A farmer and his son, having finished ploughing for the day, manoeuvre their tractor from the field across the adjoining road. Suddenly they see a Jaguar speeding toward them at l00 mph. A split second before impact, the Jaguar suddenly veers off the road into the field, skids through a cloud of dust, regains the road and flies off into the distance. The farmer turns to the boy and says, "Son, we left that field just in time."

The spirit of this tale lies at the heart of the failure of unemployment policy throughout the EU over the past decade. By subsidising unemployment rather than employment, policy has compounded the problem it is meant to solve. Governments pay people when they are unemployed and tax them when they find a job. Far from inducing workers to seek employment and firms to take them on, the policy discourages them from doing so and thereby contributes to the unemployment problem. It discourages people from seeking work and then provides a safety net to those it has kept unemployed

As a way of tackling unemployment, this policy makes little sense. It is particularly damaging in times of recession, when unemployment is clearly a waste of human resources, rather than the efficient outcome of people's desire to search for jobs. But there is an alternative. If the same money spent on unemployment benefit could be redirected so that it provided an incentive, rather than a disincentive, to create employment the EU would undoubtedly reap a large benefit.

This is the purpose of my ‘Benefit Transfer Programme', on which the UK Workstart pilot schemes are based. The idea is to give the unemployed - particularly those who have been unemployed for a long time - a better option by allowing them to use a portion of their unemployment benefits as a voucher paid to employers that hire them. In this way unemployment benefit systems, which currently impose an implicit tax on work could be the source of employment subsidies directed at those who need these subsidies most - the long-term unemployed.

Current benefit systems are notoriously inefficient. They keep the unemployed from competing effectively for jobs. But they also magnify existing inequities in people's job opportunities. The longer people are unemployed, the more their skills erode, the more discouraged they become in searching for jobs, and the more wary employers become of hiring them.

The appropriate policy response to the problem of the long-term unemployed ought therefore to be to make it more profitable for firms to hire them and for these unemployed to find jobs, rather than merely to provide limited support when people are unemployed. To the unemployed, the amount the government spends on unemployment benefits may not appear very substantial; but if these funds, along with the foregone tax revenues, were offered to employers as wage subsidies, they could have a very substantial effect on employment.

Since the Programme is voluntary, the unemployed will join only if it is to their advantage. But many will, since the wages they will be offered will be much higher than their unemployment benefits. At the same time employers will join only if they find it profitable. Once again, many may well do so since the subsidies reduce their labour costs.

In short, employees wind up receiving substantially more than their unemployment benefits, and many employers wind up paying substantially less than the prevailing wages. The difference is the unemployment support that has been transferred to wage subsidies.

The reduction in unemployment can be achieved at no extra budgetary cost, since the government would not be spending more on the wage subsidies than it would have spent anyway on unemployment support. Funds that previously encouraged unemployment are now encouraging employment. And since the long-term unemployed exert no noticeable dampening influence on wages, the Programme would not be inflationary.

What distinguishes the Benefit Transfer Programme from previous wage subsidy proposals is that it can link the size of the employment vouchers to the size of unemployment benefits, the duration of previous employment, the duration of subsequent employment, and the amount of training that employers provide.

The longer people have been unemployed (up to a 2-year maximum), the larger would be the vouchers that they receive immediately upon finding jobs. But once they have found jobs, the vouchers would gradually decline as their span of employment continues.

By linking employment vouchers to existing unemployment benefits, the Benefit Transfer Programme would be self-regulating, providing the most generous subsidies when unemployment is highest and focusing support on regions with the highest unemployment rates.

Substantially larger vouchers could be given to employers who can prove that they are using these funds for training. The Benefit Transfer Programme could then become the basis for an EU initiative to promote the acquisition of skills. Clearly, firms will spend the voucher on training only if they intend to retain their recruits after the subsidies have run out. So training for the unemployed would automatically come with the prospect of long-term employment, something that existing government training schemes do not offer.

The case for implementing the Benefit Transfer Programme at the EU level appears strong. The Programme will promote employment and training, it will not be inflationary and will not cost governments anything. So what have we to lose?

Dennis J Snower, ‘The future of the welfare state’, CEPR Occasional Paper No. 13 (March 1993).