Why welfare-to-work must succeed

By Paul Convery (Joint Director, Unemployment Unit & Youthaid) April 1999

As the New Deal for 18 to 24 year olds passed its first anniversary in Spring 1999, the general shape of Government programmes for the remainder of the Parliament has become very clear. The New Deal programmes form part of a wider strategy commonly described as "Welfare to Work" and this has become central to many different aspects of Government strategy.

Having started life as a series of manifesto commitments that promised straightforwardly to help groups of people excluded from the labour market, the New Deals represented a distinct break with the previous Government's disappointing and relatively unsuccessful programmes.

But the New Deals – and the wider welfare-to-work approach – are more than just a set of new schemes for the unemployed. They represent just one strand, though an important one, in a political project which promotes employment, economic recovery and social justice simultaneously.

The rise of mass unemployment

During the 1950s and 1960s, Britain lived through a period of full employment. The post-war boom lasted almost 30 years and, across most of the country, jobs were plentiful. Many of these required skills that could easily be picked up on the job. Occupations that did need highly skilled staff usually had lengthy apprenticeships followed by a guaranteed lifetime of employment. The majority of the workforce were men and most would stay with the same firm throughout most of their working life.

As the post-war boom started to deflate, the labour market became less secure as the demand side of the economy fluctuated, inflation began to rise and the economy was buffeted by a succession of external shocks. Until the mid 1970s, unemployment was rarely higher than about 2.5% of the workforce. In the South East, even in 1974, the unemployment rate was just 1.4% whilst in the regions of Britain which subsequently became blighted by mass lay-offs, unemployment rates remained low. In Scotland, Wales and the North West, less than 4% of the workforce were unemployed.

But in the period from 1980, Britain experienced two recessions, mass unemployment and the growth of low skilled, poorly paid and insecure jobs. It saw the labour market transformed by social changes too, as work patterns changed – for example the collapse of the pre-dominance of men working in manufacture as global competition and the legacy of decades of under-investment took their toll.

The economy and labour market have now changed beyond recognition. Globalisation has imposed intense pressures on all firms in the traded sector – pressures which have subsequently cascaded into companies that do not face external markets and even into the public sector. Competitiveness has put a premium on workers who can adapt to advancing technology and to new working patterns. People without skills are being left behind – stuck in precarious jobs that are poorly paid. These jobs offer little prospect of advancement out of poverty.

More worryingly, the non-working population has taken on a new character. Persistent long-term unemployment has become a state of life imposed on over a third of a million people who claim JSA. But other groups of non-employed people have grown too – people taking early retirement because of incapacity and lone parents. In total nearly 4¾ million people want to work and the majority of them are technically described as economically "inactive" because they have become detached from active jobsearch and from the mainstream of the labour market. In many cases, the benefit system itself has encouraged this alienation from the world of work.

Tackling unemployment and poverty

During the two decades when mass unemployment became a political and economic reality for millions of people, the Government of the time presented this as an unfortunate and unavoidable feature of the new global economic order. And, over the span of two savage recessions, it was described as a "price worth paying" to enable the British economy to emerge leaner and more competitive.

The Government elected in 1997 clearly does not share this view. In fact, Britain's economy had slipped down the international wealth and competitiveness rankings. Taking "social justice" as one of its founding beliefs, the new Government regards poverty and unemployment as being amongst the causes of Britain's comparative economic under-performance.

The new Government's "Welfare to Work" approach does not aim to tackle poverty by spending more on social security. It argues instead that social justice is better served by recreating individual economic self-sufficiency – work is the most effective route from poverty.

Bringing more people into the workforce and increasing their employability also has an economic rationale. Unemployment seems to be falling to its lowest level in almost 20 years and some economists have started to worry about how low it can drop before inflationary pressures are triggered.

In previous periods, as the economy expanded, shortages of skilled labour caused wage inflation. Policy makers would then be forced to slow the economy down by increasing interest rates and choking off demand. These boom and bust cycles did not really fine-tune the economy. Instead they destroyed jobs and for many people, their exclusion from the labour market became long-term.

