of

responsibility similar to the one used

before 2005.

The Reform of Placement Activities

The reform itself was triggered by the socalled

placement affair. In early 2002, it

became evident that the number of placements

claimed by the Federal Labour

Agency (FLA) was remarkably biased

upwards, because it used to accredit a large

part of successful individual job search to

itself. Up until then, the FLA had a de

facto monopoly on placement activities.

It turned out that only about 10% of

the more than 90,000 employees of the

FLA were actually engaged in placement

activities, although placement was widely

viewed as one of its major tasks. Not surprisingly,

the process operated by the FLA

became the subject of harsh criticism. As a

consequence, privatization and re-organization

of the schemes run by the FLA

emerged as a suitable solution.

Mainly in 2003, but also in 2002, several

new placement instruments were introduced:

In March 2002 the FLA started issuing

placement vouchers (§ 421g SGB III).

Each one entitles its owner to use a private

placement agency after three

months of unemployment (six weeks

since 2005). If the agency successfully

places a client, it receives an incentive

payment from the FLA.

The first payment is made at the beginning

of employment, the remaining

part only after six months of continuous

employment. There are no market

entry barriers to service providers.

Originally, the value of the voucher was

determined by the duration of unemployment.

The first tranch could be

encashed on the very first day of

employment. This, however, induced

fraud and deadweight loss. Thus, since

2005, the first tranch is paid out only

after six weeks. The total value of the

voucher has also been fixed at 2000

euros. Abuse fell substantially after the

change.

As an alternative to placement vouchers,

the FLA, since 2002, has been

allowed to contract-in third parties to

carry out placement activities. After six

months of unemployment, job-seekers

may also now claim the use of these private

agencies (§ 37 SGB III).

Contrary to placement vouchers, the

FLA has discretion over performancerelated

bonus payments. Since 2003,

private agencies have also been eligible

for compensation if they are engaged in

the placement of specific target groups

like the elderly, youth, and long-term

unemployed (§ 421i SGB III).

In 2003, Public Temporary Work

Agencies (PSAs) were introduced. They

were meant to operate as the flagships

of the reform (§ 37 c SGB III). Each of

the 180 regional districts of the FLA

had to establish at least one.

The general idea was to make systematic

use of the commonly observed

attachment effect of temporary work.

Since roughly one third of employees

working on behalf of a temporary work

agency are thought of as likely to be

permanently hired by the lessee sooner

1 See

Le Grand J, Motivation,

Agency, and Public Policy: Of

Knights and Knaves, Pawns and

Queens

, Oxford University

Press, 2003

52

Paying for success

or later, it appeared to suggest the use

of temporary work as a placement tool

(with a special focus on hard-to-place

unemployed). Therefore, PSAs were

subsidized for hiring the hard-to-place

unemployed and could also claim a

bonus payment for each individually

successfully placed at a lessee. The government

intended to place 500,000

people via the change.

The main problem with outsourcing placement

services arises from an unusual trilateral

contract relationship between service

provider, client, and paying authority (see

Figure 2). A job-seeker makes use of a service,

but does not have to pay for it. The

service provider has to claim for bonus

payments at the FLA, but the FLA can

only indirectly judge whether this claim is

justified. Because of a lack of cost control,

such a constellation is vulnerable to serious

inefficiencies.

According to contract management theory,

the main problem is one of differences

between principals and agents.

1 The former

is a representative of the public interest who

wants to maximize public utility. The latter

are public authorities like the FLA, external

service providers and job-seekers.

Within this setting, the FLA and service

providers have to cope with their specific

principal agent problem. Even if the head

of each institution behaves in accordance

with public interest, this may not necessarily

be true of his employees. Each individual

follows his or her own interest, which

may mean he or she doesn’t follow the aims

of the institution.

Economically, this could be overcome

via an internalization of economic risk, e.g.

by cost-sharing between job-seekers and

the FLA. This would stimulate job seekers

to insist on service quality directly from

the service provider and thus ensure that it

behaves as the FLA wants.

However, this was not implemented.

Instead, FLA monitoring relies on information

reported by service providers.

Verification by the FLA is indirectly based

on its records of the former job seeker and

his or her time at a new employer.

Evaluation results

The reform act as a whole was accompanied

by a Parliamentary resolution saying

that each instrument had to be evaluated

within the shortest possible time period

(BT-Drs. 15/98). Based on this statement,

Service

Provider Client

Federal Labour

Agency

Service

Provider

Client

Service

Payment

Payment Service

Standard contract relationship:

Trilateral contract relationship:

Figure 2: Standard contract relationship vs. trilateral contract relationship

a large scale research project was commissioned

by the Federal Ministry of Labour

and Economics, involving about 80

researchers from various German research

institutes and universities. The final

reports were due in June 2006.

External placement services were evaluated

within module 1a “Reform of

Placement Processes”, carried out by a

research consortium under the leadership

of the Social Science Research Center

Berlin (WZB).

2 Using a quasi-experimental

approach that compared ex-post recipients

of a placement voucher or participants

in external placement activities to nonrecipients

or non-participants, they mainly

focused on individual effects. For each

recipient a similar non-recipient was identified.

Analogously, matched pairs were

formed for participants and non-participants

in external placement activities.

Another module was devoted to macro

effects.

3 The idea was to control for substitution.

It could be that certain instruments

have a positive impact on the individual

level, but only at the expense of reducing

the employment prospects of non-participants.

In such a case, the overall effect on

employment could end up in a zero-sum

game.

Unfortunately, however, the necessary

aggregate data for placement vouchers and

external placement activities are not available.

It was therefore impossible to produce

macro level results for the instruments

under investigation.

Independently of the research project

commanded by the German government, a

specific project on placement vouchers and

external placement activities was carried

out by the Centre for European Economic

Research (ZEW) on behalf of the FLA.

4

The focus of this study was micro-oriented

and based on a matched-pair approach as

well.

Conditional independence is a central

assumption of the matched-pairs method.

This means that the treatment effect is

always the same, given a set of characteristics

of a certain individual. As a consequence,

the treatment effect can be identified

statistically by taking a sufficient number

of pairs of individuals, where each pair

is identical in terms of observable characteristics,

except for the treatment.

However, participants and non-participants

may not differ systematically with

regard to unobserved characteristics that

affect the outcome. If this condition is violated,

the pairs differ in more than only the

treatment so it is not possible to ascribe

differences in the outcome to the treatment

alone.

Unfortunately, the validity of the condition

of irrelevant unobservables can neither

be tested nor proven. People could differ,

for example, with regard to their general

activity level, which is difficult to observe

when based on usual characteristics like sex,

age, education, profession, and the like.

But if people who claim for a placement

voucher are more active in general than

non-claimants and if this activity level

makes it more likely that claimants find a

job, a comparison of claimants and nonclaimants

in terms of job finding rates is

biased by such unobserved a priori differences.

It is therefore essential to make the

best possible use of available observables.

The two studies at hand were carried

out thoroughly enough in that respect.

However, the WZB study reports a

remarkable incidence of deadweight loss

under placement vouchers, which means

that in a considerable number of cases,

placements were declared, ex-post, as

induced by a service agency, even though

the match came about independently.

Statistically, this is equivalent to a violation

of the conditional independence assumption.

Consequently, the results reported

later on should be taken with caution.

The recent quantitative importance of

the three placement instruments under

consideration can be found in Figure 3.

Vouchers are playing a minor role. On

2 Wissenschaftszentrum Berlin

für Sozialforschung, Institut für

Angewandte Sozialforschung,

Evaluation der Maßnahmen zur

Umsetzung der Vorschläge der

Hartz-Kommission - Modul 1a:

Neuausrichtung der Vermittlungsprozesse

,

Bericht 2006 für

das Bundesministerium für

Arbeit und Soziales, 2007

3 Rheinisch-Westfälisches

Institut für Wirtschaftsforschung,

Institut für Sozialforschung und

Gesellschaftspolitik,

Evaluation

der Maßnahmen zur Umsetzung

der Vorschläge der Hartz-

Kommission - Modul 1f –

Verbesserung der

Beschäftigungspolitischen

Rahmenbedingungen und

Makrowirkungen der Aktiven

Arbeitsmarktpolitik

, Bericht 2006

für das Bundesministerium für

Arbeit und Soziales, 2007

4 The results are published in

Pfeiffer F, Winterhager H,

“Vermittlungsgutscheine und

Beauftragungen Dritter im

Vergleich”, Zeitschrift für

Arbeitsmarkt-Forschung

, 39 (3

and 4), pp 425-445, 2006 and

Pfeiffer F, Winterhager H.

Selektivität und direkte

Wirkungen von Vermittlungsgutscheinen:

Empirische

Befunde aus der

Einführungsphase, Perspektiven

der Wirtschaftspolitik

, 7 (3), 399-

419, 2006

The labour market reform in Germany and its impact on employment services

www.policyexchange.org.uk

• 53

54

Paying for success

average, 5,500 people per month were

placed via vouchers in 2006, with a slight

increase in 2007. The number given refers

to the number of payments for the first

tranch of the voucher. Official numbers for

the second tranch after six months are currently

not available.

Compared to the initialization period of

placement vouchers, the recent figures

show a sharp decline. In total, the FLA

issued 1.4 million placement vouchers in

its initial version until December 2004.

8% of them were encashed by the end of

2005. The following decline was a reaction

to increasing evidence of the already mentioned

abuse of placement vouchers.

The average stock of people subject to

placement by third parties culminated in

late 2005, and was followed by a rapid

decline afterwards. Out of an average stock

of about 100,000 people in 2006, they

were able to place about 46,000 clients.

The average stock of job-seekers

employed at a PSA amounted to less than

4,000 in 2007. There were 12,600 in

2005, and 6,000 in 2006. Here again, the

tendency is still downwards. In 2006, PSAs

were able to place 12,000 clients. However,

they are clearly well short of the ambitious

target of 500,000 set by the government.

The overall number of placements

encountered by the Federal Labour

Agency in 2006 sums to 915,000 (compared

to 7.4 million outflows per year, 3

million of them into employment).

According to the figures given above, the

number of placements by private or voluntary

services amounted to 124,000 in

2006. It is thus fair to say that placements

outside public employment services

accounted for 13.6% of the total figure in

2006.

Placement Vouchers

Among the new placement instruments,

the voucher is the only one that freely

allows a job seeker to choose a service

provider. In principle, this should induce

competition among service providers and

therefore allow for efficiency gains. As

mentioned above, however, the divide

between service recipience and payment

responsibility may offset or even outweigh

potential efficiency gains.

Both available studies report a positive

impact from placement vouchers. The

WZB study, however, restricts this result to

the second generation vouchers, while the

ZEW study explicitly refers to the introductory

period.

0

25000

50000

75000

100000

125000

150000

03 03 04 04 05 05 06 06 07 07 08

Third Parties

PSA

Vouchers

Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun

Figure 3: Quantitative Importance of placement instruments

Source: Federal Labour Agency, Nürnberg; while the numbers for Third Parties and PSA refer to the stock of participants, the

number of placement vouchers refers to the number of vouchers encashed after an employment period of six weeks.

The labour market reform in Germany and its impact on employment services

www.policyexchange.org.uk

• 55

According to the WZB report, the

employment rate of placement voucher

recipients was 7.7 percentage points higher

than that of non-recipients. But the

authors point out that matches induced by

a voucher are less sustainable than other

matches in terms of average employment

duration.

This seems to be especially true for

males in east Germany. The regional effect

is so strong that it dominates the overall

average, although the sustainability of

matches in west Germany does not differ

much between recipients and non-recipients

of vouchers. The authors take this as

an indication for a considerable amount of

deadweight loss – especially in east

Germany.

The market for private placement isn’t

transparent. There is no official institution

rating or evaluating private and voluntary

employment services. Responsibility for

ratings is more or less at the discretion of

local authorities. However, they have little

information on external placement agencies

– something which would allow them

to conduct performance monitoring.

This is different from the market for

training providers. Since 2005, each training

provider has had to be approved by a

certifying authority according to a number

of quality criteria. The only device of quality

assurance in the private placement sector

that exists is a code of conduct, which

has been passed by the association of private

placement agencies.

However, this code is not very binding,

so in the absence of sanctions area-wide

quality assurance still needs to be solved.

Only plain straightforward placement

voucher fraud may lead to market exclosure

by commercial inspectorates and possible

legal action.

Due to the absence of transparent monitoring,

low-skilled workers are particularly

likely to be disadvantaged, not only

because they have more difficulties in finding

a suited private placement agency, but

also because they are not very profitable for

private placement agencies. The potential

for quality improvement by competition is

widely corrupted by lack of market transparency.

