Select Committee on Work and Pensions Written Evidence


Memorandum submitted by Centre for Regional Economic and Social Research

SUMMARY

    —    Incapacity claimants are especially concentrated in Britain's older industrial areas. The very high numbers in these places should be understood as the consequence of job losses over a long period.

    —    The Incapacity Benefit problem and the regional problem are two sides of the same coin. There can be no solution to one without the other.

    —    The Government's aspiration to move a million IB claimants back into work is nevertheless reasonable.

    —    The intention to try to re-engage IB claimants with the labour market is also appropriate now that claimant unemployment numbers are so much lower, but a universal requirement for the less severely disabled to prepare for work looks harsh.

    —    There must be doubts about whether existing regional development policies are up to the task of delivering jobs on the scale required, and in the right places, to absorb huge numbers of IB claimants—in which case efforts to reduce claimant numbers are likely to founder.

BACKGROUND

  The authors of this submission are two academic commentators on Incapacity Benefit (IB). Our reputation is rooted in extensive research into economic inactivity, incapacity and unemployment across a range of localities in Britain. The more recent publications from this research include a book on how men become detached from the labour market[13] and a major report on the extent of hidden unemployment among incapacity claimants.[14]

  In particular, our research has led the way in highlighting how incapacity claimants are highly concentrated in Britain's older industrial areas. To illustrate this point, Table 1 lists the top 30 GB districts in terms of the share of the working age population claiming incapacity benefits in August 2004. The table also shows the bottom five districts. Table 2 shows the same incapacity figures by region, and contrasts them with the claimant and ILO measures of unemployment.

  Four points should be immediately apparent from these tables:

    —    There are huge differences in the incidence of incapacity claims across Britain. At the extremes, the incapacity claimant rate in Easington (County Durham) and Merthyr Tydfil (South Wales) is 10 times that in Wokingham (Berkshire) or Hart (Hampshire).

    —    In the worst affected areas the rate is very high indeed—up to one in five of all working age men and women.

    —    The list of areas with the highest rates is virtually a roll call of older industrial Britain.

    —    At the regional scale, the North, Scotland and Wales are far ahead of southern England.

  Data such as this and our detailed research, which has included interviews with some 2,000 IB claimants, has led us to a view on Incapacity Benefit which differs in important respects from that put forward by the Department for Work and Pensions (DWP). In particular, we have concluded that:

    —    The big increase in incapacity numbers, compared with 20-25 years ago, is the main way in which the labour markets of northern Britain have adjusted to job loss.

    —    Although a degree of ill health or disability is quite widespread in the workforce, health problems alone can explain neither the scale of the increase in IB claimants through time nor the concentration of claimants in certain parts of the country.

    —    A substantial proportion of IB claimants should be regarded as "hidden unemployed", in that in spite of their health problems they could reasonably be expected to have been in work in a genuinely fully employed economy.

    —    Interventions to re-engage IB claimants with the labour market are necessary, but in the absence of large-scale job generation in the older industrial areas of the North they are unlikely to be effective.

  The initial job losses in northern Britain often fell on men, and male IB numbers were the first to rise sharply. Most of the recent increase in IB numbers has been among women, though in virtually the same areas where male IB claimant rate were already high.

  Our view is that the Incapacity Benefit problem and the UK regional problem are inseparable. They are two sides of the same coin. We acknowledge that previous Work and Pensions Committee reports have flagged up the regional dimension of incapacity claims but they have done so without recognising its full significance. In our view, despite all its powers and responsibilities the DWP can at best deliver only a small part of the solution. The key to reducing incapacity numbers actually lies with regional economic development, and therefore primarily with the Treasury, DTI, ODPM and the devolved administrations. This perspective differs from that of economic commentators who have never looked beyond national data. However, the Committee should be aware that our understanding of the incapacity benefit problem is widely accepted within the academic community studying Britain's urban and regional problems.

  What we do, below, is comment on the Government's proposed IB reforms in the light of this interpretation of the problem. In the absence of the Green Paper at the time of writing, our understanding of the proposals is based mainly on press reports and our comments address issues of principle rather than detail.

THE GOVERNMENT'S PROPOSALS

The aspiration to reduce incapacity claimant numbers by one million

  We think this is reasonable. The current headline total of non-employed incapacity claimants of working age is 2.7 million. We have invested considerable effort in trying to disentangle just how many of these men and women might have been in work in a genuinely fully employed economy. Our preferred estimates[15] are based upon comparisons with the low rates already achieved in the parts of southern England that are at or close to full employment. We also make adjustments for underlying differences in the extent of incapacitating ill-health. Our estimates point to around 1.1 million "hidden unemployed" on incapacity benefits. On the other hand we would make three observations.

