Tough love: Britain could slash unemployment by time-limiting benefits

 
Sam Bowman
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We need a holistic rethink of welfare (Source: Getty)
Most talk of welfare is about how much we spend. Far too little is about how we actually spend it, but this is what really determines whether it does what we want or not.

Jobseeker’s Allowance (JSA) is a very small part of the £217bn per year we spend on welfare, costing around £5bn annually. But in interaction with in-work benefits like Working Tax Credits, it can be one of the crucial factors in a person’s decision whether to take a job or keep looking for something better.

The difficulty is that we can only cut JSA so far before it stops being capable of giving people a short-term safety net in between unexpected periods of unemployment. And as a new paper from the Adam Smith Institute (“Time for Time Limits”) argues today, this is where we can learn quite a lot from reforms abroad.

The US’s problems with welfare in the years leading up to the end of the Clinton Administration are well-known. Nearly 5m families were receiving unemployment benefits, and poverty among single mothers was at 44 per cent. Inner-city communities were decaying and large portions of US society seemed to be hopeless.

These were the problems that the Clinton welfare reforms were designed to fix: to get people into a job – any job – and stop depending on the state for their livelihoods.

If only Richard Nixon – a Republican – could go to communist China, perhaps only Bill Clinton – a Democrat – could have reformed America’s welfare system. Clinton removed penalties against marriage and cohabitation, and provided rewards for states that moved people into work. But the central part of the reforms was the introduction of time limits.

Federal benefits were limited to a maximum of a two-year continuous claim, and a lifetime limit of five years on all benefits paid for by the federal government. Even though most people were nowhere near the five year time limit, there was now an incentive for them to conserve benefits and enter work whenever possible. The results were significant: welfare rolls dropped by more than half, from 5m families claiming income assistance in the mid-1990s to less than 2m families ten years later in 2006.

Subsequent studies have estimated that the reforms reduced unemployment by 6-7 per cent, and by 12-13 per cent in female-headed families. And this effect still held during economic downturns: even in the years following the Great Recession, states that cut their maximum welfare duration, like Missouri, saw falls in unemployment too.

Time limits went alongside an expansion of the Earned Income Tax Credit (EITC), which topped up the earnings of low-paid workers, similar to the UK’s Working Tax Credit. Without the EITC, the US may not have seen such a dramatic fall in unemployment.

In the UK, our welfare time limits are informal and capricious. Without structural changes, across-the-board welfare cuts may not do much to reduce unemployment.

Cutting Working Tax Credits may be exactly the wrong approach, making work pay less than unemployment. We need a holistic rethink of welfare. If the American experience is anything to go by, time limits on unemployment benefits may be an effective way to move more people into work and out of long-term poverty.

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