Placement by Third Parties

Placement by third parties comes in several

components: profiling, activation, job

aquisition, and case management. This

section, however, concentrates on the

holistic approach to placement by third

parties. This is the rule underlying § 37

SGB III since 2006, but has been in practice

since 2003.

Judging by official announcements,

placement introductions by third parties

were not meant as a competitive measure,

but as support for public placement activities

instead. This points to a delicate issue.

Since third parties have to be commanded

by the FLA, it is unlikely that the FLA will

make active use of an instrument that has

the potential to shed bad light on its own

performance.

If the FLA commanded third parties, it

would probably try to shift hard-to-place

clients. Service providers cannot reject certain

clients that are assigned for a placement

program by the FLA.

Commanding third parties became

accomplished via a centralized and nationwide

tendering procedure launched by the

FLA. Especially in the beginning, the

advertised lots were relatively large and

covered more than one, local FLA district.

Sub-lots were then assigned to local labour

agencies, who could assign clients of their

choice to the program. Large-scale tendering

was explicitly intended to destroy local

networks.

The employment rate of placement voucher recipients

was 7.7 percentage points higher than that of

non-recipients

According to a 2003 report by the

German Federal Court of Auditors, corruption

in local districts of the FLA was a

major source of exaggerated prices for

placement services. Because of large-scale

tenders, the resulting offers were indeed

dominated by supra-regional service

providers.

In the aftermath, prices deteriorated

despite the fact that in 47 of 104 tenders in

2004/2005 only one or no offer was made.

However, from the second half of 2005

onwards, lots became smaller again after

heavy complaints by local labour agencies

that organizational disorder was caused by

new and unknown service providers.

The culmination of the upheaval was

marked in 2005, when the strongest competitor,

holding a market share of 26%,

went bankrupt. Since then, the tendering

process has remained centralized, but now

refers to certain local districts of the FLA.

Interestingly, competition has not made

much progress since then. In 2006, the

FLA received only a single offer in two

thirds of its auctions.

The low profitability of the tenders is a

major reason. Especially for contracts based

on perfomance related bonus payments, the

risk is taken by the service providers.

In 2006, roughly two thirds of all contracts

were based on performance-related

bonus payments. For the rest, contractors

could claim an additional general expense

claim of 75 euros per client. In cases of a

purely bonus-based contract, the proportion

of successful placements must be

unrealistically high in order to make the

operation beneficial for a private service

provider. Not surprisingly, this increases

the incentive to concentrate on “good”

risks in order to maximize revenue.

Evidence for subsequent creaming

effects is clearly supported in both evaluation

studies. The development was accompanied

by a deterioration in wages and a

rise of precarious employment at private

service providers. This has to be taken into

consideration when interpreting the poor

evaluation results for external placements.

While established local service providers

became threatened by bankruptcy, expanding

inter-regional providers had to recruit

inexperienced and low-paid employees.

The overall service quality declined.

Programs now typically run for six or

twelve months. The typical lot size lies

between 50 and 150 participants.

Competition between local service

providers is more or less non-existent. This

makes it difficult to compare the performance

of different service providers, because

each comparison encounters the peculiarities

of different local labour markets.

Consequently, the incentive for service

providers to increase their effort lags

markedly behind a situation where several

providers can be directly compared when

competing within the same local area.

The impact analysis carried out by the

WZB does not support the expectation that

private placement is more efficient than

public placement. It clearly shows that external

placement has no measurable impact on

placement speed compared to direct placement

by the FLA. On average, it usually

takes about 4 months for participants as well

as non-particpants to re-enter employment.

However, in terms of sustainability,

placement performance by third parties is

even worse than that of the FLA. While

the average placement duration of jobseekers

placed by third parties is 12

months, comparable job-seekers directed

by the FLA stay in their jobs, on average,

for 16 months. Third parties perform par-

56

Paying for success

While established local service providers became

threatened by bankruptcy, expanding inter-regional

providers had to recruit inexperienced and low-paid

employees

ticularly poorly when dealing with the elderly

or in regions with high unemployment.

Only males in East Germany are

benefitting from external placement.

However, the reason for this is unclear.

According to the WZB study, the average

costs for placement by third parties

amounted to 600 euros in 2004 and 725

euros in 2005. Unfortunately, no reference

is available for non-participants. The

WZB study incorrectly assumes zero

placement costs for non-participants,

which is only valid if non-participants

received no alternative treatment at all.

Since this is not the case, it is not possible

to assess the cost-saving potential of external

placement.

Placement by Personal Service Agencies

PSAs are publicly subsidized temporary

work agencies. Job-seekers assigned to a

PSA get a regular work contract there. A

PSA may also train its clients in order to

improve their employability.

Contrary to a commercial temporary

work agency, however, the PSA has to

employ its workers throughout the contract

period of normally 12 months, no

matter whether they can be lent out or not.

Depending on the employability of a jobseeker,

this introduces a risk for PSAs.

The PSA business model is based on a

mixture of bonus payments for successful

permanent placement and case-related lump

-sum payments to cover wages and training

by the FLA. The establishment of a PSA is

subject to a tendering process. The level of

bonus payments and case-related lump-sum

payments has to be offered by bidders.

The hiring rate of PSAs is a field of obvious

conflict. It turned out that PSAs, on

average, hired less workers than agreed

upon in the contract with the FLA. Because

they want to reduce their risks, they are

reluctant to hire too many workers.

Critics argue that PSAs are more or less

a subsidy for commercial temporary work

agencies and that the instrument generates

nothing but deadweight loss. This was

especially true during the introductury

phase of PSAs, when lump-sum compensations

were relatively high on average.

However, the argument even holds after

prices have deteriorated. On average,

lump-sum compensation is now 500 euros

per case per month. Given the economic

risk of not being able to lend out workers,

there is not much left for additional activities

like active placement or training.

At first glance, it now pays for the FLA

to send job-seekers to a PSA – the lumpsum

compensation is less than the average

cost of unemployment benefit. However,

one has to take into account that average

duration of unemployment is higher for

employees of a PSA than for other unemployed

people.

Compared to the high expectations of

PSAs at their introduction, they have been

a complete failure. According to the evaluation

results from the observation period

2003-2004, the situation is dominated by

a strong locking-in effect.

Being employed at a PSA seems to lower

job-search activities. Compared to a control

group, the employment probability of workers

in a PSA sixmonths after leaving the PSA

is, on average, 6.4% lower than that of the

control group at the same point in time. On

average, members of the control group

entered into employment one month earlier

than their counterparts at a PSA.

By the end of 2005, the government

abandoned the clause that each local district

of the FLA had to run at least one

PSA. This should be viewed as the virtual

end of the instrument. Its quantitatve

importance is now close to zero.

Conclusion – Efficiency Gains by

contracting out placement services?

By and large, the German experience with

contracting-out of placement services is not

encouraging. However, it isn’t evidence

against the usefulness of competition and

The labour market reform in Germany and its impact on employment services

www.policyexchange.org.uk

• 57

privatization in general.The introduction of

private placement services is related to existing

public institutions that are not really

interested in competition.

Since the FLA can selectively assign job

seekers to different agencies, the poor performance

of private service providers may

have been actively brought about by the

FLA in order to maintain its power. In any

case, the existing studies show a latent

danger of deadweight loss when introducing

external service providers. This is especially

true for placement vouchers and

PSAs.

To some extent, the failure of private

placement services is because of an

unsolved principal-agent problem. Service

clients do not have strong incentives to

insist on service quality from providers.

Even if they did, they could hardly sanction

poor quality. As an option for overcoming

the lack of immediate quality control,

models of cost-sharing between clients

and the FLA should be considered.

Besides this, it seems that competition

didn’t improvement quality enough. This

is especially true for placement by third

parties. To a large extent, this may be due

to a monopsonistic market structure where

the FLA is the major service demander.

There is nomarket driven price increasing

mechanism in case of bad quality or no supply

at all. Competitors try to enter the market

via price dumping. Consequently, the

profitability of private placement for hard to

place clientele seems to be unattractive.

The German experience thus suggests

that price flexibility among service demanders

is important. Competition should be

organized by the best output at a given

price level The winner could be rewarded

with an extra lot at the same price level.

Continuous tournaments among a number

of competitors at various price levels

would allow for an optimization of costs

and benefits at mid-price levels.

5 An estimated figure; Central

Intelligence Agency (2008)

The

2008 World Factbook

(USA:

Central Intelligence Agency).

6 Destatis.

7 Of population aged between

15 and 65 years. Source: IWH.

8 Gross wage figures in West

Germany used. Includes part

time jobs and ‘minijobs’. Source:

Deutsche Rentenversicherung

Bund: Rentenversicherung in

Zahlen 2007.

9 Bundesministerium für Arbeit

und Soziales, Sozialbudget

2006.

10 General rule for

Arbeitslosengeld used:

60%/67% of previously earned

net income. Source:

Bundesagentur für Arbeit.

11 Count of people registered as

unemployed at the Federal

Labor Agency (who could be

employed for up to 15 hours per

week. Figure does not include

individuals in active labour market

programs, early retirement

schemes and suchlike (exclusions

which amount to roughly

25% of the registered unemployed).

Source: Federal Labor

Agency.

12 Please note, these figures are

systematically underreported

due to artificial interruptions of

unemployment duration caused

by sickness and suchlike (standardized

OECD figures report an

increase from 48 to 57%

between 2002 and 2006).

Source: Bundesagentur für

Arbeit.

13 Deutsche

Rentenversicherung Bund:

Rentenversicherung in

Zeitreihen, p. 199.

14 Includes partial payments.

Source: Deutsche

Rentenversicherung Bund:

Rentenversicherung in

Zeitreihen, p. 134.

58

Paying for success

Germany

GDP in 2007: $3.25 trillion 5 .

Population, 2005/6: 82.3 million 6 .

Number of people in the labour force, 2005/6: 54.8 million 7

Average weekly wage among adults in full-time work, 2005/6: $827.33 8

Total spending on welfare, 2005/6: $1 trillion 9 (30.2% of GDP).

Rate of per week unemployment benefit, 2007: $260.91. 10

Number of people unemployed, 2005/6: 4.5 million (11% of population) 11 .

Number of unemployed people in 2005/6 out of work for one year or more: 1.9 million 12

Number of days formerly unemployed people must be in work for their assistance to be considered

successful: 180.

Total spending on incapacity benefit, 2005/6: $20.7 billion 13

Rate of per week incapacity benefit, 2005/6: $237.63 14 .

5

The creation and

regulation of markets

in employment services

- Danish experiences

by Thomas Bredgaard

Introduction

When trying to contract-out Public

Employment Services (PES)

, decision-makers

are confronted with two intricate challenges:

first, to create a market structure that resembles

a “real market” and then, second, to

establish regulatory mechanisms for monitoring

and controlling market behaviour.

Both of these tasks are fraught with

important questions: can cost-efficient markets

supply high-quality services? How can

free-market competition be combined with

public regulation? Can public regulation to

reduce transaction costs and opportunistic

behaviour go together with ambitions to

reduce public bureaucracy?How can private

service providers that are motivated by economic

incentives be encouraged to cater for

the long-term unemployed with severe barriers

to labour market entry? How can a

competitive market structure be combined

with partnerships, policy learning and

mutual trust between providers and purchasers?

Contracting-out is not a panacea;

there are several answers to these problems.

The Danish experience in creating and regulating

a market for employment services is

reviewed in this essay.

Since 2003 Danish

PES have been partially

contracted out to various “other

actors” (private service providers, educational

institutions, trade unions, unemployment

insurance funds etc). The two

phases of the implementation of the tendering

model, the initial creation of a market

structure parallel to the

PES , and the

subsequent regulation of the market

through a new structure of local jobcentres

in each municipality are reviewed here.

It’s clear from the review that the contracting-

out of

PES is not responsible for

Denmark’s current low unemployment

rates, but rather, are a result of the historic

economic boom experienced over the past

few years. Furthermore, the problems in

creating and regulating markets for former

PES

have not been resolved in Denmark,

although important lessons can be learned

by reviewing its experiences.

Historical and institutional background

In order to know where we are and where we

are going, we need to know where we have

come from. In international comparisons,

Danish labour market regulation is quite

unique. Even if the welfare state follows the

Scandinavian traditions of universal services

and benefit provision and the public sector is

large in international comparison, the labour

market has traditionally been characterised

by limited state intervention.

