Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by David Webster (ES 11)

  The argument of this memorandum is that the Government's employment strategy places insufficient emphasis on local labour market conditions, which vary widely across the UK. Supply-side measures such as the New Deals need to be supplemented by much more vigorous policies to boost demand for labour in the most disadvantaged localities. This argument has been set out previously in a number of publications which are referenced below. As far as possible, this memorandum updates the research evidence.

How much has worklessness really fallen since 1997?

  In order to judge what effect the current economic slowdown might have on the labour market, it is necessary to examine the effect of the economic expansion of the second half of the 1990s.

  Judged in terms of unemployment as officially measured, the record has been good. This applies whether the claimant count (those receiving unemployment-related benefits) or the wider ILO definition (looking and available for work) is used. Claimant unemployment has fallen by about 600,000 since 1997 and ILO unemployment by rather less. However, the record has been less good than it appears, for two reasons:

    (i)  The New Deals themselves have a "register effect", in other words they reduce the claimant count without getting people into work. People on "options" are not counted as unemployed, and those who are "sanctioned" for non-compliance are also removed from the count. Calculating the total effect is complex but the best estimate seems to be around 50,000.The "options" effect is more important than the "sanctions" effect because although the latter are running at around 18,000 per year they do not last so long.

    (ii)  More important is the movement of people out of unemployment but not into jobs, ie into economic inactivity. The key labour market status from this point of view is long term sickness, although there are other destinations also. At November 2001 there were 3.008m working age people claiming sickness and disability benefits compared to only 2.803m at May 1997, an increase of 205,000. On any sensible view, many of these people are really unemployed. This issue is explored further below.

  Overall, up to 40 per cent of the 600,000 apparent reduction in claimant unemployment since 1997 is probably not real. Nevertheless, there has still been substantial real improvement.

How much of the labour market improvement has been due to the Government's employment programmes?

  There have now been several studies of the economic impact of the New Deals. The National Audit Office's estimate (NAO 2002) is typical. This puts the impact on youth unemployment of the New Deal for Young People at about 25,000-45,000, with a positive effect on employment of other groups of about 10,000. These are small numbers in relation to the total real fall in claimant unemployment of about 350,000 since 1997. Indeed, the real effect of the New Deals actually appears to be smaller than their "register" effect.

  Employment Zones have also had a very limited impact. Up to September 2001, 54,389 participants had started and claims had been made for 16,643 jobs.

  The New Deal for Lone Parents—few of whom are found in the claimant count—has had a similarly small effect. DWP figures to end-January show 146,000 participants entering jobs, but most of these would have entered employment anyway.

  The Working Families Tax Credit has increased incentives to enter work, particularly for lone parents, and may have a greater effect in the longer term. But to date take-up has been clearly been largely by people already in work (Webster 2001). This was predicted by HM Treasury (2000b). Their maximum estimate for the additional labour supply impact on lone parents and couples of 122,900 is small in relation to their then projected UK increase in claims of 583,000.

  Total placements of people in work are not the same as the net impact on unemployment. Comprehensive calculations appear to be available only for the New Deal for Young People, and estimates are therefore necessarily approximate. However, the overall net impact on real claimant unemployment of all the Government's employment programmes seems unlikely to have been as much as 100,000 and is probably nearer 50,000. These programmes have played a relatively small role in the labour market improvement since 1997. Economic growth has been far more significant. The current economic slowdown is therefore extremely important from an employment point of view.

Long Term Sickness

  The UK has the highest rate of working age sickness of all 15 European Union (EU) countries. The UK had 7.0 per cent of its working age population inactive due to long-term sickness in 1999, compared to only 2.1 per cent in Germany and 0.3 per cent in France. Britain compares favourably with the rest of the EU in terms of ILO unemployment, with eight countries having a higher rate. But if the working age sick were to be added to the unemployed, Britain would become the third worst, after Finland and Spain (Figure 1).

