Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by the Department for Work and Pensions (DWP) (ES 10)


  1.  This memorandum provides DWP's written contribution to the Work and Pensions Select Committee's inquiry into the Government's employment strategy and the implications of the economic cycle for the help available to jobless people. The memorandum sets out:

    —  the Government's employment strategy;

    —  the impact of the Government's strategy since 1997;

    —  recent developments in the economy and labour market; and

    —  the implications of the economic cycle for employment policy.

  2.  The Government's key labour market objective is to achieve high and stable levels of employment so everyone can share in growing living standards and greater job opportunities. The aim is to reduce the total number of people without a job, and the concentration of those without a job—whether amongst particular groups or in particular areas of the country.

  3.  The Government has put in place a national framework to promote sustainable growth in the economy and jobs—a stable macro-economy; policies to promote competition, innovation and enterprise; investment in higher levels of education and skills; active labour market policies to match people to jobs and help disadvantaged groups move from welfare to work; and policies to tackle discrimination and make work pay. At regional and local level, this is supported by specific policies to improve the operation of local economies. This approach has contributed to significant improvements in the labour market over recent years, though there is still more to do.

  4.  While no country is immune from economic cycles, or from the impact of world economic shocks, the UK labour market continues to perform well compared to other major economies and compared to our own recent economic history. There is little evidence that either the economy in general or the labour market in particular is weakening substantially.

  5.  While it is uncertain what the future holds, the policies put in place since 1997 are, in the Government's view, appropriate to tackle unemployment and to help people into work, whatever the stage of the economic cycle. Because of the dynamism and diversity of the UK labour market, these policies ensure that jobless people can get the help they need to find work in good economic times as well as bad.

  6.  The creation of Jobcentre Plus will extend to inactive benefit recipients—including lone parents and those on sickness or disability benefits—the help that has been available to unemployed jobseekers for a number of years. By ensuring that as wide a spectrum of people as possible are able to compete effectively for jobs, it will build on the aim of employment opportunity for all. Experience also suggests that, if the economy weakened, it is not the newly unemployed who would be most affected but those furthest away from the jobs market—such as the existing long-term unemployed and inactive benefit claimants. This is why policies such as Jobcentre Plus, and other measures targeted at particularly disadvantaged individuals and areas, are the right ones to pursue whatever the stage of the economic cycle.


Policies for full employment

  7.  The Government's employment strategy was set out in the Green Paper "Towards Full Employment in a Modern Society" (HMSO March 2001). It defined full employment as achieving "employment opportunities for all over the next decade—in every part of the country". This means aiming not just for a high and stable level of employment, but for a more even distribution of employment across different parts of the country and different sections of the community. This is a broader and more demanding definition of full employment than those traditionally used in the past.

  8.  The medium term goal, as set out in the Department's Public Service Agreement (PSA) is to increase employment over the economic cycle. The longer-term aim, set out in the Green Paper, is that over the next ten years, there will be a higher proportion of people in employment than ever before.

  9.  The Green Paper was launched at a time when claimant unemployment had fallen below one million for the first time in a generation.[1] Helping more people into employment of course means seeking to reduce further the number unemployed and on benefit. It will also increasingly mean extending employment opportunity to people on other benefits who in the past were often excluded from help to get into work.

Macro-economic framework

  10.  A range of different but interlinked policies need to work if this is to be achieved. In particular, the UK—more so than other countries—has seen huge swings in employment and unemployment over the last 25 years. The effect of these sharp economic cycles on unemployment is shown in figure 1.

  11.  It takes many years for an economy to recover the ground lost during recessions such as those the UK experienced in the early 1980s and early 1990s. After the recession in 1990-92, for example, unemployment did not return to the level it had reached just prior to the recession until mid-1997.

  12.  The damaging and prolonged impact of past periods of economic instability explains why the Government has placed such importance on achieving a strong and stable economy. New frameworks for both monetary and fiscal policy have been introduced to deliver low inflation and sound public finances. Though economic stability on its own is not enough to deliver employment opportunity for all, it is the necessary foundation on which everything else is built.