TheDanishmodel is “liberal” in the sense

that the state does not, in principle, inter

www.

policyexchange.org.uk

• 59

vene in the voluntary collective bargaining of

labour market organisations (trade unions

and employers associations) and job protection

for ordinary employees is weak.

1

This has created a special relationship

between a flexible labour market with high

job-to-job mobility and a relatively generous

social security system – often labelled

Danish “flexicurity”.

In the last couple of decades active

labour market and educational policies for

the unemployed have grown in importance

as the third corner in a “golden triangle”.

2

In it, active labour market policies have

two functions: to motivate the unemployed

to take and seek vacant jobs (a

deterrence effect), and to help the unemployed

that are not capable of finding a job

on their own (a qualification effect).

Denmark’s history of limited state intervention

in its labour market shaped its system

of job placements as well as its labour

market policy. Until the late 1960s the

“private” unemployment insurance funds

(closely affiliated to the trade unions)

mediated and allocated vacant job positions

to their unemployed members as well

as administering unemployment insurance.

In 1969 a unified Public

Employment Service (

PES ) was created,

among other things, to take over responsibility

for job placements for the insured

unemployed. However, the unemployment

insurance funds remained somewhat active

in allocating vacant jobs to their members

through ‘parallel-broking’.

The municipalities have become more

active in unemployment policy since the

late 1970s. Being responsible for benefit

administration and service provision for

recipients of social assistance (unemployed

persons without insurance entitlements),

they created make-work programs, education

and training, especially for young people.

They were also allowed, from 1991, to

allocate jobs on the ordinary labour market

to their target groups.

After strong criticism of the

PES ’ inability

to service the ordinary labour market,

the conservative-led coalition government

decided in 1990 to ‘liberalise’ and modernise

the PES. The liberalisation was

meant to create a market for job placements

through temp work agencies, unemployment

insurance funds and trade

unions. However, the market never materialised

in full because of an “unlevel playing

field” where the services of the PES

remained free of charge. The PES subsequently

maintained its position as the

largest job provider for unemployed people.

3

In 1994, a major labour market reform

attempted to strengthen the position of the

PES

. Some of the main changes included a

shift towards earlier and more individualised

interventions in the unemployment

spells and the introduction of new activation

instruments (individual action plans,

upgrading education and training, job

rotation and leave schemes). The new activation

policy was traded-off with a shorter

unemployment benefit period (currently 4

years) and a stronger criteria for labour

market availability and sanctions.

The implementation of the new active

labour market policy was given to tripartite

regional labour market councils in which

representatives of the labour market organisations

played a dominant role in policymaking.

The new approach did not, however,

halt the criticism of the

PES for being

inefficient, unresponsive and expensive.

4

In 2002, a fundamentally new approach

to PES reform was taken. The steering and

organisation of labour market policy was

changed substantially with the contracting-

out of the

PES , which was one of the

main elements in the labour market reform

‘More people into employment’ (

Flere i

Arbejde

).

Rhetorically, the introduction of a

“quasi-market model” was never framed as

privatisation, contracting out or liberalisation

of the

PES , but merely as a wish to

include “other actors” in service delivery.

1 Jørgensen H,

Consensus,

Cooperation and Conflict: The

Policy-Making Process in

Denmark

, Edward Elgar, 2002

2 Madsen PK, “Denmark:

Flexibility, Security and Labour

Market Success”,

Employment

and Training Papers

(International Labour

Organisation)

, no 53, 1999;

Bredgaard TF and Larsen F,

“Quasi-Markets in Employment

Policy in Australia, the

Netherlands and Denmark”,

CARMA Research Paper

, no 6,

2007

3 Csonka A,

Fri Formidling: Om

Liberalisering af

Arbejdsformidlingen

,

Socialforskningsinstituttet, 1992

4 Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006; Bredgaard

T, Larsen F and Møller LR,

“Contracting out the Public

Employment Service in

Denmark: A Quasi-market

Analysis”, in Bredgaard T and

Larsen F,

Employment Policy

from Different Angles

, DJØF

Publishing Copenhagen, 2005

60

Paying for success

5 See Struyven L, “The New

Institutional Logic of

Public

Employment Services

”, in

Bredgaard T and Larsen F (eds),

Employment Policy from

Different Angles

, DJØF

Publishing Copenhagen, 2005

6 Bredgaard T, Larsen F and

Møller LR, “Contracting out the

Public Employment Service in

Denmark: A Quasi-market

Analysis”, in Bredgaard T and

Larsen F,

Employment Policy

from Different Angles

, DJØF

Publishing Copenhagen, 2005;

Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006

7 See Bredgaard TF and Larsen

F, “Quasi-Markets in

Employment Policy in Australia,

the Netherlands and Denmark”,

CARMA Research Paper

, no 6,

2007; Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006; Bredgaard

T and Larsen F,

Employment

Policy from Different Angles

,

DJØF Publishing Copenhagen

8 See Le Grand J and Bartlett

W,

Quasi-Markets and Social

Policy

, Macmillan, 1993

9 Le Grand J and Bartlett W,

Quasi-Markets and Social Policy

,

Macmillan, 1993

The creation and regulation of markets in employment services - Danish experiences

www.policyexchange.org.uk

• 61

This helped to secure broad political support

– even from the trade unions, who

came to consider themselves as service

providers in this new market.

The use of different types of service

providers was, however, not new in itself:

public authorities had previously contracted

educational institutions and unemployment

insurance funds in the implementation

of labour market policies, especially in

the delivery of education and training.

But the split between purchasers and

providers through binding and formal contracts

and tendering rounds was new. A

fresh “institutional logic” was introduced.

5

The planning and delivery of employment

services was delegated to independent

service providers.

6 All former restrictions

on the duration, scope, target groups,

average prices and types of activities were

abandoned. Service providers winning

contracts with the

PES were allowed “freedom

of methods” in selecting the most

suitable path to reintegration of the unemployed,

as long as they complied with the

contract and the broad frames of the law

on active labour market policy.

The arguments for introducing tendering

models in employment services vary

according to the country of implementation.

Nevertheless, there are several common

themes.

7 The dominant ones are as

follows:

Improved efficiency : open competition

between independent service providers

improves the efficiency of services

(understood as quicker and higher

employment effects). This creates more

“value for money” (less public spending).

Improved quality : service providers that

target specific groups contribute to

more innovative methods and tailored

individual solutions, thus improving

the quality of services. Freedom for the

unemployed to choose a provider is

also expected to improve the quality of

services.

De-bureaucratisation : open tendering

models are smoother, more flexible and

responsive to changes in the business

cycle and the needs of target groups.

They thus create a less bureaucratic

employment service – one where individuals

are not clients but consumers

and costumers.

Before evaluating the Danish attempts at

achieving these objectives, one should keep

in mind that one is evaluating a “quasimarket”

and not a conventional commodity

one.

8

Market

implies that state provision is

replaced with independent and competitive

market providers.

Quasi suggests that these

markets differ from conventional ones in at

least three ways: one, not all providers aim at

maximising profits or are necessarily privately

owned; two, demand in the market is

often public and not private and, three, the

choice of provider is often delegated to a

third party (the purchaser). The preconditions

for well-functioning quasi-markets in

welfare policy are thus different from those

of conventional markets. Le Grand and

Bartlett use four evaluation criteria: efficiency,

responsiveness, choice and equity.

9

To achieve these criteria four preconditions

must be fulfilled: one, a competitive market

structure must be established (with many

service providers as well as purchasers, easy

entry and exit, and free pricing); two, accurate

information on costs and qualitymust be

available, together with low transaction costs

to avoid moral hazard and adverse selection;

three, providers must be motivated by economic

incentives, and purchasers by the welfare

of citizens; four, the creaming and parking

of clients (inequality) must be avoided.

Providers must be motivated by economic incentives,

and purchasers by the welfare of citizens

10 Newsletter from the Danish

Ministry of Employment, no. 11,

November 2004

11 In absolute number, around

22.000 unemployed individuals

are currently referred to “other

actors” during the year (app.

14.000 full-time equivalents).

12 Due to the national action

plan (see below) unemployed

individuals are transferred to

external providers at a later

point in time in their unemployment

spell (typically after 6

months), and they remain with a

provider for typically one year.

Compared to before, this leads

to a reduction of the volume of

persons referred to external

providers. On the other hand,

the intensity of activities has

increased since providers have

to provide longer-term and consecutive

activities.

62

Paying for success

The creation of the Danish

“quasi-market”

When the Danish “quasi-market” had

been in operation for nearly two years, the

Minister of Employment proudly

announced:

“I can’t think of any precedent in Danish

politics when such a huge market has been

created from scratch in such a short time. A

market that, on top of everything, is

already operating on a par with the PES

[…] Other actors are here to stay”.

10

The Minister voiced one of the main

parameters of success: the increase in the

number of unemployed people referred to

external service providers. Ironically, however,

the size of the market has shrunk ever

since the claim. As seen in the figure below,

the number of insured unemployed

referred to “other actors” peaked in early

2005 with about 40 %. It currently stands

at around 10 %

11 ; so what happened?

From its inception in 2003, the government

set the first minimum target: that at

least 15% of insured jobseekers should be

referred to “other actors”. In addition, local

authorities were asked to set minimum targets.

The Minister of Employment could

issue, but not dictate, guidelines for these

targets, The tradition of municipal selfgovernance

constrained him.

Traditionally, local authorities have only

sporadically used open competitive tendering.,

They tended to only use external

providers on an ad-hoc basis. In any case,

the PES quasi-market was kick-started and

grew constantly until its peak in 2005.

A few contracts have been phased out

since then, while the Minister of

Employment issued an action plan (see

below), which put a temporary halt to the

conclusion of new contracts.

12 However,

new contracts were signed and gradually

took effect in 2007. The market is thus

expected to recover in the coming years.

The new local jobcentres (an amalgamation

of the

PES and municipalities, cf.

below) are also beginning to sign contracts

with external providers, particularly for

uninsured persons with severe barriers to

labour market entry.

These changes suggest that the “quasimarket”

for employment services is

dynamic and volatile. Between the first

and second tendering rounds the composition

of providers has shifted: private

providers are winning market share at the

expense of educational institutions and, to

40

35

30

25

20

15

10

5

0

2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007

1kv. 2kv. 3kv. 4kv. 1kv. 2kv. 3kv. 4kv. 1kv. 2kv. 3kv. 4kv. 1kv. 2kv. 3kv. 4kv. 1kv. 2kv.

Figure 1: Percentage of unemployed referred to “other actors” (only

unemployed individuals with unemployment insurance)

Source: The Danish Labour Market Administration (www.jobindsats.dk.)

a lesser extent, trade unions and unemployment

insurance funds. Even as the

market size shrunk considerably from

2005, the same tendency applies; private

providers are currently out competing the

other types of providers (see table below).

Efficiency, responsiveness, choice and

equity are also central in the creation of a

well-functioning “quasi-market”.

14 Experiences

(not only in Denmark) show that

there are substantial transaction costs in

establishing a quasi-market for employment

services. Some will be transitional,

but others, related to contract renewal,

monitoring, supervision, benchmarking,

and controlling market behaviour, are

recurrent. There is one main problem:

transaction costs tend to increase as the

market becomes more competitive and

transparent.

While it is feasible to reduce transaction

costs by entering into more stable provider

and partnership relations (see the

Australian Job Network

), this implies moving

further away from the original intentions

behind the competitive tendering

model.

15 In the first phase of contracting

out (2003-2005) the transaction costs in

Denmark turned out to be substantial –

for some surprisingly so. The providers

found that preparing and presenting tender

bids required a disproportionate

amount of resources. The administrative

tasks, such as working out payment and

documentation of jobseekers’ employment

situation, also turned out to be quite

demanding,

16 not least because Denmark

operated a regional tendering model with

different tendering criteria in each region.

Regional purchasers found it difficult to

precisely describe the services required, and

the call for tenders was therefore rather

vague at times – and very heterogeneous

across regions. This led to diverging interpretations

of the services to be delivered,

which again created extra work when

attempts were made to settle differences

over expectations.

17

There is another dilemma in the competitive

tendering model: transaction costs

increase as jobseekers are given more

freedom

of choice

. “Quasi-markets” often

depart from conventional commodity

markets where the “consumer is the king”

because choice is determined by public,

not private, demand and, therefore, delegated

to a third-party (the purchaser).

A 2004 survey in Denmark found that

67% of jobseekers did not feel they had

had the opportunity to choose between

providers.

