Rt Hon Lord Lilley


    Freud has huge potential to cut unemployment and the benefit budget – new report 

    Half-hearted implementation without learning lessons from abroad could cause policy to fail


    Read the full report at


    Read the summary at



    Contracting out employment services – the central and highly controversial recommendation of the review into Welfare To Work conducted by David Freud which reported in March 2007 – could slash unemployment and save the taxpayer over a billion pounds a year. That is the conclusion of the first analysis of other countries’ experiences conducted for leading British think tank Policy Exchange. The report ‘Paying for Success: How to make contracting out work in employment services’ by former Employment Secretary Peter Lilley MP and Policy Exchange’s Chief Economist Dr Oliver Marc Hartwichargues, however, that care needs to be taken implementing the policy if the mistakes made abroad are not to be repeated in the UK.

    Contracting out employment services is not new: Britain is a decade behind some other countries in this respect. Although the original Freud Report mentioned other countries’ experiences, no detailed analysis existed of the reforms elsewhere. Policy Exchange commissioned research into contracting out in 5 other countries: Australia, America (Wisconsin), Germany, The Netherlands and Denmark. While no two countries labour markets and welfare systems are identical, it would appear that the advantages of deploying the private and voluntary sectors to get people into work greatly outweigh the possible negative effects.

    Unemployment and Incapacity benefit rates in the UK have been largely static for a decade. Unemployment varied between 1.4m and 1.7m between November 1999 and May 2007; Incapacity Benefit rates have been stuck between 2.3m and 2.5m over the same period. While several countries have slashed the costs of their employment programmes after introducing contracting out by greatly improving jobseekers’ chances of finding work quickly, the report argues that a piecemeal approach is potentially hazardous. Nevertheless, separating the purchaser (the State) from the provider (private or voluntary employment agencies) enabled both to focus on what claimants really needed to get back into work.

    The international verdict


    Four years after introducing contracting out the cost of the labour market programmes fell by AUD 3.7bn to AUD 1.3bn – a 65% drop. Under contracting out, the cost of placing a person in employment dropped from between AUD 10,000 and AUD 16,000 to between AUD 5,000 and AUD 6,000. Compared
    to what it is predicted would have happened under the old system, positive outcomes from the changes have been recorded. 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). However, problems have been encountered too: some private providers let people stay on welfare for a long period before finding them work so as to increase their fees. There was also some evidence of firms concentrating only on the claimants who were easiest to place in jobs.


    In the first contract period after the changes, Wisconsin saved 15% of its welfare budget. As a result, its legislature has been able to re-allocate funds to youth, literacy, nutrition, and domestic violence prevention programmes. The welfare rolls in Wisconsin 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. Claimants in Wisconsin do, however, frequently go through an initial period of poverty (wages below the poverty line) when they move from benefits into work but, once in work, their incomes soon rise to better levels than on welfare.


    ’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. 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. However, helping the hardest to reach recipients became unprofitable and the system needed to be changed. Also, the jobs people go into using private employment agencies appear not to be any longer-lasting than those found using the State’s help.


    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. Again, though, private providers tended to focus most on getting jobs for those who would find it easiest to find jobs themselves.

    The Netherlands

    The Netherlands has been more successful in getting lone parents and the disabled back to work than many other EU countries.  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.  Employment services would also appear to shorten periods of unemployment although providers are hard to assess as there is no rating system.


    In his review of the analyses done in the five countries Peter Lilley MP comments: “The only people at present who do not stand to benefit from success in enabling people to move from welfare to work are those whose job it is to help them do that. Maybe that is one reason the UK has been less successful than other countries at boosting employment after a long period of steady growth with a deregulated labour market.


    “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.”

    Dr Oliver Marc Hartwich, Policy Exchange’s Chief Economist, added: The overall results in other countries are encouraging. Implementing a successful programme of contracting out in the UK will require both courage and skill. It can hardly fail to be an improvement on the status quo. The several million people not working who could be working deserve a better deal than they are currently receiving. Contracting out offers a good solution if we are going to ever see a substantial fall in the numbers unemployed or on Incapacity Benefit.”

    Peter Lilley MP and Dr Oliver Marc Hartwich are available for interview