Supply-side policies

  13.  The Government's macroeconomic strategy is supplemented by a number of other elements that have the common objective of maximising the effective supply of labour; ensuring the widest range of people have the chance to take up the jobs on offer, including the unemployed, the economically inactive, people with disabilities, lone parents, people from ethnic minorities and older people.

  14.  While this approach has a clear social purpose—tackling the exclusion faced by certain groups or areas—it also helps to support the aim of economic stability. The more people who can be re-attached to the world of work, the more chance there is of helping individuals take up the new jobs that are coming up all of the time. If more vacancies can be turned into jobs rather than remaining unfilled, then bottlenecks, skill shortages and inflationary wage pressures can be eased—allowing the economy to run with higher levels of employment and output, at lower inflation.

  15.  This means the macro-economic framework and supply-side policies are interdependent. There needs to be a successful economy to deliver sufficient job opportunities for all of the population. Equally, policies to promote social inclusion help to defuse the bottlenecks that could threaten the economy's ability to grow, whilst ensuring that the benefits of growth and rising living standards are spread as widely as possible through society. Each set of policies supports the other and both are needed to achieve the aim of full employment.


  16.  This section considers the impact of the Government's strategy on the labour market including changes in employment and unemployment since 1997.[2] In the analysis of unemployment that follows, the focus is primarily on the claimant count, rather than the ILO measure of unemployment. The claimant measure is the more appropriate when focusing on welfare to work policies and in addition, it is a good indicator of the economic cycle.

Labour market developments since 1997

  17.  The combination of a stable macro-economic framework and supply-side reform has contributed to considerable economic advances since 1997:

    —  continued steady economic growth, with the lowest sustained period of inflation and interest rates since the 1960s;

    —  the number of people in work is up by over 1,300,000;

    —  ILO unemployment is down by over 500,000 and long-term ILO unemployment more than halved;

    —  claimant unemployment is down by over a third and long-term (12 months and over) claimant unemployment is down by over two-thirds. There are now less than 200,000 long-term unemployed claimants, compared to a peak of over 1,300,000 in the mid-1980s;

    —  long-term youth unemployment has been almost eradicated (figure 2). The number of 18-24 years olds unemployed for 12 months or more is less than 5,000, compared to a peak of over 300,000 in the mid-1980s;

    —  the employment rate of over 50s has increased each year for the last four years and has grown faster than average employment rates; and

    —  the employment rate for lone parents has increased from 45.6 per cent in spring 1997 to 51.5 per cent in spring 2001 and the number of lone parents on Income Support has fallen to its lowest level since 1992.

  18.  As a result the current UK employment situation is relatively favourable, both compared to recent history and to our European neighbours. The number of people in work is at record levels and the number unemployed is at its lowest since the mid-1970s.

  19.  The UK's employment rate is much higher than in the rest of the EU; while Europe as a whole is aiming for an employment rate of 70 per cent by 2010—up from 64 per cent now—the UK already has 74.5 per cent of its working age population in jobs. Employment rates are also well above the EU average in every region of the UK and in most local authority areas (figure 3). One reason for this is the wider and more diverse range of jobs available in the UK than elsewhere; with a wide range of hours worked and more shift, night and weekend work. It is this diversity that allows more people to find the type of job that suits their particular personal circumstances.

  20.  At a local level, figure 3 shows that the spread of employment across the country is relatively even. Figure 4 shows that this is also true of claimant unemployment. Since 1997, unemployment rates have fallen fastest in the areas with the highest unemployment to start with; consequently the spread of unemployment across the country has become more even over the last few years. There are also new jobs coming up all the time, all over the country.

Remaining labour market challenges

  21.  However, despite these substantial improvements there is still more to do. The next phase of the Government's reform programme centres on the remaining concentrations of labour market disadvantage that need to be tackled:

    —  there are still nearly five million people of working age on benefit, four million of whom are on "inactive" benefits, principally sick and disabled people and lone parents.