18 They are often automatically

allocated to a provider by the

PES system,

13 “Framework contracts” are

pre-qualification contracts

signed with external providers.

In order to operate on the market,

a service provider also

needs to conclude a subsequent

specific contract with purchasers.

So “framework contracts”

does not guarantee that

any unemployed persons are

referred to the provider.

14 See Le Grand J and Bartlett

W,

Quasi-Markets and Social

Policy

, Macmillan, 1993

15 Considine M,

Enterprising

States: The Public Management

of Welfare-to-Work

, Cambridge

University Press, 2001; Sol E

and Westerveld M,

Contractualism in Employment

Services: A New form of Welfare

State Governance

, Kluwer Law

International, 2005

16 Rambøll,

Erfaringsopsamling

Vedrørende Inddragelsen af

Andre Aktører I

Beskoeftigelsesindsatsen

,

Rambøll Management, 2004

17 Rambøll, Erfaringsopsamling

Vedrørende Inddragelsen af

Andre Aktører I

Beskoeftigelsesindsatsen,

Rambøll Management, 2004

18 Rambøll,

Erfaringsopsamling

Vedrørende Inddragelsen af

Andre Aktører I

Beskoeftigelsesindsatsen,

Rambøll Management, 2004

The creation and regulation of markets in employment services - Danish experiences

www.policyexchange.org.uk

• 63

Table 1: Number of “framework contracts” and market shares in Denmark

13

No. of Share in No. of Share in No. of Share in

framework percentage framework percentage framework percentage,

contracts 2003 contracts 2005 contracts 2007

2003 2005 2007

Private providers 94 51% 222 62% 83 79%

Educational institutions 38 20% 59 16% 5 5%

Trade unions and 25 13% 44 12% 3 3%

unemployment

insurance funds

Consortia 19 10% 16 4% 13 12%

Other 10 5% 19 5% 1 1%

Total 186 99% 360 99% 105 100%

Source: The Danish Labour Market Administration.

19 National Labour Market

Administration,

Effekt af

Indsatsen hos Andre Aktører:

Foreløbig Opgørelse [New

Frames for the Involvement of

‘Other Actors’],

Arbejdsmarkedsstyrelsen

, 2005

20 Rambøll,

Erfaringsopsamling

Vedrørende Inddragelsen af

Andre Aktører I

Beskoeftigelsesindsatsen

,

Rambøll Management, 2004

21 Ministry of Employment,

Handlingsplan for Brug af Andre

Aktører,

Arbejdsmarkedsstyrelsen, 2004;

National Labour Market

Administration,

Effekt af

Indsatsen hos Andre Aktører:

Foreløbig Opgørelse

,

Arbejdsmarkedsstyrelsen, 2005

64

Paying for success

but rejection is possible if other “equally

effective” providers are available (which is

often not the case).

As explained above, the Danish quasimarket

model was introduced parallel to a

still-functioning

PES system, which, in

principle, should make it possible to compare

the

outcomes and effects of the two systems.

In practice, this is far from easy, as

the first simple effect measurements have

proved.

19

It has been far more difficult than anticipated

to meet the conditions for establishing

a well-functioning quasi-market for

employment services. Admittedly, a market

has been established with a relatively

high number of service providers (at least

until 2005) and purchasers, but the market

is really more an expansion of what was

already in existence than the establishment

of a new quasi-market.

20

It’s impossible to evaluate the efficiency

of this market at present, either in terms of

cost-effectiveness or employment effects.

There have been high levels of information

asymmetry and transaction costs. As a

result, both transparency and freedom of

choice have been reduced. Consequently,

the authorities have introduced regulation

to make both the quasi-market work better

and to eliminate some of the unacceptable

outcomes of the tendering model.

Regulation of the Danish

“quasi-market”

Although the Danish “quasi-market” had

only been going for about 18 months, in

spring 2005 the Minister of Employment

issued a plan to rectify some of its worst

aspects. It was the first example in Denmark

of an attempt to re-regulate the market.

Its main objective was to use external

providers as part of a competence strategy

rather than a resource one.

21 Instead of relieving

the

PES of standardised and administrative

duties (like the “contact periods, see below),

specialised external providers would be

contracted for clearly defined target groups,

where providers could “make a difference”.

The action plan was also an attempt to

create a more centralised and standardised

market for employment services in light of

the decentralisation of labour market policy

to local jobcentres in each municipality

(see below). The most important changes

of the action plan were as follows:

External providers only to be used

where there is a clear employment

rationale and for clearly defined target

groups where they can

make a difference .

The initial basic contact (after 3

months) with jobseekers no longer to

be contracted out to external providers.

The use of external providers must be

as smooth and un-bureaucratic as possible.

Complicated (regional) payment

models and contracts replaced by one

simplified and centralised payment model

and standard contracts.

Financial incentives should be used to

get jobseekers as quickly as possible into

employment rather than using activation

or educational activities (

work first ).

Performance payment must amount to

75% (the remaining 25 % is paid as an

intake fee). A successful outcome is

measured as being in ordinary employment,

education or adult apprenticeships

for at least 13 weeks within the last 26

weeks (transfer into private job training

is rewarded with half the bonus). Pay can

be adjusted to give a higher bonus for

more challenging target groups such as

long-term unemployed or immigrants.

External providers are to take over

full

financial responsibility

for all activities

It has been far more difficult than anticipated to meet

the conditions for establishing a well-functioning

quasi-market for employment services

22 Rambøll, Erfaringsopsamling

Vedrørende Inddragelsen af

Andre Aktører I

Beskoeftigelsesindsatsen,

Rambøll Management, 2004

The creation and regulation of markets in employment services - Danish experiences

www.policyexchange.org.uk

• 65

during the contract period, and are

obliged to ensure that jobseekers participate

in activation activities for at least

40% of the time.

To support the tendering model, a

national IT system was designed. There

was to be more focus on

measurable

outcomes

and benchmarking of productivity.

Comparable measurements of

provider outcomes were to be established

and published on the internet (at

the time of writing, this module is still

not operational).

The supervision and control of service

providers to be strengthened by central

administration as well as local jobcentres

(random samples, unannounced

visits, monitoring of contract compliance,

outputs and outcomes).

As indicated above, until 2005 external

providers were mainly used to “relieve” the

PES of administrative tasks; that is, as extra

hands to help out with the contact periods.

The “contact periods” were invented in

2003 as a guarantee that the

PES would

contact jobseekers at least every 3 months,

and as an availability check on the individual

unemployed. Previously, the PES had

not been in contact with each unemployed

person on such a regular basis, and the new

contact periods, therefore, drained the

resources of a

PES -system that was already

squeezed financially.

Contracting-out this service to external

providers thus provided financial and

administrative relief for the

PES , and soon

became the dominant instrument for outsourcing

to the market. By implication, the

focus was largely on minimising costs and

not maximising effects.

22

With this approach, external service

providers quickly developed into a flexible

but extended arm of the

PES , which did

not promote specialisation, innovation and

individualisation as intended. As the

national action plan takes effect, this might

change as external providers can no longer

be used to handle purely administrative

tasks (such as contact periods).

However, at the same time, the financial

risks of specialisation, innovation and individualisation

are transferred from the public

authorities to the providers. The payment

model is tuned towards higher outcome

bonuses, and providers have to

finance all jobseekers’ activities themselves

(instead of referring them to activities paid

for by the authorities).

One important advantage in the first

Danish tendering round was that instead

of relying on standardised national measurements

and evaluations (since they were

not available at that time), practically all

purchasers used regular, informal meetings

and dialogue with providers for mutual

exchange of experiences and alignment of

interests. It could be argued that the need

for coordination and monitoring was partly

solved by means of a culture of cooperation

and dialogue.

Whether it will be possible to preserve

this culture in the wake of the action plan is,

however, an open question. On the one

hand, the involvement of external providers

has been shifted away from administrative

tasks to delivery of services where specialised

providers can make a difference; on the

other hand, it has introduced a much more

outcome-focused payment model, something

which may threaten the mutual trust

needed for partnership and cooperation.

In general, a competitive tendering

model easily leads to conflicts of interest

between principal (authorities) and agents

(providers). As the principal wants to keep

agents at arm’s length, expectations and

outcome demands are communicated to

the providers through tendering rounds

and contracts. In principle, this secures

transparency in the market and a level

playing field for providers.

But, on the other hand, most providers

call for dialogue and cooperation. As they

see it, discussion allows for corrections,

improvements and harmonisation of interests,

which may secure a more targeted and

successful delivery of services. However, in

the view of the authorities such cooperation

might bias the process and favour

some providers over others, and therefore

not secure a level playing field.

23

The new, centralised tendering regime

and payment model may also have major

implications for equal access to services

and the fair treatment of jobseekers. So far

creaming and parking

has not been explicitly

on the agenda in Denmark. This could

be because such opportunistic behaviour

does not occur; that information asymmetry

means the authorities do not know

what is happening on the ground; or that

creaming and parking is taboo. Based on

our data from interviews, we have found

indications that all three explanations have

some validity.

24

It is also evident that the open prioritisation

of target groups, something which is

clear from a comparison with Australian and

Dutch experiences, does not happen to the

same extent in Denmark.

25 However, there is

a risk that creaming and parking will become

more widespread with the new central payment

model of 25% commencement fee

and 75% performance-related pay and the

transfer of economic risks upon providers.

In general, quasi-markets have difficulties

in catering for the needs of the jobseekers

least ready for ordinary employment if

outcomes are measured shortly after intervention

(e.g. 6 months later). There are

also problems when instruments are

focused on short-term interventions (i.e.

jobseekers are “turned in the door” which

is the informal expression of the Danish

PES

) and if economic risks are shouldered

by the providers (i.e. providers motivated

by economic incentives will be reluctant to

invest in jobseeker where the return on

investments is uncertain).

26

The box below summarises the main

characteristics of the Danish “quasi-market”

model in employment services, as it

has developed since its inception in 2003.

23 Bredgaard T and Larsen F,

“Implementing Public

Employment Policy: What

Happens When Non-Public

Agencies Take Over?”,

International Journal of

Sociology and Social Policy

, vol

27, no 7/8, pp 287-300, 2007;

Bredgaard TF and Larsen F,

“Quasi-Markets in Employment

Policy in Australia, the

Netherlands and Denmark”,

CARMA Research Paper

, no 6,

2007

24 Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006

25 Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006; Bredgaard

T and Larsen F, “Implementing

Public Employment Policy: What

Happens When Non-Public

Agencies Take Over?”,

International Journal of

Sociology and Social Policy

, vol

27, no 7/8, pp 287-300, 2007;

Bredgaard TF and Larsen F,

“Quasi-Markets in Employment

Policy in Australia, the

Netherlands and Denmark”,

CARMA Research Paper

, no 6,

2007

26 Bredgaard T and Larsen F,

Udliciteringen af

Beskoeftigelsespolitikken:

Australian, Holland og Danmark

,

DJØF-forlaget, 2006; Bredgaard

T and Larsen F, “Implementing

Public Employment Policy: What

Happens When Non-Public

Agencies Take Over?”,

International Journal of

Sociology and Social Policy

, vol

27, no 7/8, pp 287-300, 2007;

Bredgaard TF and Larsen F,

“Quasi-Markets in Employment

Policy in Australia, the

Netherlands and Denmark”,

CARMA Research Paper

, no 6,

2007

66

Paying for success

Service delivery systems Local jobcentres (one in each municipality) and external service providers

Purchasers National labour market administration, employment regions (4), local jobcentre

(91)

Levels of tendering National (service tenders), regional (state framework contracts), local

(one or more jobcentres)

Service providers Private consultancy firms, recruitment firms, temp agencies, educational

institutions, unemployment insurance funds, trade unions

Types of contracts Framework contracts (pre-qualification) and binding contracts (2+2 years)

Payment model One national payment model

75 % outcome payment (13 weeks uninterrupted ordinary employment with

in last 26 weeks, transitions to ordinary education or adult apprenticeships.

Half bonus if transition into private job training)

25 % intake payment

Providers have to finance all activities from their own budgets

Price bids are given as average price for specified target groups for

52 weeks

Selection criteria

Price (40-50 %)

Other criteria (50-60%)

Table 2: Summary characteristics of the Danish “quasi-market”

for employment services

The construction of new local jobcentres

in each municipality has also been an

important part of the 2005 plan. Until

2007, Denmark had a two-tiered employment

system: the

PES had responsibility

for services and benefits (together with the

unemployment insurance funds) for people

with unemployment insurance, while

the municipalities remained responsible

for people on various types of social security

(social assistance, disability benefits,

vocational rehabilitation etc.).

