Select Committee on Work and Pensions Third Report


II. Economic situation and Government strategy

6. The Committee undertook this enquiry against a backdrop of uncertainty and turbulence in the financial, currency and equity markets. The United States (US) economy had already shown signs of downturn before the events of September 11th 2001 threatened to trigger a worldwide recession. The telecommunications and technology sectors in particular had entered a phase of intense retrenchment and restructuring following the abrupt reversal of an investment boom in the late 1990s. Immediately after September 11th, industries such as tourism and transport experienced severe shocks from which recovery has been patchy.

7. Across the world, the major economies have all experienced a slowdown in output. GDP in the major G7 economies grew by just 1% during 2001 and for the first time since 1974, growth slowed significantly and simultaneously in the US, Europe and Japan, accompanied by sharp declines in world trade growth, investment, industrial production and stock markets.

8. In the UK, low levels of GDP growth in the second half of 2001 and the first quarter of 2002 suggested that unemployment might start to rise and the Government's employment strategy might be destabilised.[5] Despite this, the labour market indicators during 2002 have so far remained positive. At the aggregate level, employment continues to grow (as public sector job creation outstripped private sector job losses in the year to December 2001) and the available evidence about vacancies indicates that employers continue to hire at a relatively undiminished pace.

9. Unemployment - measured using both the Jobseeker's Allowance (JSA) claimant count and the Labour Force Survey - generally continues to decline. However, the working age employment rate for February to April 2002 rose by just 0.1 percentage point over the quarter and economic inactivity has started to increase marginally. This has been more evident amongst some population groups that had until recently benefitted from improvements to their labour force position - particularly lone parents, ethnic minorities and older workers.

10. Employment growth has tailed-off since mid 2001 and some areas of the UK have experienced rises in unemployment.

11. The Committee heard from witnesses who described significant local variations in the health of the labour market and the impact of a two speed economy in which some sectors are declining whilst others continue to grow strongly and are experiencing shortages. The manufacturing sector experienced prolonged recession during 2001 and finished the year with its output having contracted by more than 2%.

Employment change by region - employees, UK, seasonally adjusted
(Standard Statistical regions)
Men & women
Annual Change
East Anglia
East Midlands
North West
Northern Ireland
South East
South West
West Midlands
Yorkshire and Humberside
Employment change by sector -
employees, UK, not seasonally adjusted (SIC 92)
Men & women
Annual Change
Agriculture and fishing
Energy and water
Distribution, hotels and restaurants
Transport and communications
Banking, finance and insurance, etc
Public administration, education & health
Other services
+ 75,000

12. Early indicators suggest that manufacturing growth is beginning to recover with export prospects beginning to improve as the US dollar weakens and sterling falls against the Euro. The overall economy grew by 1.2% in the last quarter, with manufacturing output rising in two consecutive months (1.1% in April and 0.7% in May), signalling an end to the sector's long recession. A combination of economic stability, higher public spending and low interest rates is likely to ensure that the second half of 2002 sees a gentle recovery. In stark contrast to manufacturing, service industries grew by almost 4% in 2001 with the strongest growth in retailing, hospitality and in the public sector.

13. Ms Bridget Rosewell of the British Retail Consortium, described the most recent annual period in the retail sector as: "the steadiest period of expansion since 1995 ... after a period of quite weak growth in the year 2000, it picked up through 2001 and has been reasonably steady since".[6] Although she did foresee that retail sales would start to slow during 2002, she identified retail and other types of consumer service employment as more resilient to any downturn. She noted that between 1995 and 1998, the main growth in jobs was in banking, finance and business services. However, the period since 1998 has seen the biggest growth in services, public administration, education and health. Although these sectors "require a lot of specialist skills" she identified the retail and distribution sectors along with "support services" occupations across many industry sectors as offering good potential for generating entry level jobs where candidates could acquire "good habits of work and some skills" without having to acquire technical expertise.[7]

14. The Chartered Institute of Personnel & Development (CIPD) in its submission reported that forward-looking surveys of employer recruitment intentions "look extremely encouraging". It identified the sectors most likely to expand permanent employment in 2002 as being those where "demand for labour is clear and robust, notably retail and the public services". The CIPD warned that, in a tight labour market, government initiatives like the New Deal would have to be "closely attuned to employer needs, decisions and practices".[8]

15. The DWP in its written evidence argued that the labour market remains "in a historically strong position to cope with global economic developments" with employment 125,000 higher than a year earlier and new Jobcentre-notified vacancies at "high levels".[9] Although the officially published series of notified vacancies has been suspended by the Office of National Statistics, the DWP told us that their management information indicated that over 10,000 vacancies are being notified each working day, totalling almost 2½ million each year.[10] The rate of new vacancy notification has changed significantly on the position in early 2001 although the introduction of the Employer Direct service means that Jobcentre Plus may be acquiring a greater market share of available vacancies, so trend measurement over time may not be too reliable. Despite the reasonably upbeat signals contained in evidence submitted to the Committee, it remains unclear exactly how the wider economic situation will develop and how this will impact upon the labour market.

