Universal Credit and unemployment rates in the United Kingdom

by Fabiana Alberda & Margot Keijzer


At this moment, nearly 1.25 million people in the United Kingdom (UK) are unemployed (Statista, 2022). Many reasons can be attributed to these numbers, such as lack of education or skills, economic downturn, structural issues in the labour market, personal circumstances, or discrimination in the labour market (Organisation for Economic Co-operation and Development [OECD], 2009)

To improve their situation, the UK government introduced a number of policies and programs aimed at supporting low-income workers, unemployed individuals and reducing poverty. These included Income Support, Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance, Housing Benefits, Child Tax Credit and Working Tax Credit, followed by the introduction of the minimum wage. These programs and benefits had a significant impact on the lives of low-paid workers and have helped to improve the economic well-being of many individuals and families.

However, given the complexity, and inflexibility of this benefit system and the system not always meeting the needs of individuals and families, a new benefits system called Universal Credit was introduced in 2013. Universal Credit is a major overhaul of the UK’s social security system that will impact about eight million households (Brewer, Browne, & Jin; 2012; Millar & Bennett, 2017). It combines – contrary to its name – six means-tested benefits and tax credits into a single payment based on income, assets, and circumstances, which are paid monthly. A significant aim of the government, with regard to Universal Credit, was to increase employment rates and work incentives by making the system less selective and more flexible than the previous system of means-tested benefits (Brewer, Browne, & Jin; 2012; Millar & Bennett, 2017). This was done in a number of ways which will be touched upon later in this literature review. It is interesting to study whether this change in the social assistance scheme has led to the realisation of the government’s goal of decreasing the unemployment rates.

This literature review examines whether deviating from a social assistance scheme that is highly selective and less flexible towards a Universal Credit scheme – which is less selective and more flexible – has affected unemployment rates in the United Kingdom.

 It will do so by first exploring the literature in regard to this topic. Second, some empirical evidence will follow. Finally, a conclusion and discussion, including implications for future research, is given. 


The United Kingdom as a liberal welfare state

            According to sociologist Esping-Andersen (1990), the nature of class mobilisation, class-political action structures and the historical legacy of the institutionalisation of the regime shape the various welfare states. Esping-Andersen argues that looking at the history of welfare states, there are three trajectories, a liberal, a conservative and a social-democratic one (Arts & Gelissen, 2002). This class coalition mobilises to shape welfare policy in ways that reflect their interests, such as by advocating for lower social spending and a greater reliance on the private sector to provide welfare benefits and services. The United Kingdom is therefore specified in the literature as a liberal welfare state (Arts & Gelissen, 2002; Wilson, 2017). This type of welfare state embodies individualism and the priority of the market. The functioning of the market is actively and passively encouraged by the state in which either private welfare schemes are subsidised or social benefits (which are often means-tested) are kept to a modest level for those who need it. Besides, there is little redistribution of income in this kind of welfare state and the social rights are rather limited. This results in a divide between, on the one hand, a minority of low-income state dependents and on the other hand, a majority of people that can afford private welfare provisions. The social benefit schemes in the United Kingdom are, therefore, often means-tested and selective in order to alleviate poverty.

Low wages

            Since the 1970s, trends regarding unemployment and wage inequality had moved in different directions. Globalisation or also named in the literature as ‘macro-economic shocks’ are increasingly acknowledged as a driving force behind the changes to work and living conditions around the world through the years (Burgoon & Dekker, 2010). The ‘Unified Theory’ argues that these trends can be explained by the combination of the ‘macroeconomic shocks’ and whether the labour market institutions of a specific country are flexible or more rigid (DiPrete et al., 2005). This theory argues that in countries with more flexible labour market institutions, such as the United Kingdom, the wages could be regulated with regards to these macro-economic shocks, which caused the impacts on employment to be relatively small. However, due to the flexible wage regulation, wages were lowered which resulted in high-income inequality. In the open employment systems of the liberal countries, the effects of the globalisation process are expressed in increasing income losses due to the lowering of wages (Buchholz et al., 2008). The European labour market is characterised as more rigid which resulted in a limited effect of the shocks on the wage structure but instead caused a decrease in employer demand for low-skilled labours. DiPrete et al. (2005) built upon this theory and found that while the more liberal countries have experienced rising strong skill-based wage inequality, the European countries had an upward trend in insecure jobs and an increased amount of low-skilled workers within these insecure jobs. The UK, as a liberal welfare state with flexible labour institutions has dealt with low wages. These low wages and minimum social protection can lead to poor living conditions and poverty.