However, when a liberal-conservative

government came into office in 2001, the

liberal Minister of Employment soon

declared that the government was aiming

for a more unified governance system (a

‘one-stringed’ system). It looked to municipalise

the system by shifting the responsibility

for, and target groups of, the

PES to

new municipal jobcentres.

27

It met fierce opposition, however, from

its political opponents, and the labour

market organisations (trade unions and

employers association) that preferred the

state

PES system in which they traditionally

had major influence over labour market

policy formulation, steering and implementation.

The reform came to a standstill.

However, a window of opportunity

opened in 2004 when the government

moulded the 275 municipalities into 98

larger ones and transferred competencies

away from the regional level. This gave

impetus to governance reform in employment

policy. After another round of heated

political bargaining, the government found

a narrow majority with the nationalist

party (Dansk Folkeparti), and moved forward

to implement a new local jobcentre

structure from 2007.

The new structure is not a full municipalisation

as the government intended,

but a rather incoherent organisational

compromise. Each municipality now has a

local jobcentre which is charged with

(re)integration of the labour market.

Benefit administration and sanctions

remain with either the unemployment

insurance funds (insured unemployed) or

the municipal administration (uninsured

unemployed).

There are two different types of jobcentres.

In the majority of municipalities (77)

the

PES and the municipal social and

employment departments are working

side-by-side in the same building. The

PES

is, however, still responsible for services

and benefits for insured unemployed,

and the municipalities for uninsured

unemployed – which also means that there

are two different executives: one from the

PES

and one from the municipality (quite

similar to the German

Arbeitsgemeinschaften ,

ARGE). The remaining 14 jobcentres are

run exclusively by local authorities on a

trial-basis (evaluation will take place in

2010), which means that municipalities

have also assumed responsibility for

administering unemployment insurance

benefits (cf. figure below).

There are different ways of tendering in

each level of this new governance system.

The Minister of Employment can issue

national tenders for specific groups which

are administered by a new contracting unit

in the national labour market administration.

In September 2006 just such a tender

was announced for two target groups: one,

unemployed individuals with vocational

education (e.g. bricklayers and hairdressers)

or with a short to medium-term

academic education (e.g. dental technicians,

teachers, nurses) and, two, unemployed

individuals aged 55+ (including

27 In a longer-term perspective,

the implicit objective was also to

create a unified benefit system,

i.e. to amalgamate unemployment

insurance benefits and

social assistance (and thereby

also remove benefit administration

from the unemployment

insurance funds).

The creation and regulation of markets in employment services - Danish experiences

www.policyexchange.org.uk

• 67

After another round of heated political bargaining, the

government found a narrow majority with the nationalist

party, and moved forward to implement a new local

jobcentre structure from 2007

former executives). The national labour

market authorities contract providers, but

the local jobcentres are free to decide

whether they want to make use of them

(they sign a specific contract with each

provider when they do).

In between the national and regional

level, tenders are made for unemployed

academics. The tenders are national, but

administered by the regional employment

authorities. The local jobcentres are

obliged to refer any unemployed academic

in the municipality to the providers that

have been certified to deliver these regional

services.

At the regional level, each authority can

decide to make its own tender for target

groups that are not covered by the aforementioned

tenders. If they do so, the local

jobcentres are obliged to use them.

Even if the homogeneity of the target

groups described above can be debated,

there is, nonetheless, a clear division of

labour between the national and regional

authorities on the one side and the local

jobcentres on the other. The former

assume responsibility and contract out

services for unemployed target groups

with vocational and higher education

(the easiest target groups), while the latter

target groups with little or no education

and training (the most difficult target

groups).

The local jobcentres can – alone or

together with other jobcentres – make

their own calls for tender for their target

groups. So even if the volume of the market

has declined in recent years, it is clear

that there are a number of different opportunities

for contracting out in the new

governance system, which is still in its

infancy.

In relation to the use of external

providers in the local jobcentres, it is

important to recall that the Minister of

Employment can only dictate quantitative

minimum targets for the state

PES system

for insured unemployed. The municipalities

are free to decide whether to contractout

services to external service providers.

Once the minister has set the targets

for private provider involvement, it is,

even in the public system, to a very large

extent the public parts of the local jobcentres

who, in cooperation with regional

and local tripartite employment councils,

manage the tendering process. Thus,

there are currently two parallel systems

for provision: the local jobcentres and private

providers.

28 The national, regional and

local employment councils (BER,

RBR and LBR) exist to give

advice to the respective political

and administrative authorities,

and assist in monitoring the

results and effects of the local

jobcentres. The councils are tripartite

bodies composed of

administrative/political representatives,

representatives of the

municipalities, and representatives

of the labour market organisations

(the latter have a majority

of representatives in all three

councils).

68

Paying for success

Central government financing

Monitoring results and effects

Job centres

Municipal financing

BER

RBR

LBR

KB

Minister of Employment

Administrative region Employment region

State

Municipality

Municipality

BER: Central employment council

RBR: Regional employment council

LBR: Local employment council

KB: Municipal government

Figure 2: Organisational set-up of the Danish employment system

28

Conclusion and policy challenges

The Danish “quasi-market” for employment

services has been in operation for

nearly five years, and has gone through two

distinctive phases of implementation.

Firstly, it was created between 2003 and

2005 – or, to be precise - an already existing

market for reintegration of insured

unemployed was substantially extended. In

the second phase of implementation after

2005, the market shrunk substantially as a

consequence of the introduction of a new

contract regime.

In the new contract regime specialist

providers are asked to “make a difference”

for target groups rather than relieve the

PES of administrative duties. The delivery

of services is now taking place through a

new structure of local jobcentres in each

municipality.

Judging by the Danish experience, it is

difficult to create and regulate a market

in employment services that lives-up to

political expectations and the preconditions

for a well-functioning market. The

anticipated efficiency gains and cost-savings,

which are spurring the introduction

of quasi-markets, are still largely

unknown and undocumented. Even if

the Danish labour market is currently

outperforming the majority of European

countries on a range of labour market

indicators (cf. appendix below), it is

unwarranted to claim that the contracting-

out of the

PES accounts for the relative

success.

Instead, the quasi-market model creates

a new type of employment policy, as well

as new conditions for steering and regulating

the labour market. Clouded in the

“technical” language of improved efficiency

and effectiveness, such changes are often

neglected and depoliticised. Setting aside

ideological motivations for choosing to

contract out employment services, the

Danish experience gives at least three reasons

for decision-makers to introduce the

quasi-market model.

One, the open tendering model is well

suited to support a politically intended

shift in the substance of employment policy.

Internationally, there is a trend towards

a stronger work-first approach. This

implies a shift away from both a traditional

passive social security (where lack of

demand is seen as the main cause of unemployment)

and a human capital approach

(where lack of competencies and qualifications

is seen as the main cause of unemployment).

The work first approach interprets

unemployment as a result of inadequate

(individual) economic incentives and

motivation. Finding a job as quickly as

possible, where any job is seen as a “good

job”, is the objective.

Implementing such a policy shift has,

especially in Denmark, turned out to be

difficult within existing public implementation

structures. Policy intentions are distorted

and skewed during the implementation

process, especially by relatively

autonomous local municipalities and case

workers.

29 The quasi-market model offers

a depoliticized and efficient structure for

implementation of a work-first rather than

human capital approach.

Two, the unemployed are being prioritized.

Tailoring initiatives and cost-efficiency

is a positive formulation of this

approach, but in reality it is a way to avoid

spending disproportionate resources on

unemployed people with few chances of

ever finding a job, or the deadweight costs

of putting resources into unemployed people

capable of finding a job on their own.

Private providers seem much more susceptible

towards such creaming and parking

than traditional public employment advisors.

30

From a public policy perspective the

result is, however, increasing inequality in

service delivery, and inequality before the

law.

Finally, contracting out provides political

decision-makers with better instruments

to control the expenditures of

29 Larsen F, Abildgaard N,

Bredgaard T and Dalsgaard L,

Kommunal Aktivering: Mellem

Desciplinering og Integration

,

Aalborg Universitetsforlag, 2001;

Bredgaard T, Dalsgaard l and

Larsen F, “An Alternative

Approach for Studying Public

Policy: The Case for Municipal

Implementation of Active Labour

Market Policy in Denmark”,

University of Aalborg,

Department of Economics,

Politics and Administration,

Working Paper

, no 4, 2003;

Considine M, Enterprising

States:

The Public Management

of Welfare-to-Work

, Cambridge

University Press, 2001

30 Also see Considine M,

Enterprising States: The Public

Management of Welfare-to-

Work

, Cambridge University

Press, 2001

The creation and regulation of markets in employment services - Danish experiences

www.policyexchange.org.uk

• 69

employment policy. Admittedly, it might

be more expensive to enter into contracts

with non-public agents in the short-run,

but it does give more flexibility (through,

for example, changing the amount of services

bought from providers according to

fluctuations in unemployment rates). The

problems of organisational restructuring

are transferred from the public to the private

sector. When unemployment figures

are low it is probably much easier to fire a

private provider than a public servant.

Political decision-makers may have a

variety of reasons for contracting-out public

employment policy. One thing should,

however, be an obvious conclusion from

this analysis: choosing a quasi-market

model involves much more than a discussion

about “technicalities” in relation to

how employment policy is implemented in

the most effective and cheapest way. A

quasi-market model (and its design) does

have an important impact on the substance

of employment policy and the possibilities

of governing the labour market.

Public decision-makers need to strike a

balance between the dynamism of the market

and the need to fulfil political and

social objectives. On the one hand, authorities

try to let the market work on its own

premises as a means of improving efficiency,

quality of services and innovation. On

the other hand, interventions may be

required to remedy the unintended outcomes

of market behaviour; e.g., to reduce

creaming and parking, transaction costs

and underinvestment in education. Doing

so, however, erodes the original market

principles of competition, choice and

autonomy. Striking the balance between

the logic of the market and social goals is

therefore inherently difficult – and basically

not a technical or administrative issue –

but a genuine political dilemma.

Paying for success

70

31 An estimated figure; Central

Intelligence Agency (2008)

The

2008 World Factbook

(USA:

Central Intelligence Agency).

32 OECD (2007)

Employment

Outlook

(Paris: OECD).

33 Danish Ministry of

Employment.

34 Statistics Denmark.

35 Danish Ministry of

Employment.

36 Statistics Denmark.

37 Danish Ministry of

Employment.

Denmark

GDP , 2007: $310 billion

31 .

Population, 2007: 5.4 million

32 .

Rate of per week unemployment benefit, 2005/6: $500.35

33 .

Number of people unemployed, 2005/6: 114,000

34 (3.9% of population).

Number of days formerly unemployed people must be in work for their assistance to be considered

successful: 13 weeks in a given 26-week period.

Rate of per week incapacity benefit, 2005/6: $526.39

35 .

Number of people on incapacity benefit, 2005/6: 258,000

36 .

Rate of per week lone parent benefit, 2005/6: $435.45

37 .

It might be more expensive to enter into contracts with

non-public agents in the short-run, but it does give

more flexibility

6

It’s the client, stupid!

An active role for the

client in Dutch

employment services

by Els Sol

Historical background:

marketization as part of a major

welfare reform

The Dutch began to reform their activation

policies relatively early. They started

to do so after seeing ever larger amounts

of their population taking disability benefit

despite many of them being fit

enough to work. This phenomenon came

to be known as the ‘Dutch disease’.

1

The large number of disabled pensioners

was a legacy of past policies. Previous governments

had encouraged employers to shift

mature-age workers with moderate disabilities

from their payrolls on to the public disability

pension system, which was integrated

with workers’ compensation.

Claimants received only limited help

from the government in their search for

employment. Job search requirements

were relatively lax. Welfare recipients

were seen as objects of policy rather than

subjects who could actively contribute to

increasing opportunities. The

Public

Employment Service

( PES ) delivered the

government’s active labour market policies

that were meant to lessen the problem.

But it had a lousy image, small market

reach, and, ultimately, little effect.

The increase in demand for, and costs of,

social security was initially met with

retrenchment of the system. Expenditure

was stabilised as a result, but there were no

reductions in long-term unemployment.

Further steps were taken once the government

realised that its generosity could not be

sustained unless the level of joblessness fell.

A new ‘activating regime’ (

activerend

stelsel

), inspired by a government thinktank,

was subsequently introduced. The

status quo was represented as a security

net in which clients had become trapped.

In the new system the same net would act

as a trampoline in which people on benefits

would be bounced back into the

labour market.