  The Government acknowledges that the high level of long-term sickness is a problem, and has attempted to address it by tightening eligibility for Incapacity Benefit and through specific labour market programmes which, though small, are being expanded. However, it appears that the net flow into sickness is continuing. The DWP's latest Client Group Analysis shows that 87,000 people who were claiming JSA in November 2000 were claiming a disability benefit in November 2001. This is 9.1 per cent of the group, and even after allowing for flows in the other direction, the net flow is still 4.8 per cent. This is far greater than from any of the other non-working groups. <mr40> A recent official analysis based on the Labour Force Survey (LFS) showed that the propensity of the unemployed to move into inactivity rose steadily during the 1990s, from about 8 per cent to 13 per cent per quarter (Young 2001). In other words, much of the improvement in unemployment has been offset by a worsening in sickness.

  Local authority level data on sickness back to May 1995 have recently become available from DWP. Over the whole period May 1995 to November 2001, the proportion of the Great Britain working age population on sickness benefits rose from 7.4 per cent to 8.4 per cent. In the areas with the worst sickness rates, there was generally some improvement, but this has been extremely slight for a period of such prolonged economic expansion, underlining the seriousness of the problem. In Glasgow, the proportion fell from 19.7 per cent to 18.7 per cent, Liverpool from 18.2 per cent to 17.9 per cent, and Easington from 25.7 per cent to 23.3 per cent, but it rose in Manchester from 13.6 per cent to 15.4 per cent.

  A full account of the evidence that many if not most of the long-term sick are really unemployed is in Webster (2002a). While the Government has yet to acknowledge officially that the UK's true unemployment rate is far worse than shown in the official statistics, this analysis is now widely shared. Since the mid-1980s, British policy has been based on the assumption that people can be pushed into work by a combination of low unemployment benefits and direct pressure. However, as Beatty et al (2000) explain in detail, there are such a large number of people both employed and unemployed who can potentially qualify for sickness benefits that the actual effect of this approach is to create a large flow into sickness as well as into jobs.

  A recent study showed that the large increase in disability benefit claims in the USA since 1984, especially among unqualified people, was strongly related to a rise in the value of the benefits relative to relevant earnings, to relaxed criteria for benefit award, and to declining employment prospects (Autor & Duggan 2001). The processes involved in Britain appear to have been similar, although the proportions of the labour force involved here appear to be some 50 per cent greater than in the USA (Autor & Duggan 2001, Nickell & Quintini 2001).

  The "register" effect of the New Deals has been particularly large in relation to long-term claimant unemployment. In effect, it has become more or less impossible for anyone to become long-term claimant unemployed. However, long-term unemployment has been transferred on a substantial scale into long-term sickness, where it is more intractable.

I am grateful to Paul Bivand of the Centre for Economic and Social Inclusion for advising me of the size of the "register effect" of the New Deals and for pointing out the data on flows into sickness benefits.The Local authority and parliamentary constituency claimant unemployment rates published in Labour Market Trends use an invalid denominator. The Office for National Statistics has already concluded that they should be withdrawn and an announcement is expected soon. The House of Commons Library already publishes different claimant unemployment rates for parliamentary constituencies using a valid methodology. Claimant unemployment rates quoted in this memorandum have been corrected to remove the distortion caused by commuting between local authority areas. The methodology is explained in Webster (2002b).

Geographical Variations in Worklessness

  Despite the overall improvement, little progress has been made in reducing labour market disparities between areas. At January 2002 claimant unemployment varied across the 408 local authorities in Great Britain by a factor of over 20, from 0.5 per cent in Hart, Hampshire, to 10.8 per cent in Tower Hamlets (Webster 2002b). <mr40> These differentials are almost completely static. The correlation across local authorities between Census unemployment in April 1991 and claimant unemployment in January 2002 was 0.90 (Figure 2). In other words, if an area had high unemployment a decade ago then it still has high unemployment now. There has been little "convergence" in terms of rankings.