Old and new benefits system

            The government has tried to adapt the benefits regime to these low wages with the implementation of different means-tested benefits and tax credits that were administered by the Department for Work and Pensions (DWP), namely: income Support, Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance and Housing Benefits in the mid-1990’s. In 2003 Child Tax Credit and Working Tax Credit were added to this social insurance system as well (Brewer, Browne, & Jin; 2012; Millar & Bennett, 2017; GOV.UK, n.d.). From now on we will refer to these benefits as the “old benefits system”. Because the government believed that the old benefits system was too complex and inflexible and that it did not always provide support to the needs of individuals and families, Universal Credit was introduced in 2013 as part of a wider government reform of the social assistance system which combines several of the means-tested benefits and tax credits listed above into a single payment which are paid monthly to the claimant  (Brewer, Browne, & Jin; 2012; Millar & Bennett, 2017). There are multiple differences between these two benefit systems. The differences between the old benefit system and Universal Credit are shown in Table 1.

Table 1.

Differences between the old benefits system and the Universal Credit System

DomainsOld benefit systemUniversal Credit
  PaymentsSeparate monthly received payments

1. Child Tax Credit
2. Housing Benefit
3. Income Support
4. Income-based Jobseeker’s Allowance (JSA)
5. Income-related Employment and Support Allowance (ESA)
6. Working Tax Credit
One single monthly payment
Universal Credit is paid as a single payment directly to the claimant, rather than as separate payments for each benefit.
  Flexibility  Before Universal Credit, the benefits system in the United Kingdom did not always provide adequate support for those who were in work but still struggling to make ends meet. This made the system less flexible.It is designed to be more responsive to changes in circumstances. For example, if someone’s income or circumstances change, they can report this online and their Universal Credit payment will be adjusted accordingly.
ComplexityBenefits are administered by different government departments that have their own eligibility requirements, application processes, and payment schedules. This complexity makes it difficult for individuals to navigate the system and understand their rights and entitlements.   Consists of multiple payments on different schedules.          Universal Credit has a single application process, rather than multiple application processes for different programs. This simplifies the process of claiming benefits and makes it easier for individuals to understand what they are eligible for.   Universal Credit is paid monthly in arrears, rather than multiple payments on different schedules. This simplifies the payment process and makes it easier for individuals to budget and plan their finances.
  Selectivity  The different programs were often targeted at specific groups of people, such as those who were unemployed, disabled, or caring for children, which made it difficult for individuals to access the support they needed if they fell outside of these categories.    It is available to a broader range of people. Because it is also available to people of working age who are on a low income or out of work. This means that it is not limited to specific groups of people, such as those who are disabled or retired.  
  Motivation to work  Some of the programs that made up the benefits system before Universal Credit had disincentives to work built into them, meaning that individuals who earned more money through work would lose some of their benefits. This discourages some people from seeking employment or from increasing their hours.  It includes support for people to move into work, including help with job search and training costs. This means that it is not just a safety net for those who are unable to work, but also helps people to improve their circumstances and increase their income.  
  Cut back  The complexity of the system before Universal Credit also made it easier for individuals to fraudulently claim benefits or make mistakes in their applications, which further increased the overall cost of the system.The implementation of the Universal Credit system in the United Kingdom has helped to reduce fraud and error in the benefits system by introducing a number of measures to improve the accuracy and integrity of payments.

           One of the two most important differences between the two benefit systems is that first, the Universal Credit benefit system is less harshly means-tested, meaning that it is available to a wider range of people. Universal Credit is also available to people of working age who are on a low income or out of work, rather than being limited to specific groups such as those who are disabled or retired. With this, the welfare system of the United Kingdom deviates from their old traditional way of thinking that help should only be offered to those groups who are seen as more deserving such as the old, sick and disabled, who can not provide for themselves (Laenen, 2020). The welfare system now sees more people as more deserving of support or assistance. This corresponds to the deservingness theory. This theory refers to the idea that some people are more deserving of support or assistance than others, based on their circumstances or personal characteristics. This can include factors such as whether someone is disabled or caring for a dependent, or whether they are considered to be actively seeking work or making efforts to improve their circumstances. The deservingness theory is often used to justify the allocation of benefits or other forms of assistance and can influence decisions about who is eligible for support and how much they should receive.

           Second, Universal Credit encourages people to work, meaning that Universal Credit helps to increase the incentives for those who had very little motivation to work under the previous benefits system. Under the old system, individuals could lose a large portion of their earnings through withdrawn benefits and tax credits when they began earning a small amount, making it difficult for them to financially justify working (Millar & Bennett, 2017). With Universal Credit, the support provided to individuals while they are working is more flexible and responsive to changes in circumstances, making it more financially viable for them to enter or increase their hours in the workforce, without losing out financially (Brewer, Browne, & Jin; 2012; Millar & Bennett, 2017; GOV.UK, n.d.). This is important because in this way the poverty trap can be avoided. The poverty trap is a situation in which low-income individuals or households are unable to increase their income or wealth because they are trapped in a cycle of poverty. This occurs when the amount of income or assistance provided by the government decreases as a person’s earnings increase.