2

Unemployment and disability were no

longer seen as the consequences of social

and economic problems, but as the results

of a social security system that could be

used by individuals (employers, employees

and benefit recipients) for their own benefit.

Labour participation was to become

the prime goal of social economic policy.

The idea that full societal participation

could be achieved outside the sphere of

paid labour (through voluntary work, for

example) was rejected.

The activation and re-integration of

claimants into the labour market (ideas

inspired by the policy debates in the

United States and United Kingdom) came

1 Visser J and Hemerijck A,

A

Dutch Miracle

: Job Growth,

Welfare Reform and Corporatism

in the Netherlands, Amsterdam

University Press, 1997

2 WRR,

Een Werkend

Perspectief[A working

Perspective]

, WRR, 1990

www.policyexchange.org.uk

to dominate Dutch policy thinking. Under

several left-right ‘purple’ cabinets

3 ‘Work

above Income’ became equivalent to the

UK’s ‘Work First’ slogan. Employment was

seen as the most important part in the

attempts to solve several social and economic

problems.

In 2007 the current Christian-Social

Democratic cabinet acknowledged that for

some, regular paid employment is a step too

far and extended the targets to include social

activation, but the ‘Work above Income’

system still has its two original, and most

important, components. The first one is a -

relative to Anglo-Saxon countries - still generous

social security system that encourages

work and includes sanctions; an active

labour market policy is the second.

The latter rests on four elements: one,

a general labour market policy; two, a

‘reintegration’ scheme which offers backto-

work services to the unemployed and

those most likely to lose their jobs; three,

temporary labour market policies for specific

groups (women and the old); and,

four, sheltered employment for those

whose productivity level is too low to (re-

)enter normal employment.

Since 2002 employment services have

been delivered by companies and not-forprofit

providers in a quasi-competitive

system called the ‘re-integration market’.

As a part of the broader welfare reform

package a new governance system was set

up to replace the five separate benefit

agencies and the obsolete

Public

Employment Service

. A negative evaluation

of the

Public Employment Service in

1995

4 gave the government the chance to

create what was to become a hybrid of

public one-stop-shops and a private

employment services market.

In 2000 a government think-tank

called ‘The Future of Labour Market

Policy’ concluded that different labour

market conditions called for deeper

adoption of re-integration policies.

5 Its

report, ‘Aan de slag’ (Getting it done),

recommended that the focus of reintegration

policy be shifted from benefit

dependence to help for movements from

state support to the labour market. The

report proposed the budgeting of welfare

schemes; the use of placement results to

steer benefit administrations; more flexibility

in welfare-to-work and reintegration

budgets; and the creation of a proper

quasi-market for employment services.

Private providers were seen as more effective,

more client-oriented, and cheaper.

3 Under Wim Kok between 1994

and 1998, and 1998 to 2002.

4 De Koning J

et al ,

Arbeidvoorziening in

Perspectief[The PES in perspective]

,

The Hague, 2005

5 Parliament/TK, “Aan de Slag,”

Parliament/TK, no 1 (27914),

2000-2001

2

Paying for success

Table 1 Chronological overview of the main reforms in governance 2001-2006

Law Main features

200

Structuur Uitvoering Werk en Inkomen (Structure Foundation of one unemployment benefit

Implementation Work and Income)(SUWI) Agency (UWV)

Foundation of one-stop shops (CWI)

Abolition of the

PES

Obligation to tender all employment services

Introduction of a market with for profit providers

2003 Wet

werk en bijstand (Work and Welfare Act) Decentralisation of welfare towards municipalities

on a budget based system

2006

Wet werk en arbeid naar arbeidsvermogen Obligation of employers to offer employment

(Act on work and income according to labour services to the disabled

capacity for disabled)

6 MvT, Parliament/ TK 28870, no 3

7 For the disabled who are still

under employment contracts

with their employers, a

private

market for employment services

was created in 2006. The

employer takes on the role as

principal and buys employment

services for his personnel from

private (for profit) providers. A

major incentive for employers to

buy employment/outplacement

services is the legal obligation to

continue payments to a disabled

employee under an employment

contract for two years. This is a

third market segment for the

providers in the Dutch reintegration

market, next to the municipal

and UWV segment. Other

than principals in the two first

segments, employers do not use

open tenders for employment

services. As this new market

segment in the reintegration

market completely differs from

the welfare-to-work market

model in the UK where only

transitions from benefit to work

and are incorporated, and transitions

from work to work are not,

this article focuses on the other

segments only.

It’s the client, stupid! Dutch options for welfare to work

www.policyexchange.org.uk

• 3

The report and its recommendations

became the basis for the privatisation,

agentification and decentralisation that

were central to the institutional reforms

that took place between 2000 and 2006

(see table 1 for details).

In line with the proposals, a new

Structure for Work and Income

( SUWI )

was introduced in 2002. It replaced

national employment assistance programs

– including public sector jobs for

jobless people and vocational training

programmes – with a contestable market

for employment assistance. Employment

services for the most disadvantaged jobseekers

were decentralised and contracted

out to private and community organisations.

Characteristics of the Dutch model

Each of the main characteristics of the

Dutch model of marketization are listed

below:



The Department of Social Affairs

This government department is responsible

for the general management

of the programme but has delegated

its role of gateway for the intake and

referral of all social security benefit

claimants to the local Centres for

Work and Income (CWI), which are

public entities. It has also given away

its role as principal for the fully privatised

system of employment service

delivery for the long-term unemployed

to the National Benefit

Agency for the (short-term)

Unemployed and Disabled (UWV),

and to all 450 municipalities for the

people on social assistance.

Both the UWV and municipalities

have been obliged to contract out.

This rule has been enforced in order

to create a proper market and to

restrain municipalities from delivering

their welfare-to-work services in

house or through local public or nonprofit

satellites (many of which have

performed badly).

6 But as a result of

political pressure by the municipalities

in 2006, this obligation lapsed for

municipalities. In cases where municipalities

do contract out they have to

conduct tenders according to

European norms (as does the UWV).

Parliament wanted public tasks

(intake, eligibility and sanctioning) to

remain in public hands. In this

model, private companies replace

what the public sector previously

offered the hardest to help claimants.

The public Centres for Work and

Income get the more standardised tasks

of dealing with the mainstream benefit

claimants.

7

The Department of Social Affairs ultimately

funds nearly all benefit and

employment assistance schemes, but does

not specify the form or content of contracts.

The UWV and municipalities

decide which employment services are to

be offered to clients.



Centres forWork and Income

During the first six months of unemployment,

claimants who are close to

meeting the needs of available jobs are

given help by the Centre for Work and

Income (CWI). If recipients are still out

of work after six months they are transferred

to the UWV or municipality.

People with significant difficulties in

getting employment are immediately

referred to the municipalities or the

UWV and thereby to companies and

not for profit providers. CWIs use an

Private providers were seen as more effective, more

client-oriented, and cheaper

8 Teulings CN, Bovenberg A and

van Dalen HP,

De Calculus van

het Publiek Belang

, Ministerie

van Economische Zaken, 2003

9 Ministry of SZW,

Naar een

werkende reintegratiemarkt

,

Ministry of SZW, 2002,

http://docs.minszw.nl/pdf/35/200

2/35_2002_3_3085.pdf

Paying for success

‘Opportunity Meter’ to profile the people

they work with. After being transferred

to either the national UWV or a

local municipality, claimants are offered

intensive support, which is delivered by

private providers in a quasi-market and

is funded by the UWV employment

services budget or the municipalities

depending on the type of benefit.



Municipalities

The Dutch municipalities are a separate

public administration layer with

their own social assistance budget,

political responsibility and control.

Since 2004 they have had complete

policy freedom, so in each area can

develop their own reintegration policies

in return for big financial incentives.

The Minister of Social Affairs is only

responsible for the system of social

assistance, which means he takes care of

the judicial framework, the distributive

budget code and monitor system.



The UWV

The relationships faced by the benefit

agency are different. The Department of

Social Affairs determines the instruments

and the UWV implements them. Since

the Structure for Work and Income Act

(2001), the UWV has been steered and

monitored on the basis of performance

indicators which are related to the flow

of claimants from unemployment or disability

benefit to the labour market.

There are no financial incentives.



Private for and not-for-profit providers

Dutch recipients of income support –

except parents with young children and

people with severe disabilities – are

obliged to engage with the labour market.

Individuals must maintain some

sort of work in order to remain eligible

for continued receipt of the benefit.

Private employment providers thus

have all recipients of income support as

their clientele, i.e. those people in the

social security systems for the unemployed,

disabled and those on welfare.



Client councils

Jobseekers are represented by local and

national client councils, which together

form the National Client Council

(LCR). The LCR is a statutory body

whose main function is to represent the

views of clients to the Minister as part

of the RWI consultative mechanism.

The LCR has had success in advocating

individual client accounts for employment

assistance (IROs, see below) and

a network of independent advisors to

help clients to locate and negotiate

with reintegration providers.



Board forWork and Income and Inspectorate

forWork and Income

Two organisations oversee the quasimarket:

the Board for Work and

Income (RWI) and the Inspectorate for

Work and Income (IWI).

The tripartite advisory Board for

Work and Income (RWI) is responsible

for the quality and transparency of the

private market for employment services

and for labour market and reintegration

policies in general. A system of self-regulation

(based on the subsidiarity principle

8 )

is meant to induce transparency.

The Inspectorate for Work and

Income (IWI) is the second monitoring

organisation. It tracks the legitimacy

and efficiency of the provisions by the

UWV and the legitimacy of the implementation

of the WWB by the municipalities.

Both organisations report to

the Minister of Social Affairs

The Department of Social Affairs established

the main rules for evaluation of

process effectiveness of the market in a

report entitled ‘Towards a functioning

reintegration market’ (

Naar een werkende

reintegratiemarkt

). 9 They are:



Entrance and competition: no specific

entrance criteria, a ‘sufficient’ level of

competition, and a level playing field

for FP and NFP providers.



Transparency.



Public and open tender procedures.



Payment by performance.



High quality of service delivery.



Access to services for all clients.



Freedom of choice for all clients.

The creation of a quasi-market and contracting

out of employment services by

benefit agencies are seen by the Dutch government

as vital to the results-orientated

system it wants to see. Both changes force

principals to set concrete targets and formulate

success criteria for providers.

Because it brings policy and practice

together, the role of principal makes

municipalities and the unemployment

benefit organisation more aware of what

welfare-to-work schemes require. Competition

between providers should uncover

any new intervention techniques developed

by providers. Furthermore, the existence

of multiple principals – there are

more than 450 municipalities – means

there will be a laboratory for any changes.

A Market for employment services in

practice

The Dutch market for employment services

developed quickly. It used the experiences

of already existing companies like

temp work agencies, vocational training

institutes and other specialized, mainly

non-profit, organisations, and new commercial

entrants. In the Netherlands the

reintegration market quickly developed

into a for-profit market.

Currently, not-for-profit providers are a

small proportion of the UWV market.

They serve no more than 4 percent of it

and tend to be specialised companies

working with disabled people.

10 However,

exact figures for the whole market are not

available. Historically, the Dutch have not

had as great a role for the non-profit sector

in this domain as the Anglo-Saxon countries

have, due to better provision from the

government itself.

For an illustration of the effect of the

introduction of the marketization for nonprofit

companies in the city of Amsterdam,

see table 2 below.

Not much is known about the results of

the non-profit providers, who are mainly

active in the municipal market. There is no

10 Koning P, “Maatschappelijk

Verantwoord Reintegreren”,

Economisch Statische Berichten

,

no 4525 (92), pp 791-794, 2007

It’s the client, stupid! Dutch options for welfare to work

www.policyexchange.org.uk

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

1996 1997 1998 1999 2000 2001 2002 2003

profit non profit

%

Table 2 Expenditure of reintegration budget in percentage of non -profit and

for profit reintegration companies, Amsterdam, 1996-2003

Source: Sol E and Hoogtanders Y, “The Road to Privatisation: The Amsterdam Case”, in Sol E, and Westerveld M (eds),

Contractualism in

Employment Services , Kluwer Law International, 2005

11 Le Grand J,

Motivation,

Agency and Public Policy: Of

Knights and Knaves, Pawns and

Queens

, Oxford University

Press, 2003

12 Koning P, “Maatschappelijk

Verantwoord Reintegreren”,

Economisch Statische Berichten

,

no 4525 (92), pp 791-794, 2007

13 Sol E, Castonguay J, van

Lindert H and van Amstel Y,

Work First Werkt: Op Weg naar

Evidence Based Work First

,

Divosa, 2007

14 Kok L, Hollanders D and Hop

J,

Kosten en Baten van

Reintegratie

, SEO, 2006

6

Paying for success

monitoring of them on a national scale. It

is often argued that not-for-profit

providers may behave differently during

market failures as they attract more intrinsically

motivated employees who provide

better services (and are often driven by

equity concerns).

