Rt Hon Lord Lilley

    Peter Lilley, MP for Hitchin and Harpenden, is calling for sweeping changes in the welfare system to get more people off benefits and into work.


    He says: “Evidence collected from other countries suggests that greater use of the private and voluntary sectors can hardly fail to be an improvement on the present system.

    Peter Lilley, a former Secretary of State for Social Security, has worked with Policy Exchange, an independent think-tank, on an analysis* of the employment services provided to jobseekers in Australia, Germany, Denmark, the Netherlands and the American state of Wisconsin.

    “Contracting out employment services offers potentially huge savings. In Wisconsin, the number of people claiming welfare fell by 80 per cent over three years. If the UK achieved only a quarter of that, the annual spending on incapacity benefit would be cut by one billion pounds.

    “It is time for a completely new approach to welfare provision in this country. It must be right to use the profit motive if it delivers opportunities to millions of disadvantaged people.

    “There will be opposition to change, especially from those with a vested interest in the status quo, but our citizens demand and deserve a better focused and more efficient system.

    “Both Denmark and the Netherlands have been more successful in getting lone parents and disabled people back to work than other EU countries.

    “Of course, welfare systems are hardly ever directly transferable between countries because of national peculiarities, but this study offers important lessons about the use of the private and voluntary sectors in getting people into work.

    * Paying For Success – How to make contracting-out work in employment services is a report published by Policy Exchange, edited by Peter Lilley MP and Dr, Oliver Marc Hartwich.


    Note to Editors: Briefing Note:

    PAYING FOR SUCCESS – The pros and cons of contracting out welfare [BRIEFING NOTE]


    Positive experiences in the five countries




    Several countries in the report slashed the costs of their employment programmes after contracting-out. The shift towards a concentration on how to get people back to work, though, was the most important change common to all of them. The split between purchaser and provider tended to make both public and private agencies focus on what claimants needed to get back into employment, rather than on other things, like qualifications, that had unknown effects on the likelihood of job search success.[1]

    The five countries




    Contracting-out significantly cut the cost of getting claimants back into work. The Australian Productivity Commission found that in the first four years after the introduction of the new scheme, the cost of the country’s labour market programmes fell from AUD 3.7bn to AUD 1.3bn. If the UK matched this reduction of more than 50%, the cost of operating the welfare system would be cut by £250 million.

    According to Australia’s Department of Employment and Workplace Relations, each person placed in a job came to cost between $5,000 and $6,000, compared with $10,000 to $16,000 under the previous arrangements.  Each net employment outcome under the Intensive Assistance programmes was on average costing $22,000 using the new system, compared with $35,100 under the old one.[2]



    Compared to what it predicted would have happened under the old system, the Department of Employment and Workplace Relations found positive outcomes from the changes. Three months after completing the relevant programme, 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 (two other back-to-work schemes).

    The department reported a positive 11% net impact on employment outcomes for those doing Job Search Training, a 10% net 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.

    It also discovered that these outcomes were superior to many found abroad. For example, 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.  It concluded: ‘These impacts are…equal to or better than those of high performing programs internationally.’[3]



    Compared to the previous system, the number of places served by the back-to-work programmes increased. According to an Australian National Audit Office report in 2005, 250 localities now have an employment office where there was not one previous to 1998.[4]



    The system came to be well-favoured by both claimants and employers (a 1999 survey recorded a ‘strongly positive view overall by job seekers about the Job Network’).[5]

    The United States (Wisconsin)



    As the number of payments to out-of-work claimants fell, the state of Wisconsin came to save large amounts of money. In the first contract period after the changes, it saved 15% of its welfare budget.[6] As a result, its legislature has been able to re-allocate funds to youth, literacy, nutrition, and domestic violence prevention programmes. Furthermore, many counties no longer see welfare as one of their primary policy areas – several have shifted their focus to foster care and adoption schemes, medical assistance, distribution of food stamps, and subsidized child care.[7]



    The welfare rolls in Wisconsin fell by 80% over three years. The system had to be cut back after such success because it had to deal with a far smaller case-load.[8]  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.[9]



    When the state looked at what had happened to the cases dealt with in the first two years of the programme, it found that many people had moved into jobs that gave them incomes well above the poverty line. The rate of poverty in Wisconsin thus fell.

    At the end of those two years, 81% of the people who had enrolled in the programme were no longer in it. 76% had moved on because they came to be earning too much.

    About half were earning between $12,000 and $18,000 per year (before additional refundable tax credits), around a third were earning less and about a fifth were earning more (the 1998 poverty threshold was $13,001 for a family of three).

    Looking over a longer period, for those who left the programmes 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.

    The child poverty rate (a more sensitive measure than adult poverty) peaked at 34% in Milwaukee in 1993, declining in the period before the implementation of Wisconsin Works, and then, in the first year afterward, dropped a full six percentage points to 20%.  Thereafter it rose slowly along with the weakening of the national economy around 2002, but had fallen again by 2006 (after the beginning of the economic recovery).

