Paying for Success – How to make contracting out work in employment services

Published by Policy Exchange (London), 14 April 2008

Edited by The Rt. Hon. Peter Lilley MP and Oliver Marc Hartwich


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 other countries’ experiences, there was no detailed analysis of the reforms in a global context.

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. 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.

The task of the commissioned experts was twofold: on the one hand to judge the effects of contracting out employment services on employment and welfare spending; on the other hand, to identify any difficulties that had been experienced in the process.

The overall results are encouraging. The essays in this compilation show how the use of the private and voluntary sectors has brought improvements, for example:

  • 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 the cost of benefits for lone parents with children over seven by around £300 million.
  • 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.
  • 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.

However, difficulties arise from the design of the contracting out regimes. Some of the authors report 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.

At a time of growing cross-party recognition that welfare reform along the lines suggested in the Freud Report is the way forward, Paying for Success confirms its benefits. But in doing so, mistakes made abroad should and can be avoided.

Authors and Editors:

Professor Thomas Bredgaard, Aalborg University (Denmark).
Dr Oliver Marc Hartwich, Chief Economist, Policy Exchange.
The Rt. Hon. Peter Lilley MP, former Secretary of State for Social Security.
Professor Peter Saunders, Centre for Independent Studies (Australia).
Dr Hilmar Schneider, Director, Institute for the Study of Labour (Germany).
Professor Els Sol, University of Amsterdam (The Netherlands).
Jason Turner, former welfare reform adviser in Wisconsin (USA).

Paying for Success in the media:

Daily Telegraph: Privatised welfare system plan ‘open to abuse’

Daily Mail: Britain ‘is ten years behind other countries in reforming its benefits system, at the cost of £1.5bn a year’

The Sun: Privatise dole to save money

BBC: Private firms ‘save benefit cash’