16. More importantly, employers will have started to adjust their employment policies to offset the impact of downturn. Profit margins are under pressure, so firms will seek to cut costs through productivity gains and other short term measures. This means that fresh employment growth might lag behind an expansion in activity. As the CIPD says, "most employers in the private sector will increase hours worked by existing staff and/or hire more temporary workers during the early stages of recovery - the reverse of what happened in response to the slowdown."[11]

17. As firms face greater competitive pressures, their expectation of employee capabilities will rise. Whilst employers will continue to offer entry level jobs, the employability requirements of these openings will become more demanding and many unemployed people may fail to reach this new basic employability threshold.

18. The consequences for the Government's strategy are clear. Firstly, demand for jobs may grow at a slower pace than overall growth in the economy; secondly, new entrants and re-entrants will have to be equipped to higher standards of basic employability. The Government's employability programmes have to adapt and change to reflect these changing labour market circumstances.

The Government's employment strategy

19. The Government's Green paper Towards full employment in a modern society[12] and Budget Statements (Nov 2001 and April 2002) committed the Government to the aim of achieving "high and stable levels of employment" and a more even distribution of employment throughout the UK. The main points of the Green Paper's strategy - which brings together many different aspects of Government policy and several Departments' responsibilities - are:

Ensuring macro-economic stability Treasury
Promoting competition, enterprise and innovation DTI
Tackling discrimination DWP and DTI
Making work financially worthwhile Treasury and DWP
Broaden welfare-to-work programmes to focus more on those who are economically inactive and long-term unemployed adults, as well as improving the delivery and responsiveness of the New Deal. Make the New Deal a permanent deal, and continually seek to improve it. DWP
Investment in learning to ensure that people have the skills and to update and add to these skills in response to a changing economy - help break the "low pay, no pay" cycle and help people stay and progress in work. DfES
Put employers at the centre of the strategy and ensure that improvements in skills training are based on the needs of employers. DWP
Promote diversity and create opportunities for all. DTI
Assist the hardest to helpDWP
Improve the service for all people of working age, who are either claiming benefit or seeking work and apply the principle of employment first for all working age benefit claimants. DWP

20. In the course of this inquiry, evidence was sought from other Government departments,[13] which highlighted that many other Government Departments have significant contributions to the Strategy. These help businesses and communities to maximise employment by:

Improving transport links Department of Transport
Improving physical infrastructure Office of the Deputy Prime Minister (ODPM)
Area-based regeneration initiativesODPM
Sustaining an enabling regulatory environment ODPM
Contributing to the health improvement of working people Department of Health
Ensuring safe working conditions DTI
Aiding mobility by increasing housing supply ODPM
Supporting employees through childcare and children's services DfES
Offering selective regional assistance and business support services DTI

21. The labour market is subject to fluctuation and change: some sectors are growing rapidly and employer requirements continue to change. Low economic growth however seems to have had little impact on New Deal performance. The evidence also shows that public agencies have experienced difficulty in responding quickly to large-scale redundancies.[14]

22. Witnesses warned against the Government's attention being diverted from its employment strategy either by other pressing areas of public policy or by the impact of any downturn in the economy. Working Links in its submission stressed that "neither economic slowdown nor the declining national levels of unemployment should persuade policymakers that now is the time to cut back on employment related spending".[15]

23. In its evidence, the DWP has committed itself to pursuing active labour market interventions regardless of the stage in the economic cycle. It recognises that its efforts towards the harder-to-help categories of non-employed must be increased if the labour market turns downwards: [16]

    "If the economy is weakened, it is not the newly unemployed who would be most affected, but those farthest away from the jobs market ¼ Jobcentre Plus and other measures targeted at particularly disadvantaged individuals and areas are the right ones to pursue whatever stage of the economic cycle."

24. The Committee strongly welcomes this commitment and is encouraged both by the resilience of the labour market and by the determination of the Government. Although economic growth has recently been slow, evidence shows that programme performance has not been significantly affected, that vacancy levels remain high and that many entry-level jobs remain available to clients of Jobcentre Plus.[17]

25. We support the Government's determination to continue its pursuit of active labour market policies, which will be continued even if the labour market cools, but consider that contingency plans should nevertheless be made in case of an unexpected severe economic recession. In particular, we suggest that plans for early implementation of additional Transitional Employment projects would be advisable, specifically in areas affected by lower growth.

5   UK GDP increased by 0.1% in the January to March period having risen by 1.1% over the year as a whole. Growth in the last three months of 2001 was also 0.1%, ONS, First Release, GDP estimate, 26 April 2002. Back

6   Q. 1. Back

7   QQ. 4 and 7. Back

8   See Appendix 3, Ev 177. Back

9   DWP, Ev 151, para 31. Back

10   Ibid. Back

11   DWP, Ev 151, para 29. Back

12   Towards full employment in a modern society, Cm 5084, March 2001. Back

13   The Department for Education and Skills (Ev 108-109 and 135-143); the Department of Trade and Industry (Ev 143-146), and the Department for Transport, Local Government and the Regions (Ev 106-109, and Department for Transport Ev 127-124) See also oral evidence, Questions 186-303. Back

14   See also paras 28 to 30. Back

15   Ev 42, para 7. Back

16   Ev 147, para 6. Back

17   See DWP evidence, Ev 147 onwards. Back

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