    —  though the number of people flowing onto inactive benefits has been falling, the longer average length of stay on these benefits means that 80 per cent have been claiming them for more than a year (figure 5). This compares to less than 20 per cent of unemployed claimants with durations of more than a year;

    —  despite having one of the world's highest employment rates, worklessness is concentrated amongst older people, ethnic minorities, disabled people and lone parents;

    —  there remains a concentration of labour market disadvantage in a small number of areas within each region. These areas of low employment are concentrated in the major cities—particularly London and Liverpool—some seaside and coastal towns and some, though not all, coalfield and other industrial areas particularly in Wales and the North East.

The Government's employment policies

  22.  The employment strategy is reflected in a spectrum of policies, tailored to the varying needs of a diverse client group, and designed to address the variety of reasons why people find it difficult to return to work:

    —  establishing an effective system for maintaining continuous attachment to the jobs market and matching people to jobs;

    —  welfare to work policies that focus on particular groups who face disadvantage in the labour market and help them back into work;

    —  specific local initiatives designed to boost the infrastructure and human capital of particularly disadvantaged localities;

    —  education and training to equip people with the skills they need to take up jobs;

    —  promoting diversity in the jobs market, so there are a range of different types and patterns of work available to suit individuals' different needs;

    —  tax and benefit reforms that make work pay, including the introduction of the National Minimum Wage.

  23.  In doing so the aim is to cement the improvements since 1997, while introducing further reforms to tackle the remaining challenges highlighted above.

Structural reform

  24.  The UK has been in the lead on policies to integrate the payment of benefit and the maintenance of a strong work focus in the system—using the benefit system and the public employment service to maintain regular contact with jobseekers, bring them into regular contact with jobs and ensure they stay motivated and job ready. International evidence—for example, surveys of member countries' policies by the OECD—has supported the UK approach. As a result, our lead is increasingly being followed elsewhere. But although this system works well, it does not currently work for everyone.

  25.  That is why the Department is setting up Jobcentre Plus; extending the sort of help already available to unemployed people, so that we have, in one place, help with work and help with benefits, for all those of working age. This includes those on "inactive" benefits, many of whom are sick or disabled, older people, or lone parents. For some, increasing the work focus will be enough for them to see there are vacancies they can take up. For others, particularly those who have been outside the labour market for a long time, further help will be available through the New Deal programmes.

  26.  To be successful Jobcentre Plus will need to build on the lessons learnt from the "ONE" pilots, including those highlighted in the Work and Pensions Select Committee's recent Report. As the Committee recommended, Jobcentre Plus needs to create a new culture where all benefit claimants of working age have the support and encouragement to move towards independence and work.

  27.  Jobcentre Plus and the New Deals for people on inactive benefits will build on the success of the New Deals for the claimant unemployed that, together with the steady growth we have seen since 1997, have made such significant inroads into long-term unemployment. The New Deal for Young People has contributed to the virtual eradication of long-term youth claimant unemployment—those unemployed for one year or more.[3] The New Deal for 25 and over has contributed to a two-thirds fall in long-term adult claimant unemployed since 1997.[4]

  28.  Even with the more established labour market programmes, the Department is continually seeking to improve their operation. The New Deal for the older claimant unemployed was reorganised in April last year and, since then, the number of 25s and over unemployed for two years or more—the group most affected by the changes—has fallen by 30 per cent. In the New Deal for Young People, we have introduced greater flexibility for personal advisers and reduced the programme's administrative complexity.


National and international developments

  29.  There are uncertainties in the international economy, but the UK has so far fared better than other countries and better than in the past.

  30.  There is evidence that the labour market slowed in the second half of 2001, though not significantly. Compared to the previous three months, employment fell by 19,000 in the June-August 2001 quarter, and by 24,000 in the July-September quarter. After reaching 947,000 in September 2001, claimant unemployment rose by a few thousand a month in the following three months, driven by a pick up in new JSA claims. There was also some increase in the level of redundancies recorded by the Labour Force Survey, albeit from a historically low level.