The new Government's emphasis on economic stability – which ultimately leads to further growth in jobs – needs mechanisms that help to minimise wage inflation by expanding the numbers of employable people. Activating the long-term unemployed – particularly if they gain precisely the skills which are causing shortages and bottle-necks – means that the economy can grow faster without risking a resurgence of inflation. Evidence from other countries shows that increasing the training and skills competence of the population in itself can increase employment.

The Government's strategy

Firstly economic management has to achieve healthy growth and stability, avoiding the swings in output that destroy jobs, create persistent unemployment and lead to permanent exclusion from work. But growth and stability alone are insufficient. Four other conditions are needed:

Programmes for the unemployed

For 20 years, governments responded to rising unemployment with an increasingly tough benefit eligibility regime coupled with a haphazard mixture of training and work experience schemes. For the majority of their participants, these were of extremely low quality. As a result, programmes of this sort acquired a dismal reputation amongst the general population and were often viewed with hostility by unemployed people.

For this reason, the New Deals – both for the young unemployed and for the long-term unemployed – are meant to be different. They are designed to help claimants make real choices and enjoy high quality offers of help.

At the core of these New Deals are real jobs with real employers paying real wages. This strong focus on employers is underlined by a promise made by employers to offer lasting jobs which should pay a proper wage based on the going rate.

And for those who do not go straight into employment there are work experience and learning routes that should lead eventually to employment.

Employers certainly have a strong incentive to join the New Deal – and over 50,000 have signed up. It is financially far more attractive than other programmes, delivering at least £2,310 to an employer over a 6-month period.

A high level of funding is also seen in the other options: for a Full-time education & training course, colleges and training organisations will be paid up to nearly £3,000 depending on the course's complexity and costs of materials and special equipment; in the Voluntary sector and Environment task force options providers could receive nearly £4,000 per participant for each 6-month placement – well over twice the level of funding under some previous programmes of work experience.

And unlike many previous Government programmes, the New Deal places a strong emphasis on training and education, with a minimum entitlement of one day per week in off-the-job training. It also places a strong emphasis on helping meet the childcare costs which might prove to be an obstacle to some participants.

Another promising feature of New Deal is the closer attention paid to matching and screening participants to vacancies. In the Gateway phase, personal advisers – and some specialist external agencies – aim to provide high quality guidance and counselling to help unemployed people make informed choices about getting work or improving their employability.

In the first year however, New Deal progress was slower than expected. By January 1999, 233,200 young people had entered the New Deal for 18-24 year olds. Of these 53,600 had found work – of which about a fifth were in a New Deal subsidised job. An unexpectedly high number of people – nearly 22,000 – enrolled on the Full-time education & training option whilst about 12,500 had joined the Voluntary sector and Environment task force options

But a large number of entrants were still in the preparatory Gateway phase – some 78,000 – and the amount of time spent in this stage has caused anxiety about participants' progress. For the 27,000 young people who had their first New Deal interview in July, almost half were still on the Gateway when their maximum 4 months were up. Worse still, a quarter were still there at the end of December – 6 months after starting.

The outcome for young people who have participated in one of the New Deal options is encouraging. The proportion of leavers from the Employment option who found unsubsidised jobs was 61%, whilst a third of leavers from the Full-time education & training option had entered work – a figure slightly understated because some leavers went onto other education that is technically outside New Deal. On this basis, the New Deal is achieving job entry rates that outstrip many of the programmes it has replaced.

By contrast, job entry has been rather lower in the New Deal for people aged 25 and over. In its first 7 months, nearly 100,000 people entered the programme and nearly 6,800 of them gained jobs as a result – two in three of doing so without the need for a job subsidy.

The New Deal for Lone Parents – which is primarily a guidance and counselling programme – can claim over 6,000 jobs successfully found by lone parents in the period to January 1999. This is almost 20% of the total who decided to participate in its pilot phase, and since its national launch in April 1998.

