A full-scale US-style 'workfare' scheme, under which the unemployed are required to work for their welfare payments, has failed to win support because of its cost.
Ministerial sources said the overhead costs for a workfare system would have been rejected by the Treasury.
But ministers are now actively considering a less expensive system under which the long-term unemployed would be put to work on environmental schemes and other jobs which would either use their existing skills, or teach them new skills.
'It could be some sort of community service. They would have to be jobs that are not being done elsewhere, otherwise, that would merely be putting people out of work,' one source said.
The options are being studied by Gillian Shephard, the Secretary of State for Employment, and her ministers. Decisions have yet to be reached.
It is unlikely there would be coercion, with the removal of benefit for those refusing to join the schemes.
Ministers said the type of scheme to be adopted would rest on the outcome of Mrs Shephard's bid for an increased budget for next year in the annual public expenditure review.
One option could be to build on the Employment Action schemes under which the long-term unemployed can volunteer for work schemes to help the community in return for their unemployment benefit plus pounds 10 a week.
The Department of Employment told the Training and Enterprise Councils (Tecs) that the Employment Action schemes would be merged with Employment Training (ET), the main training programme for the unemployed, and it had been agreed that it would not be mandatory.
The Treasury has been pressing Mrs Shephard to cut entitlement for unemployment benefit from a year to six months to save money.
That was resisted, but the Treasury is now seeking to restrict entry to Employment Training to those who have been without a job for more than six months, according to a leaked document.
The Department of Employment last night confirmed that a review was going on. It said the results would be announced at the time of the Autumn Statement on next year's public expenditure figures.Reuse content