  31.  However, the labour market remains in a historically strong position to cope with global economic developments. Nationally employment is 125,000 higher than a year ago and unemployment is also down over the year on both the ILO and claimant count measures. New Jobcentre vacancies are at high levels—over 10 thousand every working day.[5] For the first time since the 1950s, the UK has the lowest unemployment rate of all the major (G7) developed industrialised countries. And while ILO unemployment in the UK has fallen over the last year, five of the other six major economies have seen year on year increases. Seven of the other fourteen EU countries have also seen ILO unemployment increase on the year. Most of these increases started in the first half of 2001, though there have been further rises in a number of countries since the autumn of last year.

  32.  Though the outlook remains uncertain, the latest UK labour market figures show some signs of improvement. Employment growth has resumed, up by 23,000 in the three months to January 2002. Although ILO unemployment also rose, this was because the increase in the number of people in the labour force (31,000) was bigger than the increase in employment—the 8,000 rise in ILO unemployment reflects the difference between these two numbers.

  33.  In addition, the latest claimant count figures show a 5,000 fall between January and February 2002, following a 9,700 fall the previous month. At 947,200 (3.1 per cent), claimant unemployment is 50,000 lower than this time last year. Over the last six months the average monthly fall in the claimant count is close to zero, though over the last three months the average fall is 4,400 a month.

  34.  Finally, having increased to around 230,000 a month between August and November 2001, the number of people making new claims for unemployment benefit has fallen back in each of the last three months. This is significant as new claims are highly responsive to the economic cycle; in the early 1990s recession, for example, they proved an accurate harbinger of the recession, rising from around 240,000 a month to a peak of 400,000 a month.

Local labour market developments

  35.  Analysis at a more detailed local level can also give insights into how the economy and labour market are performing. The claimant unemployment series is useful for this kind of analysis as there are detailed breakdowns at local level. It is also one of the most up-to-date statistics available.

  36.  Though the effect of the labour market slowdown noted above has not been evenly spread across the UK, figure 6 shows that most parts of the country are in an as good or better position now than a year ago. Compared to January 2001, 423 Parliamentary constituencies have seen a further fall in their claimant unemployment rate, 81 are unchanged and 155 have seen an increase. In most constituencies where unemployment has gone up over the year, the increase is small.

  37.  This pattern looks somewhat different from what has happened in past UK economic cycles. When the labour market slowed prior to the early 1990s recession, unemployment initially rose sharply across the whole of southern England, spreading to the rest of the UK after a lag. At the moment, there is a less clear-cut north-south pattern. Most regions have seen overall falls in unemployment of around 0.3-0.5 percentage points in the last year though within several regions, especially London, Scotland and the South East, there are areas where unemployment has increased since this time last year.

  38.  So, despite recent evidence of labour market weakening, most parts of the UK continue to enjoy lower levels of unemployment than this time last year and the pattern of change across the country does not match that which preceded the downturn of the early 1990s. This suggests recent labour market problems reflect particular local factors rather than a more generalised slowdown.


Labour market flows

  39.  In considering the implications of the economic cycle for employment policy, it is important to emphasise that there are, and always have been, huge labour market flows going on all the time. Every month, well over 500,000 people move into a new job; some move directly from one job to another, others take up work from unemployment or economic inactivity.

  40.  The Labour Force Survey (LFS) suggests that every year there are some 10,000,000 moves between employment, unemployment and inactivity. Many of these flows are cancelled out by other people moving in the opposite direction; the result is that changes in the stocks of employment, unemployment and inactivity from one quarter to the next are much, much smaller than the underlying flows that drive them.

  41.  This pattern is also reflected in the unemployment statistics. A large number of people make claims for unemployment benefit every year. In the year to February 2002 there have been about 2,700,000 new claims for JSA. Again, changes in the stock of unemployment are dwarfed by the gross inflows and outflows.[6] Over the same period about 2,750,000 people have left claimant unemployment; consequently the stock of unemployed people has fallen by around 50,000 over the year, from 1,000,000 to 950,000.

  42.  What these figures show is that, whatever the stage of the economic cycle, the labour market is constantly dealing with people who are entering, leaving or changing jobs. Evidence also suggests the UK is not unusual—large amounts of job change are a common feature of industrialised countries. So whatever the stage of the cycle, we need labour market policies that can deal effectively with these flows.