Modernising the tax and benefit system

The Government has accepted that the social security system itself creates barriers for people trying to return to employment. While the labour market has required individuals to become extremely flexible in the last two decades, the benefit system has remained very inflexible.

Indeed, as means testing has become more widespread, unemployed claimants have been locked into reliance on benefits and become averse to taking risks. In 1982, half of all unemployed claimants got a non-means-tested benefit which they received as of right because they had paid National Insurance contributions. Over the next 15 years, this proportion declined dramatically so that only one in ten claimants now gets a non-means-tested benefit. So for most unemployed households, it makes no sense to have built up savings or to have one adult in work – as both circumstances lead to partial or total loss of unemployment benefits.

The disincentives caused by means testing are a significant factor behind the growth in "workless households" – almost one in five households of working age has no-one employed.

Reforming the tax and benefit system does not just involve helping people out of the traps caused by the benefit system. It also means promoting incentives to "make work pay".

One of the most significant changes is the Working Families Tax Credit which will replace Family Credit (an in-work benefit for families with children) by a payment administered through the tax system. This starts in October 1999 when, instead of remaining "on benefit" even though they are in work, low income earners who have children can get an earnings boost via their wage packet rather than having to cash a weekly Payment Order Book. In saying that "work should pay", the Working Families Tax Credit will provide a minimum income guarantee for families with a full-time earner of £200 per week.

The Government has also signalled that it might eventually consider reform of the earnings disregard rules which make part-time work unappealing to unemployed claimants who receive means-tested JSA. At present, all weekly earnings above the first £5 (£10 for an unemployed couple) are clawed back pound for pound from a claimant's benefit. Although part-time work can help a person get back into the jobs market, the strict financial rules act as a penalty and disincentive to casual and part-time employment.

The Government seems likely to significantly reform the system of housing support. This may include extending housing benefits so that mortgage payers get a "breathing space" when they start a job. People who pay rent get a Housing Benefit run-on period of 4 weeks to help tide them over – especially helpful if a new job is paid monthly in arrears. But home owners are treated differently and their Income Support Mortgage Interest Payments stop the moment they sign off. The Government has already said that over the longer term, the "better deal for work" should include help with housing costs including help for home owners going back to work. The Chancellor said in the 1999 Budget that "taking a job should not put them in danger of losing their homes".

The Government has already gone some way down these routes. For example, disabled people on Incapacity Benefit or Severe Disablement Allowance will be protected by a 12-month "linking" rule. This protects their benefits if they try out a job then lose it and return to benefit. Most people will be able to move into a job secure in the knowledge that, if the job turns out to last under a year, they can return to benefit and receive the same rate as before and avoid having to undergo the assessment of their disability condition that a fresh claim would require.

For lone parents, the Government has also decided to extend Income Support payments to bridge the period between leaving benefit and starting a new job. To help ease the transition, from October 1999, Income Support will continue to be paid for a 2 week period (for claimants who have received Income Support for at least 26 weeks previously). And the Government plans to evaluate the effectiveness of this approach to "consider whether there is a case" for extending this run-on to other groups of claimants.

A skilled and productive workforce

The third strand in Government thinking acknowledges that low skill levels mean low levels of productivity and contribute to a declining national economic output. But they also mean that significant numbers of people who have literacy problems, poor education or a lack of work experience can access only the lowest paid, most insecure jobs with the worst prospects of advancement. They may move from one job to another and find their work history punctuated by repeated spells of unemployment. Between the middle of 1992 and early 1997, 10.25 million individuals – over 40% of the economically active population – experienced at least one spell of claimant unemployment. For about half this population, job loss will have been an unexpected shock, a dramatic drop in their income and a spell of intense insecurity from which they will have recovered. They may have subsequently recovered their earning power and returned to reasonably secure employment. But for the other half, spells of unemployment are a pattern which they find it difficult to break out of because employers regard them as unskilled and unsuitable in the higher value-added occupations. So "Welfare to Work" also requires policies which tackle these labour market disadvantages, and not only policies which try to make work more financially attractive.