  Areas with high levels of unemployment also have high levels of working age sickness. There is a strong correlation across local authority areas (0.72 at May 1999) between the claimant unemployment rate and the proportion of the working age population claiming sickness or invalidity benefits. The areas with the worst problems are cities and coalfields. Although in some former coal and steel towns occupation-related illnesses are probably very high, the main factor is the loss of manufacturing and mining jobs, as has been shown by Turok & Edge (1999) and Beatty & Fothergill (1997). While the sickness rates of 25 per cent in Merthyr Tydfil and 23 per cent in Easington may have a substantial occupational component, this could scarcely apply to the 15-19 per cent rates in the big cities of Glasgow, Liverpool and Manchester. The 1981 Census data suggest that even in the former coal towns, the occupational illness component would not exceed some 7 per cent.

Official Denial of Local Job Shortages

  The Treasury and DWP are still officially maintaining a radical denial that there are any important labour market disparities between areas. This is the fundamental obstacle to addressing the important concentrations of worklessness effectively.

  HM Treasury (2000) is the principal text arguing this case. The weaknesses of its arguments are discussed in detail in Webster (2000b). In summary, they are:

    (i)  In order to sidestep the evidence on the geographical concentration of worklessness, the paper used job vacancy data to suggest that there are enough vacancies to employ all the unemployed and that these vacancies are sufficiently evenly distributed across the country to deal with geographical concentrations. The same type of argument was still being made, in a more muted way, by the Treasury and DWP as recently as last November (HM Treasury 2001). But ONS has now suspended the job vacancy series, because of its distortion by the trial of the Employment Direct scheme (Financial Times, 12/9/01). The paper also neglected the different vacancy characteristics of different economic sectors. Many services have higher labour turnover than traditional industries, so that increases in the stock of vacancies do not necessarily imply greater job availability.

    (ii)  The paper used the invalid "workforce" claimant unemployment rates for local authority areas, thus producing misleading conclusions (see Note 2).

    (iii)  The paper showed a lack of understanding of the spatial structure of local labour markets. It argued that because high levels of vacancies are found in cities alongside high levels of unemployment, the unemployment cannot be due to lack of labour demand. But for the most part these vacancies merely represent turnover among the commuter workforce. Most British cities have central business districts with numerous, mainly white collar vacancies. This is why it is often true that "areas of high unemployment lie within easy travelling distance of areas where vacancies are plentiful". But the vacancies have to be set against the labour force in the city's whole commuting catchment area.

Lone Parenthood

  Government employment policy has a strong focus on lone parents. Lack of attention to the geography of worklessness has particularly serious consequences in relation to them.

  The Census showed that between 1981 and 1991 a very strong relationship emerged between lone parenthood and unemployment across local authorities (Webster 2000a) (Figure 3). LFS data show that this relationship between did not weaken between 1991 and 2000 (Figure 4). Taken together with other evidence, this indicates that the huge rise of British lone parenthood since the early 1980s has been caused by the huge increase in male unemployment. This was a repeat of what had occurred earlier in the USA and was well documented there. But the Government sees the rise of lone parenthood as something which occurred in parallel with the rise of unemployment but not because of it. HM Treasury (2001, paragraph 3.20) described the doubling of lone parent families between the late 1970s and mid 1990s as "demographic", ie independent of the economy. But by using the invalid "workforce" unemployment rates, the paper understated the strength of the connection between lone parenthood and unemployment. It showed a correlation of 0.73 across GB local authority areas of lone parents on Income Support (expressed as a percentage of the working age population) with the local unemployment rate, when the true figure is much higher, at 0.83.

  The close relationship between lone parenthood and unemployment across areas means that employment policies based simply on supply-side incentives to lone parents to take jobs cannot work. It was loss of jobs from the affected areas which caused family breakdown. This same loss of jobs means that local labour demand is too weak to re-employ the large numbers of lone parents involved. Performance data on WFTC is already demonstrating this. While the overall rate of claim has increased in all areas, the increase over Family Credit at August 2001 was only 10 per cent of lone parent families in the highest unemployment areas, where they are concentrated, compared to 20 per cent in the lowest unemployment areas (Webster 2002a).