    A University of Wisconsin study reported:

    In part because of the substantial caseload reductions that preceded the implementation of Wisconsin Works, many of the first participants in Wisconsin Works 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.[10]



    The programme also helped the state to combat, or at least contain, several other social problems. The rate of homelessness has remained flat, crime is down 12%, and incidents of child abuse and neglect have fallen (as they have nationally).[11]



    The private contractors introduced by the changes gave more attention to claimants than the providers in the previous system. Case workers came to be paid higher salaries and to carry lower caseloads than their colleagues in the old system (about 75 instead of around 300). The shift in the demand for skills meant more of a focus on the personal parts of the help:  personality characteristics among advisers were judged to be more important than longevity or a specialized education.[12]



    The new system induced a stronger focus on helping people back to work. After the changes, a director of one vendor which had been operating before the shift, said “I had thought we were supposed to be getting recipients general equivalency degrees [remedial education qualifications]”.   He said this despite the fact that the state had been asking providers to change to emphasise employment for a long time.[13]



    The success of the initial periods after reform encouraged other parts of Wisconsin to follow the changes. The number of counties that 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 in suburban Milwaukee, and the other 17 are rural.[14]




    Germany’s unemployment count fell by 1 million in the two years after it started to reform its welfare state, the biggest fall in the country’s post-war history.[15]



    After the changes, the proportion of people concentrating on helping people back to work expanded. Previously, only 10% of the Federal Labour Agency’s 90,000 employees were involved in job placement.[16]




    Denmark has been more successful in getting lone parents and the disabled back to work than many other EU countries.[17]



    The introduction of the contracting out approach gave policy makers an opportunity to shift welfare policy towards a ‘work first’ approach. It also gave them much stronger control over the costs and direction of employment services.[18]

    The Netherlands



    The Netherlands has been more successful in getting lone parents and the disabled back to work than many other EU countries.[19]



    A Dutch empirical study found companies to be more active in selecting clients relative to other providers – they put more effort into encouraging potential clients to start programmes.[20]



    By making customers out of the immediate consumers of the service, job seekers have become more satisfied with the system, and job placements have become more successful.[21]



    The few studies that have looked into this area have concluded that the impact of welfare-to-work services is present, and that employment services do shorten periods of unemployment.[22]

    Negative experiences in the five countries



    There were several negative phenomena that occurred across many, or all, of the countries in the report:



    ‘Choice’ had an insignificant impact on several markets because claimants didn’t act like real customers. In Germany, for example, welfare recipients didn’t have strong incentives to demand high quality services, so the system didn’t improve outcomes as well as it could have done.[23]



    The neediest claimants were the group most likely to be ignored during reforms, or damaged by their outcomes.[24] In Germany, helping the hardest to reach recipients became unprofitable;[25] an emphasis on short-term outcomes in the Netherlands meant the long-term needs of some clients were ignored;[26] and in Australia the Department of Employment and Workplace Relations became concerned that some service providers were only concentrating on the claimants who would be easiest to get back to work so, in 1999, made all firms develop long-term plans for anyone who had been out of work for more than 13 weeks.[27] Similar things happened in Denmark.[28]



    ‘Creaming’ (where providers only help the claimants easiest to get back into work) and ‘parking’ (where clients are left on benefits because they are unlikely to get back into employment soon) were phenomena that developed in several countries response to the heterogeneity of need among groups who needed help.[29] 



    ‘Deadweight losses’ (spending by governments on things that would have happened anyway) were a major problem for many places.[30]



    There were also many things that occurred in only one country:



    In Australia, some private providers resorted to underhand practices. A few, for example, let claimants stay on benefits for 12 months, thus giving the provider access to higher payments once they were found employment. Others just paid employers to take claimants – between 2005 and 2006, AUD 102 million was spent on subsidizing 40,000 placements – or started them in low-level jobs so that they would receive payments when they were promoted to better ones.[31]



    The need for all providers to file reports on claimants who break their back-to-work agreements in Australia sullied the reputation of the charitable organisations involved in the country’s employment services market.[32]



    In Germany, the average length of time spent in jobs by claimants who sought help from private providers (12 months) is no shorter than the average duration induced by assistance from the government-run Federal Labour Agency.[33]The same comparison holds for those receiving help from private providers versus those searching by themselves.[34]



    Poor contract design led to the bankruptcy of Germany’s major provider.[35]



    In Germany, payments made to providers immediately after they placed claimants in jobs led to fraud.[36]



    Corruption in the handling of placement services was found among a few local governments in Germany. This led to exaggerated prices in some contracts.[37]



    Also in Germany, some private providers didn’t employ as many workers (in temporary work schemes) as contractually obliged to because they wanted to reduce their risks as much as possible.[38]



    In the absence of a rating system, comparing providers in the Netherlands has been difficult.[39]



    In Wisconsin, claimants are thought to go through an initial period of poverty (i.e. wages below the poverty line) when they move from benefits into low-paid work. [40]



    Services in Wisconsin suffered because many providers lacked good quality middle managers who understood the welfare system.[41]



    The State of Wisconsin was improperly billed by two providers for work done elsewhere. It had the thousands of dollars refunded.[42]

    Link to Report


    Read the full report at


    Read the summary at 





    See page 12.


    See pages 5 and 24.


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    See pages 5 and 46.


    See pages 44 and 47.


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    See pages 5, 6 and 49.


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    See pages 5, 6, and 13 for general comments; 25, 31 and 32 for a discussion of the Australian experience; and 63 for an analysis of Denmark.


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    See pages 18, 27, 30 and 31.


    See pages 6 and 66.


    See pages 4, 5, 9, 20 and 31 for a discussion of the Australian experience, and 56 for an analysis of Germany.


    See pages 6, 9, 20 and 31 for a discussion of the Australian experience, and 55 for a recounting of the difficulties in Germany.


    See pages 4 and 28.


    See pages 28 and 32.


    See page 56.


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    See page 9.


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