The Government calls its approach to low skills "Lifelong learning". It stresses the need for a well-educated, well-equipped and adaptable labour force which can help overcome skill shortages. And by encouraging people to enter and re-enter learning throughout their lives, it will ensure that education and training are no longer the privilege of an elite who already have secure position in the labour market. The Government plans to launch a "University for Industry" which will concentrate on strongly vocational and technical education taught using distance learning techniques and delivered by advanced information technology.

In particular, it will also create a million "individual learning accounts" which will target disadvantaged groups in the labour market by helping them "buy" training as and when required. For the first 1 million who start, the Government will make £150 available to each account holder in return for an investment by the individual of £25. This will also entitle the individual to a 20% discount on all eligible training costs up to £500 a year and 80% discounts on the cost of "key skill" courses, such as computer literacy. Further contributions by employers will be tax-deductible and employees will pay no tax or National Insurance on these contributions provided employers contribute to the individual learning accounts of their lowest paid workers.

In addition to improving the skill levels of adults who are currently in the labour force, the Government wants to improve the attainment levels of young people – before they even enter the labour market. In particular, this relies on encouraging more 16 year olds to stay on in education and on reducing the extent of truancy, antisocial behaviour and general disaffection amongst some young people while they are still at school. This framework, called "Investing in Young People", includes an improved form of occupational and educational guidance through the careers service.

Pilot projects have been launched to reduce the numbers of young people dropping out of education and training and to try out personal advisers/advocacy services for young people. Education Maintenance Allowances are being tested to see if this will improve educational participation; Access funds have been launched for 16-19 year olds in education and a new "Learning Gateway" will be implemented in September 1999 for 16 and 17 year olds.

The Government has also legislated a "right to study" guarantee which will require all employers to give a minimum equivalent of a day a week training for all employed 16 and 17 year to achieve NVQ level 2 (if they have not already reached this level).

Lastly, the Government is already replacing what it has called "the failed Youth Training scheme" by implementing National Traineeships and extending higher level Modern Apprenticeships aimed at the 16–19 age group.

Making the labour market more secure

The biggest and most significant change to the labour market will come from the National Minimum Wage which was implemented in April 1999. This is combined with a raft of employment protection provisions which flow from the EU Social Chapter. These give individuals new rights in the workplace:

These reforms should lead to a subtle shift in the balance of power between individual employees and their employers and help to foster a climate in which people at work feel more secure and have the inclination to take risks – like moving to a better job or taking a period of training and education.

Meanwhile, the Government's strategy for low pay is not only meant to deliver a decent threshold of income to the growing number of working people who are poor. It will also help to make sure that unemployed claimants who re-enter employment will be better off than if they stay on benefits.

This has been a central theme of the Government's first Budgets – "making work pay". So substantial changes to income tax and National Insurance contributions took effect in April 1999 and these have reduced the effect of very high "marginal deduction" rates on the low paid. The starting point for paying National Insurance contributions will rise from £64 per week to £76 per week in April 2000 and then to £87 per week in April 2001. As a result 900,000 low-paid people will no longer have to pay National Insurance contributions. This 25% increase over 2 years will align the starting point for National Insurance contributions with income tax personal allowances.

A Good Deal

Labour market disadvantage and unemployment have blighted generations of people who have been denied decent, secure, well remunerated work. Their disadvantage in - or alienation from - the labour market is the root cause of the multiple symptoms of social distress that we see in Britain today.

The New Deals and the Government's welfare-to-work strategy are designed to return Britain to an economy increasingly driven by knowledge-based industries and aspiring to full employment. But the Government knows that, in the past, schemes for the unemployed were a great disappointment to many of the participants. So whilst the New Deals must succeed, they must also improve.

The millions of people who are disadvantaged in the labour market want to work and want to acquire the skills that will keep them in work and participate fully in society. Their restoration into the labour market will give them the independence, economic self sufficiency, dignity and freedom from want.

That's a precious prize and it's one that's within our grasp.