New jobs

  43.  There are many new jobs coming up all of the time. Over 2,500,000 new vacancies are advertised through Jobcentres each year. Jobcentre vacancies are an important, but not the only, part of the recruitment process. Many more vacancies are notified through other routes such as newspapers, private employment agencies and the Internet.

  44.  Jobcentre vacancies also cover a wide range of industries and occupations. A breakdown of the figures by industry shows that new vacancies are predominately in services, just as total employment is now dominated by service sector jobs. Nevertheless, even in manufacturing large numbers of new jobs are coming up; around 300,000 manufacturing vacancies have been notified to Jobcentres in the last year. These figures reflect that even in a sector where employment has been in net decline, new firms will still be setting up, while some parts of the industry will be doing well and expanding. In addition, replacement demand will come from employers who have had employees quitting or retiring.

  45.  Thus new job opportunities are coming up across the economy all the time, requiring a wide range of different working patterns, personal attributes, skills and qualifications. This dynamism and diversity in the labour market provides an opportunity to help many of those who leave a job to find another job that fits their needs and experience—this is true even in the downswing of the economic cycle.

Active labour market policies across the economic cycle

  46.  Although these reforms have helped to promote continued, steady, economic growth, it is not possible to abolish the business cycle completely. Successful policies can reduce the amplitude of the cycle but, during periods when the economy weakens, active help for individuals remains necessary and important. However, as noted above, the latest evidence suggests the UK labour market remains in a relatively strong position.

  47.  Most people who become unemployed flow off quickly. Currently, of all those who make a new claim for unemployment benefit around 60 per cent leave within three months, over 75 per cent within six months and over 90 per cent within a year (figure 7). These offlow rates fluctuate over the economic cycle, though there appears to have been some underlying improvement since the mid-1980s.

  48.  As suggested earlier, downturns in the economy usually see more people joining unemployment. But, though the number of new Jobcentre vacancies also varies depending on the state of the economy, typically the number of people who take up a job does not vary as much over the economic cycle as the number who leave a job.

  49.  Even in the recession of 1990-92 there were still around 2,000,000 new Jobcentre vacancies each year. Despite these large numbers, employment fell by over a million in that recession because the numbers leaving jobs was still substantially greater than the numbers taking up work.

  50.  Nevertheless, the continued availability of new jobs means that, in a downturn, most individuals who become unemployed still leave quickly. In the early 1990s recession, for example, about half left within three months and two-thirds within six months (figure 8).

  51.  Active labour market policies exist partly to facilitate this transition back to work. Evidence suggests that active benefit administration combined with jobsearch measures are central to maintaining offlow rates from unemployment, by keeping people motivated and attached to the labour market. If such a system is in place and working well—as it is in the UK—it remains possible to get most people out of unemployment quickly.

Jobcentre Plus, New Deals and other policies

  52.  The creation of Jobcentre Plus means that, in time, all people, both unemployed and inactive, will on making a claim for benefit have a work-focused interview to discuss the opportunities available for taking up work. While job vacancies, information and advice are provided to all benefit recipients, the most disadvantaged groups receive extra help and support specific to their needs.

  53.  In addition to the help already in place, Rapid Response policies have been introduced to ensure that resources can be quickly directed to areas where structural or cyclical changes may lead to increases in the number of people flowing into unemployment. Rapid response offers a coherent, tailored package to assist those affected by redundancy to make the transition into new jobs. £9 million has been allocated over three years to develop and run a targeted, coordinated service. A further £6 million has been given to extend some of the more successful aspects of the service.

  54.  Policies are also being introduced to provide more focused and flexible help to those facing multiple barriers to employment. These include an initiative which focuses on helping drug users, Progress2work and the piloting of a new programme, StepUP which provides a guaranteed job to those clients who have been unable to find a job six months after completing a New Deal for Young People option or the New Deal 25 plus Intensive Activity Period (IAP).