11 If they receive donated

labour, they might produce at lower costs,

provide higher quality or focus on market

segments that are less profitable.

A Dutch empirical study

12 found companies

to be more active in selecting clients relative

to other providers. They put more

effort into encouraging potential clients to

start a programme (which gets them extra

payments). However, they do not place

more people in work than not-for-profit

providers. Other research into employmentbased

early intervention strategies for social

assistance claimants found better placement

rates for profit-motivated providers than for

municipal workplace companies.

13

On a yearly basis the national public

budget for reintegration amounts to two

billion euros. It has been estimated that

private providers account for around one

third of public resources.

14 Boaborea, their

industry body, claims that only 17 percent

of the budget is actually spent on their

services, the rest being taken by the public

administration (CWI, UWV, municipalities).

The total number of employment

services delivered annually in the period

2002-2006 was 150,000, of which 19% of

the services went to the disabled, 21% to

the unemployed and 60% to social assistance

claimants.

Research over the period shows that the

chances of a claimant getting intensive

help is dependent on age (the young have

a better chance) and duration of the benefit

claim (the longer duration, the better

(cumulative) probability). Men on social

assistance have a 28% chance and women

a 22% chance after one year, while unemployment

benefit claimants face odds of

33% and 32% respectively.

Procurement and tender design

There are a number of different models. At

one extreme is a model of one prime contractor

with a large contract for all benefit

claimants and for a long period of time, at

the other end is a system of multiple contractors

for small groups and small, shortterm

contracts. The Dutch chose the latter

path in 2002 in order to address the risk of

creaming and to give specialised (small)

providers a level playing field. Providers

were offered contracts to assist small

‘batches’ or ‘parcels’ of claimants with similar

characteristics, specifying the form of

help that should be given. The social benefit

administration UWV contracted out

by way of procurement of various cohort

types on a national scale.

In 2002 the agency contracted out as

many as 53 cohort types and 474 individual

cohorts. Over the years the benefit

agency has decreased the number to just

three groups (the disabled, young disabled

and unemployed) and 20 types of individual

cohort.

Short contract durations (of one year)

left major risks with providers and led to a

high turnover of personnel among the

providers. The substantial tender costs for

providers were also a major difficulty.

The cost and time involved in preparing

tenders meant a heavy administrative burden,

which initially built a high threshold for

small, specialized providers, who lost territory.

The introduction in 2004 of a kind of

voucher by the benefit agency UWV, called

the

Individual Reintegration Agreement (see

below), eliminated this entrance barrier for

small providers, who (re-)entered the market

in large numbers. However, the municipal

UWV contracts are awarded to providers on the basis

of five criteria: experience, price, placement percentage,

methods used and drop-out rates

15 Mallee L and Mevissen J,

“Re-Integratie in Nederland: Een

Private Markt voor het Publieke

Domein”,

Tijdschrift voor

Arbeidsvraagstukken

, no 2, pp

106-119, 2007

16 Vinke,

Evaluatie

Aanbestedingscontranten

, TNO,

2003

It’s the client, stupid! Dutch options for welfare to work

www.policyexchange.org.uk

market is still difficult for the small providers

because of the red tape endured in tender

procedures, the demands they face, the short

timescales of the contracts, the payment

structure (no cure, less pay), and the lack of

guaranteed clientele.

15

Between 2002 and 2008 the UWV

organised seven tender rounds. Despite the

great number of principals involved, in

practice the majority of the market is in the

hands of the benefit agency and four big

cities (Amsterdam, Rotterdam, Den Haag,

Utrecht). It is, therefore, a buyers’ market.

UWV contracts are awarded to

providers on the basis of five criteria: experience,

price, placement percentage, methods

used and drop-out rates. Initially,

placement percentages were weighted

highly. Depending on the target groups

there are different weights for criteria. As

the tenders up until now have been primarily

based on price competition, it has been

difficult for providers to stand out on quality.

16

This led the UWV and municipalities

to choose the lowest bidder for employment

services, at the cost of service quality

and the development of specialisms.

Although the type of services was prescribed,

in terms of content they were left

at the discretion of the provider. When, in

2003, the ‘no cure, no pay’ and ‘no cure,

less pay’ models of payment were introduced

- in order to give further incentives

to providers - price competition threatened

to lead to a race to the bottom. The services

to be delivered during the bidding were

of less importance. A cry for help from the

former chair of Boaborea persuaded the

UWV not lower prices any further.

Contract design

The first contracts ran for one year, but

since 2004 the UWV and most municipalities

have used longer contracts as a means

to achieving more commitment and lower

transaction costs. Lately, there has been a

trend towards using framework contracts

and longer contracts (of up to two years).

They get rolled over if case managers

(municipalities) and reintegration coaches

(the UWV) are content with the service

delivery and output. These public servants

directly influence the number of clients

providers actually get, thus giving them a

bigger say in the market than before.

The fee structure is geared to achieving

outcomes. Retention in unsubsidised

employment for at least six months is the

key payable outcome for providers. In

practice the duration can be shorter. The

UWV uses the operational definition that

a client has to have worked for two months

and has an employment contract of at least

four months. So a client still counts if after

two months he drops out.

Providers are either paid on a ‘no cure,

no pay’ basis – for the relatively easy to

help - or a ‘no cure, less pay’ basis for the

difficult ones. Typically, the reward per

client consists of a fixed payment when the

action plan is approved (20% maximum),

a fixed payment six months later (40-50%)

and bonus payments in cases of job placement

for at least two and six months (40-

50%). In practice some providers park the

hardest to help and cash the payment of

the service inputs. There is only a fixed

payment for the easy to place.

Much attention has been focused on

how to create a well functioning reintegration

market (particularly around the design

of transparent tender procedures with low

thresholds in order to contract providers

with the best price/product combination).

As a result the focus of providers was on the

bidding not on results, and on the means –

packages of services, called ‘trajectories’ –

and too little on the goal (outflow to work).

A trajectory consists of some or one of the

elements of diagnosis, guidance/ soft skills,

vocational training and placement.

Reintegration contracts generally did not

offer providers sufficient funds to invest in

the relatively costly forms of employment

assistance such as training. As a result, the

nature of reintegration services shifted from

help for overcoming barriers to work

towards assistance in the search for work.

This is still a problem and probably more

so now because the clients that remain are,

because of the economy’s ability to create

jobs for so many people, the least skilled

and thus most difficult to help. One of the

criteria for a well functioning reintegration

market is the openness of service delivery to

all (see above). The financial incentives of

the Act on Work and Income has incentivised

municipalities to seek quick wins in

outflow, helping first and foremost the easy

to help. The UWV, however, is more open

to all clients, thanks to the IRO (see below).

In all, since 2002 the UWV and the

municipalities have gained experience in

tendering, thus overcoming their teething

troubles. Nowadays there is no excessive

monitoring to ensure that providers are fulfilling

their contractual obligations. Discontent

with the lack of quality of service made

the UWV start yearly auditing of providers.

The lack of transparency in the Dutch

model is a major problem. To create a

threshold in the market and for providers

to be able to distinguish themselves from

other competitors, Boaborea developed a

quality assurance system for the sector.

There is currently a national

quality mark

for all providers (a ‘keurmerk’

17 ) dealt with

by a Foundation called Blik op Werk. Blik

op Werk also developed a provider monitor

with placement figures, satisfaction

scores and other information for future

customers and clients (the ‘reintegratiemonitor’).

18

In 2006, the UWV

developed a benchmark for itself that

allowed it to assess providers with the best

price-quality combination.

IRO: The client as customer

A major criticism of the contracts under

the tender system was the ‘one size fits all’

service and the lack of innovation and differentiation

promised by the model’s

designers. By making customers out of the

immediate consumers of the service the

government has countered part of the

problem. The result has been more satisfied

customers, more successful job placements,

a proliferation of providers and an

overhaul of the tender system.

In 2004, the government introduced

Individual Reintegration Agreements

(IROs) between individual clients, the

UWV and reintegration providers, following

complaints by client organisations and

Members of Parliament. The introduction

was strongly supported by the National

Client’s Council as a means to engaging

clients in welfare-to-work activities and

giving them greater control over the

process. In the beginning the ministry was

far from convinced that a personal budget

for the client was necessary to provide

them with freedom of choice, but pressure

from parliament was intense, so it agreed.

The core elements of the IRO arrangement

for the client are the choice of

provider and the opportunity to compose

an activity plan. Both factors come close to

making the client the principal, and thus

to establishing a real market instead of a

quasi one.

The UWV buys the IRO in the name of

the client and in line with his or her wishes.

In only 2 percent of cases are IROs turned

down. Every client that is diagnosed for intensive

help can use the IRO, irrespective of

whether or not a client needs guidance in it.

Compared to the tender process, the

IRO procedure offers more freedom of

choice to the client, the provider more possibilities

to deliver a ‘made to measure’

service, and the reintegration coach/case

manager more room to manoeuvre. For

the differences between IROs and tendering

see table 2.

Between 2004 and March 2007, 66,455

IROs started. 62 percent have been for

people on unemployment benefit and 38

percent for the disabled. IROs became

popular overnight. This spectacular growth

has now stabilised to 60 percent of all people

on ‘trajectories’ by the end of 2006.

17 www.blikopwerk.nl

18 www.blikopwerk.nl

Paying for success

The price of an IRO service package

(trajectory) is a factor 1.1 times more

expensive for the disabled and 1.3 times for

the unemployed. The placement percentages

related to regular (tendered) IROs are

1.3 to 1.6 times higher for the disabled and

a factor of 1.1 to 1.3 times for unemployment

benefit claimants. IROs can be negotiated

to a maximum price of EUR 5,000

each, but must be approved by the funding

body, the UWV. The municipal market is

reluctant to introduce similar budgets.

The introduction of IROs has led to a

dramatic expansion of the number of small

providers in the market. Upon the introduction

of IROs in 2004, the UWV had

60 contractors. It now has 2,100. For optimal

use of the IRO, clients need more

information on providers than is currently

available. The quality mark sets a threshold

in the market, but there are still too many

providers to choose from.

The IRO has become such a huge success

that it currently endangers the whole

tendering system as the UWV is no longer

able to refer the contractual amount of

clients to providers and is unable to audit

such a large amount of providers.

The new purchasing system

From 1 April 2008 the UWV (and thereby

the Department of Social Affairs) introduced

a completely new way of purchasing

re-integration products and IROs.

19 A socalled

‘purchase framework’ now determines

how the agency will purchase products.

Tenders for whole target groups will be a

thing of the past. From now on the benefit

agency will purchase for individual clients.

There will no longer be price competition

as the benefit agency will determine

product prices. Competition is based on the

quality of services of the provider. Providers

are selected on the basis of minimal requirements

(e.g. client satisfaction results, placement

percentages). A provider has to meet

these requirements in order to be on the

potential providers list. The better results

the more chance providers have of being

able to continue to deliver services.

A reintegration coach – an employee of

the UWV – and the client determine together

what is needed for the client to return to

the labour market. If this is done, the client

chooses the company that will deliver the

services. In effect reintegration coaches are

playing a larger role in the guidance of the

clients, at the expense of the providers. Only

in the case of the IRO will the provider be

responsible for such guidance.

The new rules are inspired by the

Australian Star rating system, i.e. competition

over quality is to replace competition

over price. Providers that do not deliver the

required standards will not be awarded any

further contracts. The payment-by-placement

results system applies to IROs.

Evaluation

19 http://www.uwv.nl/zakelijk/reintegratiediensten/

inkoopkaderreintegratiedien

sten/index.aspx

20 In percentages of total

entrance per cohort for 2004.

It’s the client, stupid! Dutch options for welfare to work

www.policyexchange.org.uk

• 9

Table 2 Characteristics of UWV

clientele, results and costs by

IRO and by tender (2004-2007)

IRO Tender

Number 66, 3 ,323

Client characteristics

Status Disabled 3 % %

Unemployed 62 % 3%

Age Disabled 3 , % 39,

Unemployed ,3% 2,9

Education low skilled

Disabled 2 %

Unemployed 9%

Price pro ‘trajectory’ in ? , 00 3, 0

Disabled in ? , 30 ,320

Unemployed in ? , 3 3, 30

Placement

20 Disabled 0% 29%

Unemployed % 3 %

Total Cost per placement

Disabled in ? ,02 9,9 0

Unemployed in ? 6, 0 6, 0

Source: APE,

Vierde Voortgangsrapportage IRO, APE, 200

The Act on Work and Assistance (2004),

together with the strong financial incentives

for municipalities and clients, has

proven to be a major success – figures for

social assistance are currently as low as in

the seventies.