  This relative position reflects the fact that the proportion of lone parents in work was already twice as high in the lowest as in the highest unemployment areas, again a position which was unchanged between 1991 and 2000 even though the proportion in work rose by around 10 per cent across the board over these nine years (Figure 5). To attain the Government's target of a 70 per cent employment rate for lone parents in the next decade would require negligible further increase in the most prosperous areas, but a virtual doubling of the rate in the poorest areas. This would be an increase three times greater than occurred in the last decade.

The Theoretical Basis for Supply-Side Employment Policies

  The underlying problem is the theoretical basis for the present package of Government employment policies. It was based primarily on the ideas of Layard, Budd and the OECD which derived from research in the mid-1980s (Webster 1997). The dominant preoccupation was with long-term unemployment, which appeared to have risen relative to short-term unemployment. It was argued that being unemployed in itself makes people less employable ("state dependence"), so that the primary cause of continuing high unemployment in Britain was the fact that unemployment had been high before: the "pool" of long-term unemployed people were difficult to get into work and, by exerting little downward pressure on wages, made the "natural" rate of unemployment higher than it need be. This conclusion was based on a mistake in statistical analysis, as was confirmed by subsequent experience which showed long-term unemployment coming down in line with total unemployment exactly in the same way it had gone up.

  The form of the policies derived from the assumption of "state dependence". Since the employability of every unemployed person was assumed to be undermined by their unemployment, all had to be put through a programme, irrespective of their individual characteristics. Primary emphasis was placed on the young long-term unemployed because they had the longest lives ahead of them and were assumed to be the most impressionable. The more personal treatment given to the unemployed under the New Deals has certainly been widely appreciated, but the consequence has been that resources have been diverted away from those with genuine employment handicaps. Cost pressures have dictated that the programmes are inadequate to meet the needs of those with more complex problems. The study by Hoogvelt & France (2000) in Sheffield showed that the young people who did best in the New Deal were those who were already most advantaged to start with. Britton (2002) reported on the basis of an Employment Service study of young people "sanctioned" that "The support available on the New Deal, while it is sufficient for the majority of the population, is not sufficiently intensive, and comes too late, to make any real impact on this group". Similar criticisms of the New Deal are often heard in relation to homeless young people. Many in this group do not even get picked up by the programme, because of their mobility or because they are not claiming JSA. For those who do, the "Gateway" is too short and inflexible to address their need for intensive pre-vocational training.

  The rise of working age sickness dates only from the mid-1980s and had not been noticed by the time the Budd-Layard-OECD research was carried out; all their arguments were cast in terms of claimant or ILO unemployment. This was why the Government's initial policy package placed very little emphasis on this vital group.

  The greatest weakness of the Budd-Layard-OECD analysis was that it overlooked the geography of unemployment at the local labour market level. As a result, it did not pick up the importance of local declines in employment, particularly in manufacturing and mining. This led to neglect of the demand side of the labour market. Even where locally high levels of unemployment were recognised, they were seen simply as concentrations of less employable people: hence Employment Zones, which in spite of the name a supply-side programme. This analysis also led to underestimation of the specific importance of manufacturing employment decline in Britain's unemployment problem. The decline has been far greater than in other OECD countries. Robert Rowthorn notes that since 1973, British and USmanufacturing output have increased by 14 per cent and 114 per cent respectively (Rowthorn 2001; see also Rowthorn 2000). It is essentially because of the poor performance of manufacturing that the south east, London and the east regions increased their economic value by 24 per cent in 1995-2001 compared to 5 per cent in the north east and 9 per cent in Scotland (Cambridge Econometrics, Financial Times 4/3/2002).