  55.  Since higher unemployment tends to be driven by a pick up in new JSA claims, the impact of a downturn on the JSA New Deals would follow with a lag, as the rise in inflows led to a rise in the numbers subsequently flowing into long-term unemployment. New Deal for Young People and New Deal 50 Plus would be affected first, as entry to these programmes occurs at the six months point. The impact on New Deal 25 Plus would follow somewhat later as entry occurs at 18 months. In both cases this lag would provide time for resources to adjust to the expectation of higher numbers. With new JSA claims having fallen back in recent months, there is no expectation at present that the number of people joining the JSA New Deals is set to start rising.

  56.  Historically, the numbers making claims for non-JSA benefits have been less affected by the economic cycle than the number of new claims for unemployment. Nevertheless, it is people who are already jobless, particularly those who are furthest from the labour market such as inactive benefit recipients, who would suffer the most in the event of an economic downturn. In that situation it would make sense to maintain, or even increase, the focus on policies—such as Jobcentre Plus and New Deal—that are aimed at helping the most disadvantaged groups in the labour market. In this way, the aim would be to make sure that people who are already out of work still have a fair chance of getting a job, even during a slowdown.

  57.  For those who, despite such help, still struggle to get a job during a downturn, maintaining attachment to the labour market through welfare to work policies is a sensible way to ensure that they remain ready and motivated to take up work when the upswing of the economic cycle returns.

April 2002

Figure 1

Past Economic Cycles have led to large Swings in Unemployment

  ILO unemployment is March-May quarter, except latest figure which is November 2001 to January 2002.

  Claimant unemployment is seasonally adjusted, annual average, except latest figure which is February 2002.

Figure 2

Long-term Youth Unemployment has been Virtually Eradicated

  Claimant unemployment, July estimate, prior to 1980 figures are for

Figure 3

Most local areas have an employment rate well above the EU average

  Local authority areas ranked from lowest to highest employment rate

Figure 4

Unemployment has become more evenly spread across the country

  Parliamentary Constituencies, ranked by unemployment rate, from lowest to highest

Figure 5

Most working age benefit claimants are on inactive

  JSA figures relate to February 2002, and others to August 2001. Note that some people can work and still claim benefit eg about 100,000 people in the sick and disabled category are in work and claiming Disability Living Allowance.

Claimant Unemployment Rate by Parliamentary Constituency: Change January 2001 to January 2002 (Percentage Points)

Figure 7

Most people who become unemployed leave quickly

Figure 8

Exit rates from unemployment vary little over the economic cycle

1   There are two main sources of information on unemployment; the claimant count and the Labour Force Survey (LFS). The claimant count records the number of people claiming Jobseeker's Allowance (JSA). The LFS measures ILO unemployment. People are ILO unemployed if they are out of work, have actively sought work in the last four weeks and are available to start work in the next two weeks; or if they are out of work, have found a job and are waiting to start it in the next two weeks. Back

2   In line with the Office for National Statistics (ONS) Labour Market First Release, all labour market statistics given are for the United Kingdom, unless otherwise stated. Some of the figures in this memorandum may change when ONS publish regular revisions to Labour Force Survey (LFS) and claimant unemployment figures due to LFS re-grossing or the annual review of seasonal adjustment. Back

3   The number of 18-24 year olds, unemployed for over a year has fallen by 95 per cent, from 100,500 in February 1997 to stand at 4,700 in February 2002. Back

4   The number of people aged 25 or over and unemployed for over a year has fallen from 562,000 in February 1997 to stand at 161,000 in February 2002. Back

5   Publication of the National Statistics vacancy series is currently deferred, due to the effect the roll out of Employer Direct has had on the series. The impact of Employer Direct means that it is difficult to use the number of notified vacancies to judge the trend in the labour market. Nevertheless, DWP management information indicates that vacancies remain at a high level. Back

6   The stock of claimant unemployment is the number of people unemployed on a particular date. For example, the claimant count figures for February 2002, relate to a count of claimants taken on 14 February. By contrast, the numbers becoming unemployed (the inflow) and the numbers leaving unemployment (the outflow) are calculated by summing all the flows recorded in the month leading up to the count date. Back

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