Figure 2: Unemployment rates in the UK from 2000 until 2022.

United Kingdom; Office for National Statistics (UK); January 2000 – January 2022; 16 years and older. Published by Statista Research Department, Dec 13, 2022

            Figure 2 shows the unemployment rates of the United Kingdom from 1995 until 2021in which fluctuations in unemployment rates are seen throughout the years. The unemployment rate is expressed in the percentages of unemployed people of the total population of the United Kingdom. The first decrease in the mid-90s in unemployment rates might be due to the introduction of basic social assistance policies. The figure also shows the increase in unemployment rates due to the economic crisis from 2008 and only goes up through the years after that. Interestingly, this upward trend seems to peak in 2013 and decline relatively sharply in the subsequent years, with disregard of the peak in 2020 due to the covid-19 pandemic. The downward trend of unemployment rates from 2013 on, corresponds with the implementation of Universal Credit, which might have been the cause of a higher employment rate. This might be due to the higher work incentives to increase earnings, including for those with very low earnings and hours per week and the recipients of means-tested benefits and tax credits, as they will not lose these benefits and receive more with the smallest increase in earnings. As the gains to work are increased with the implementation of Universal Credit, this might have resulted in a decrease in unemployment rates. Besides, Universal Credit may encourage people to enter the labour market or to stay in the labour market by providing a financial safety net for those who are out of work or on a low income. By providing financial support, Universal Credit may help to reduce poverty and increase the financial stability of those who are claiming the benefit. This, in turn, may make it easier for individuals to look for work and increase their chances of finding employment. Nevertheless, it is important to note that it remains difficult to determine the direct effect of universal credit on unemployment rates as unemployment is affected by a range of other factors. It can therefore not be said with absolute certainty that the decline in unemployment rates is a direct result of Universal Credit.

Nevertheless, it is important to note that there are in fact multiple negative effects of the Universal Credit system for certain individuals. The government has emphasised that Universal Credit is intended to promote work and that it is structured in a way that is similar to paid employment.

However, universal credit does not adequately address the challenges faced by low-income individuals and families, and it is designed to alter their circumstances (Millar & Bennett, 2016). Having a reliable source of income, including knowing how much money you will receive and when you will receive it, is especially crucial for low-income families. Times of transition, such as becoming unemployed or becoming a single parent, can bring financial uncertainty, as can changes in wages and other circumstances even for those who are already working. The purpose of universal credit is to reduce this risk and create a more transparent system by providing a single benefit. However, certain aspects of the universal credit system, such as the monthly assessment process, lack of detailed information about the award, and low disregard for the work allowance, may undermine this goal of income security. Besides, the strict requirements to meet in order to receive the benefit, including being available for and actively seeking work might have negative effects on individuals (Cain, 2016). Some people may find it difficult to meet these requirements due to illness, caring responsibilities or other factors. Claimants who fail to meet the requirements may face sanctions, which can involve a reduction or cessation of benefits. This can in turn lead to financial hardship and difficulty meeting basic needs.

Discussion and Conclusion

            This literature review examined whether deviating from a social assistance scheme that is highly selective and less flexible towards a Universal Credit scheme – which is less selective and more flexible – has affected unemployment rates in the United Kingdom. After conducting a critical review of the literature on the ‘old benefits system’ and the ‘new’ Universal credit system and comparing it with unemployment rates, this literature review found that even though fluctuations in unemployment rates are seen throughout the years, employment rates have increased since the implementation of the Universal Credit. It should be noted that in 2020 there was a peak in unemployment rates due to the covid-19 pandemic, however, these rates have fallen back to the unemployment rate before the Covid-19 pandemic.

           Despite the fact that the trend in unemployment rates as seen in figure 2 are in line with the goal of the government to increase employment rates, it is hard to conclude whether this is a direct result of the implementation of Universal Credit. Unemployment can be influenced by a variety of other factors which might better explain the decrease in unemployment. Besides, whether unemployment rates are decreasing does not necessarily mean that the Universal Credit system has had an overall positive effect on the recipients. An increase in employment and especially in lower-wage countries does not automatically equal better living conditions. In addition, there are negative effects on Universal Credit that need to be taken into account. These limitations or negative consequences of the scheme show that it is important to be critical when looking at the outcomes of these types of selective schemes. This study however is too limited to rightfully show the causal effect of the Universal Credit scheme on unemployment rates. Besides, by only looking at unemployment rates this study is not able to show the total effect of the changing welfare scheme on recipients. More factors should therefore be taken into account. Future research is needed to study more thoroughly whether there is a direct effect of Universal Credit on unemployment rates and whether there are other factors that need to be incorporated. Besides, future research is needed to further examine the flaws of the welfare scheme and the effect it has on the recipients. Moreover, research could examine the experiences of different groups of people, such as disabled individuals, families with children, or those living in rural areas, to understand how the new system is impacting their lives.


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