21 However, with the limited

data available it is difficult to assess the

contribution of the new reintegration market

to the effectiveness of the transition

from welfare to work. A recent evaluation

by the Department, called ‘Beleidsdoorlichting

Reintegratie’, concluded that there

is a ’small positive effect’ on the probability

of making such a transition but that it

does not, over the short-term, pay back in

terms of benefit savings (see also effectiveness

below).

22

A major weakness of the model is the

emphasis on short-term job outcomes and

a lack of resources and incentives to invest

in the most disadvantaged. A major

strength of the system is the relatively

strong emphasis on positive engagement

with clients in the form of the introduction

of IROs and the role of the Client

Councils. The quality mark also helps to

make the reintegration market more transparent.

The flexibility and scope for experimentation

at the local level are further

strengths of the decentralised model.

There is scope within the policy and service

delivery framework for municipalities

to switch to more investment and more

intensive help for the many disadvantaged

jobseekers attuned to local labour market

needs. On the other hand the model suffers

from a lack of professionalism among

its municipal principals, from missing

national standards regarding the quality

of service provision, and from learning

from practice. The lack of accurate

national data on program effectiveness is

also a problem.

There has been little empirical research

in to the net effectiveness of the privatised

reintegration service in the Netherlands.

23

The few studies that have looked into this

area have concluded that the impact of

welfare-to-work services is present but has

been limited, and that employment services

do shorten periods of unemployment.

However this type of research cannot

provide an answer regarding the relative

effectiveness of private service delivery

over public service delivery. Neither does

it give much information on how to

achieve a better price/result combination.

Some reports conclude that (meagre)

placement results are related to (low)

prices and point the finger at the importance

of a well qualified public principal

for better results.

24

Conclusions

The Netherlands has chosen a different

model than the one proposed for Britain

by David Freud. The Dutch system has big

and small principals, including clients

(IROs); a large amount of providers (some

big and many small, but mainly for-profit

in the unemployed and disabled sector); a

mixture of for-profit and not-for-profit

providers in the hard-to-help segment;

national and local tenders (only using

work budgets, no benefit ones); short-term

contracts (one to two years); sustainable

placement (six months); the use of quality

marks for providers; partnership as the

basis of cooperation between private

providers and public organisations (chain

management); and a weak culture of monitoring

and evaluation.

The Freud approach has as its main elements

one national principal (the DWP);

tenders with a small amount of big

providers; the use of work and benefit budgets

combined (‘DEL’ and ‘AMI’); a benchmark

to focus competition on results (i.e. a

star rating system); five year contracts; and

obligations to guide clients for three years.

Goal displacement is a danger in the UK

model. In markets where there is only one

buyer, providers tend to focus on the principal

and his output indicators. This is a

21 Bosselaar H, Bannink D , van

Deursen D, and Trommel W,

Werkt de WWB? Resultaten van

Nieuwe Verhoudingen Tussen

Rijk en Gementeen

, Begroting

SZW, 2007

22 http://docs.minszw.nl/pdf/

35/2008/35_2008_3_11424.pdf

23 Heyma A, “De Effectivitiet

van Reintegratieinstrumenten

voor Arbeidsgehandicapten”, in

Vos EL,

Daadwerkelijk Effectief:

Prestatiemeting van Reintegratie

en Activering

, pp 97-150,

Plantijn/Casparie, 2005;

Zwinkels W,

Effectivitiet van Re-

Integratie: Onbenutte Potenties

van Privatisering

, Tijdschrift voor

Arbeidsvraagstukken, no 2, pp

120-130, 2007; De-Graaf-Zijl M,

Groot I and Hop JP,

De Weg

naar Werk: Onderzoek naar de

Doorstroom Tussen ww, Bijstand

en Werk, voor en na de SUWI

Operatie

, SEO, 2006; Hekelaar,

Zwinkels and Braat,

De Juiste

Klant op het Juiste Traject: Een

Onderzoek naar de Netto-

Effectivitiet van het Rotterdamse

Reintegratiebeleid voor het

Ontwikkelen van Klantprofielen

,

SWA, 2006; Kok L, Hollanders D

and Hop J,

Kosten en Baten van

Reintegratie

, SEO, 2006

24 De Groot I, Kok L and Gueller

D,

Kwantitatief Effect WWB ,

SEO, 2007; Hekelaar, Zwinkels

and Braat,

De Juiste Klant op

het Juiste Traject: Een

Onderzoek naar de Netto-

Effectivitiet van het Rotterdamse

Reintegratiebeleid voor het

Ontwikkelen van Klantprofielen,

SWA, 2006; De-Graaf-Zijl M,

Groot I and Hop JP,

De Weg

naar Werk: Onderzoek naar de

Doorstroom Tussen ww, Bijstand

en Werk

, voor en na de SUWI

Operatie, SEO, 2006

0

Paying for success

risk in a market where the relationship

between output indicators and net effectiveness

is necessarily indirect. Star ratings

do not offer a sufficient solution for this

problem as experiences in the Australian

market show.

25

In the Dutch model, the introduction of

the individual contract IRO and multiple

buyers/principals are safeguards against

this drawback. IROs focus on the client as

the real customer and on matching

through direct quality control by the

client. This incentivises providers to deliver

custom made services.

The large amount of providers in the

Dutch market increases the risk of lack of

transparency in the market. A quality mark

for providers and a national provider’s

guide must safeguard against this danger.

Providers must use the quality mark to distinguish

themselves from competitors.

The weak spots in the Dutch model

are the short time horizon of the contracts

which endanger the quality of services

offered in the market, the noncommittal

attitude in professional guidance

by the Department of Social Affairs and

– despite the large amount of study

reports - the lack of solid evaluation studies.

Obviously there are differences between

more and less marketized systems for the

delivery of public employment services.

Shortcomings, however, are not univocal

to one or the other model of marketization.

At this time no conclusive evidence

from research is available. The choice for a

largely for profit market delivery system or

a hybrid remains first and foremost a political

assessment.

25 Thomas M, “A Review of

Developments in the Job

Network”,

Parliament of Australia

Research Paper

, no 15, 2007-

2008

26 An estimated figure; Central

Intelligence Agency (2008)

The

2008 World Factbook

(USA:

Central Intelligence Agency).

27 Centraal Planbureau

(http://www.cpb.nl/nl/prognoses/

nlinfo.html); Centraal Bureau

voor de Statistiek

(http://statline.cbs.nl/StatWeb/st

art.asp?lp=Search/Search).

28 Centraal Planbureau

(http://www.cpb.nl/nl/prognoses/

nlinfo.html); Centraal Bureau

voor de Statistiek

(http://statline.cbs.nl/StatWeb/st

art.asp?LA=nl&DM=SLNL&lp=Se

arch%2FSearch).

29 Centraal Planbureau

(http://www.cpb.nl/nl/prognoses/

nlinfo.html).

30 Centraal Bureau voor de

Statistiek

(http://www.cbs.nl/NR/rdonlyres/

FFD33AE0-4F01-45FA-B3D1-

90FD1EFFCA5D/0/2007k4p104p

30art.pdf).

31

Ibid

32 Ministerie van Sociale Zaken

en Werkgelegenheid

(http://home.szw.nl/index.cfm?m

enu_item_id=13730&hoofdmenu

_item_id=13825&rubriek_item=3

91905&rubriek_id=391817&set_i

d=134&doctype_id=6&link_id=13

2310&doc_id_sub=18588#link97

37800).

33 Centraal Planbureau

(http://www.cpb.nl/nl/prognoses/

nlinfo.html); Centraal Bureau

voor de Statistiek

(http://statline.cbs.nl/StatWeb/st

art.asp?LA=nl&DM=SLNL&lp=Se

arch%2FSearch).

34 Centraal Bureau voor de

Statistiek (http://www.cbs.nl/nl-

NL/menu/themas/arbeid-socialezekerheid/

publicaties/artikelen/archief/

2006/2006-2055-wm.htm;

http://statline.cbs.nl/StatWeb/sta

rt.asp?LA=nl&DM=SLNL&lp=Sea

rch%2FSearch.

35 UWV (http://www.uwv.nl/).-

36 Centraal Bureau voor de

Statistiek

(http://www.cbs.nl/NR/rdonlyres/

FFD33AE0-4F01-45FA-B3D1-

90FD1EFFCA5D/0/2007k4p104p

30art.pdf).

It’s the client, stupid! Dutch options for welfare to work

www.policyexchange.org.uk

The Netherlands



GDP, 2007: $2.7 trillion 26 .



Population, 2005/6: 16.3 million 27 .



Number of people in the labour force, 2005/6: 7.4 million 28 .



Average weekly wage among adults in full-time work, 2005/6: $841.3 29



Total spending on welfare, 2005/6: $143.3 million 30 .



Total spending on unemployment benefit, 2005/6: $6.8 billion 31 .



Rate of per week unemployment benefit, 2005/6: $1, 359 (maximum) 32 .



Number of people unemployed, 2005/6: 483,000 33 .



Number of unemployed people in 2005/6 out of work for one year or more: 200,000 34 .



Number of days formerly unemployed people must be in work for their assistance to be

considered successful: 6 months

35 .



Total spending on incapacity benefit, 2005/6: $16.3 bilion 36 .



Rate of per week incapacity benefit, 2005/6: $1, 359 (maximum) 37 .



Number of people on incapacity benefit, 2005/6: 958, 340 38 .



Total spending on lone parent benefit, 2005/6: $6.6 billion 39 .



Rate of per week lone parent benefit, 2005/6: $338.6 40 .



Number of people on lone parent benefit, 2005/6: 365,000 41 .

Paying for success

2

37 Ministerie van Sociale Zaken

en Werkgelegenheid

(http://home.szw.nl/index.cfm?m

enu_item_id=13730&hoofdmenu

_item_id=13825&rubriek_item=3

91905&rubriek_id=391817&set_i

d=134&doctype_id=6&link_id=13

2310&doc_id_sub=18588#link97

37800).

38 Centraal Bureau voor de

Statistiek

(http://statline.cbs.nl/StatWeb/ta

ble.asp?LYR=G2:0,G1:0,G3:0&L

A=nl&DM=SLNL&PA=37638aom

&D1=0,48,96,111&D2=a&D3=a&

D4=0&D5=a,!0-

83&HDR=T&STB=G4).

39 Centraal Bureau voor de

Statistiek

(http://www.cbs.nl/NR/rdonlyres/

FFD33AE0-4F01-45FA-B3D1-

90FD1EFFCA5D/0/2007k4p104p

30art.pdf;

http://statline.cbs.nl/StatWeb/sta

rt.asp?LA=nl&DM=SLNL&lp=Sea

rch%2FSearch).

40 Ministerie van Sociale Zaken

en Werkgelegenheid

(http://home.szw.nl/index.cfm?m

enu_item_id=13730&hoofdmenu

_item_id=13825&rubriek_item=3

91905&rubriek_id=391817&set_i

d=134&doctype_id=6&link_id=13

2310&doc_id_sub=18588#link97

371500).

41 Centraal Planbureau

(http://www.cpb.nl/nl/pub/cepme

v/cep/2005/pdf/h5.pdf).

Appendix

Table I Type of public private partnerships created under the Dutch model

Public market Public market Private market

Type of clients Unemployed and disabled Social Assistance Sick and disabled

with rights, without claimants employees, with employment

employment contract contract

Intake and referral of clients Centre for Work and Centre for Work and Companies specialised

Income Income in working conditions

Income maintenance Employee Insurance Municipalities Firms

Agency (UWV), Means tested Contribution-based

Contribution based Contribution based

Direct job placement CWI CWI Reintegration companies

Case Management/ Re-integration Re-integration Re-integration companies

Provision Employment Services companies companies and in-house

Sanctions Employee Insurance Municipalities Firms

Agency (UWV)

Tendering Employee Insurance Municipalities Firms (not obligatory)

Agency (UWV) (not obligatory)

Voucher UWV Municipalities

Individual Reintegration Personal Reintegration

Agreement (IRO) Budget (PRB

 

 

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