  The same underemphasis on manufacturing has led to heavy reliance on consumer spending in producing the economic expansion of the late 1990s, which is consequently now threatened. Mervyn King, Deputy Governor of the Bank of England, commented recently: "The trade deficit has widened sharply in recent years, reaching some 3 per cent of GDP at the end of last year . . . the increase . . . would have been even larger had it not been for an improvement in the terms of trade" (ie rise in value of the pound) ". . . The result . . . is that . . . Over the past five years, domestic demand has risen by over 6 per cent more than output . . . In turn, net trade has made a negative contribution to output growth for six years in succession. A continuation of that trend would be unprecedented in Britain's modern economic history. The need to rebalance the British economy is clear." The unbalanced nature of the expansion is one of the main reasons why it has done so little to reduce the disparities in labour market prospects between high and low unemployment areas. The high unemployment areas are generally those which were previously most dependent on manufacturing, and the employment trends of the later 1990s have generally continued to work against them.


  Lone parents did not feature in the Budd-Layard-OECD analysis. They were added to the New Deal on the basis of other ideas which emphasised the role of social security benefits in undermining their incentives to work. Official thinking in relation to them however suffers from the same lack of awareness of the geography of unemployment. At the time the key decisions were being taken, policy makers were unaware of the evidence on the local level lone parenthood-unemployment linkage which had emerged from the 1991 Census. They were impressed by the much higher employment rates of lone parents in Europe, not realising that no European country has anything like the same kind of geographically concentrated lone parenthood problem related to industrial decline. The UK lone parenthood rate is twice as high as the next highest in the EU.

Rebalancing Policy: The Role of Labour Demand

  Britain has a severe localised problem of structural unemployment. The main reason for the worklessness of the workless groups is their location in weak local economies. As argued previously (Turok & Webster 1998), labour supply-side programmes therefore need to be complemented by effective local labour demand-side programmes.

  This means the following:

    (i)  Much greater emphasis on policies to promote the growth of appropriate employment in the areas with the lowest employment rates. This would mean stronger urban and regional policies, and much more emphasis on derelict land reclamation and transport infrastructure, with adequate funding and effective instruments. Spending on all these policy areas is currently relatively low, and the Chancellor's urban regeneration package of autumn 2000 is very limited. In the case of Scotland, Wales and Northern Ireland, closer liaison would be needed between Whitehall and the devolved administrations, since the latter control many of the instruments of local labour demand side policy. In Glasgow, for instance, approaching 10 per cent of the total land area is vacant or derelict; but there is no dedicated land renewal budget; there is no budget for transport projects required for regeneration; and although the most important single project from a regeneration viewpoint, the M74, has been approved, the earliest possible completion date, which is not guaranteed, is 2008, 11 years after the present Government came into office. At present, because Whitehall believes that labour demand-side policies are not important, it takes little interest in how they are used, and Government departments and devolved administration are under little pressure to focus on promoting employment in the areas of greatest labour market distress. The voice of local Government in the high unemployment areas also needs to be given far greater attention since local authorities usually have by far the best appreciation of the local obstacles to employment growth.

    (ii)  A more supportive policy towards manufacturing.

    (iii)  A greater focus on the long-term sick, who are the largest workless group. This however needs to go beyond the present purely supply-side approach to address the issue of labour demand in the areas where the sick are concentrated.

    (iv)  Greater support to those groups who have genuine labour market disadvantages, and less emphasis on programmes lacking precise targeting.

    (v)   Greater local flexibility in policy, so that the right combination of demand-side and supply-side programmes can be implemented to meet the needs of the particular locality. This author has previously suggested the adoption of a system of Local Employment Plans, in which local authorities with high unemployment would be invited to propose how relevant public expenditure, both central and local, in the area should be best directed (Webster 2000c).

    (vi)  It would also be appropriate to review policy on the level of unemployment benefits. As Nickell & Quintini (2001) point out, other countries use effective combinations of higher unemployment benefits with different approaches to getting people into work. From every point of view, it would be better to have more of the unemployed featuring in the claimant and ILO figures.

  (The views expressed in this memorandum are not necessarily those of the Council.)

David Webster

Chief Housing Officer (Policy Review and Development) Glasgow City Council

30 April 2002

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