  First, we are talking about one million people who do have health problems, even if they are not necessarily incapable of all work in all circumstances. Their IB claims should not be regarded as "fraudulent", and it is worth remembering that all the claims will have been certified at some stage by medical practitioners.

  Second, even if one million IB claimants could be brought back into work the remaining number on incapacity benefits (around 1.7 million) would still be far greater than in 1979 (around 0.7 million). Even in the fully employed parts of southern England, incapacity claimant rates are well ahead of what they were twenty years ago. Given that there has been a gradual improvement in general standards of health, albeit with the slowest improvements amongst disadvantaged groups, the underlying increase suggests that employers have generally become less accommodating of workers with health problems.

  Third, making sure that there are one million extra jobs available is a daunting task, and one complicated by the fact that a very large share of the new jobs need to be located in the parts of Britain where incapacity claimants are most numerous—which also happens to be the areas where the economy is currently weakest.

Splitting Incapacity Benefit into two

  We understand the logic behind this proposal. The Government proposes to replace Incapacity Benefit with a new "Rehabilitation Support Allowance" for those with some prospect of returning to work and a "Disability and Sickness Allowance" for those with greater health problems. The latter will be paid at a higher rate.

  Our research confirms that the existing binary distinction between those who are deemed "incapacitated" and the rest of the workforce is misleading and encourages labour market detachment. Our survey work with male IB claimants, for example, finds that only around a quarter say they can do no work at all. The others report health limitations that affect what sorts of jobs they can do, or how much, or problems that come and go and therefore affect their reliability at work. Yet fewer than one in ten male IB claimants look for work, not least because Incapacity Benefit does not require them to do so.

  There is a good case for developing benefit structures that do not write off those who could be brought back into work in the right circumstances. The practical problem is in developing medical assessment procedures that are able to distinguish between the two groups. This is a tall order, and one we suspect will lead to a lot of disputes and appeals at the margins. If our survey data on self-reported heath limitations is any guide, then in the context of 2.7 million on incapacity benefits no more than perhaps 0.7 million would be eligible for the new, higher benefit. Moreover, because there is always a flow on and off incapacity benefits among those with less severe problems, the appropriate share of new claimants finding their way onto the higher benefit might be as low as one in 10.

An end to the escalation in payments through time

  This is probably a red herring. At present, IB rates escalate after six and 12 months (though those coming from Statutory Sickness Pay don't all join at the bottom). The Government proposes to end this escalation, presumably because it is thought to be a financial incentive to stay on benefit.

  We suspect the escalation of rates is largely irrelevant because the real incentive is the limited scope of means-testing of IB compared to Jobseeker's Allowance (JSA). Whereas JSA is means-tested for everyone after six months, and earlier for most claimants, IB is only means-tested for recent claimants with significant pension income. This creates an incentive for non-employed adults in some circumstances—with a partner in work for example—to claim IB rather than JSA if they are able to access IB.

  We would therefore not expect the removal of escalation in itself to have much impact. However, it remains unclear whether the Government's intention in linking the lower of the new benefits to JSA is to also introduce JSA-style means testing. If so, there could be a quite large diversion (among new claimants at least) away from incapacity benefits to JSA and thereby back into the claimant unemployment figures.

A requirement to prepare for work for those on the lower benefit

  At one level this is logical; at another it is potentially harsh and a waste of time.

  Our research indicates that in the right circumstances a substantial proportion of IB claimants would be in work. The low IB claimant rates in large parts of southern England confirm that where the economy is run fast enough for long enough, relatively few remain on IB. The Government proposes that all new claimants except the most severely disabled would be required to prepare for work, through re-training and rehabilitation for example, and that failure to do so would be backed up by financial sanctions. There are two groups for whom this is going to appear unjust.

  One is a group of older workers approaching state pension age—and it is worth bearing in mind that IB claimants are heavily skewed towards the older age groups. Many of these men and women have already had long and arduous working lives, and they have the physical ailments that attest to age and occupation. The reality is that for many of this group IB presently serves as a "bridge" to their state pension. They might have stayed in work longer if their old jobs had still been there, but to ask them to re-train or contemplate new jobs well below their previous status and earnings would be harsh. In practice this group may be one of the hardest to help and, bearing in mind that they would anyway have only a few years left in the labour market, targeting older workers may not be the most cost-effective use of resources.

  The other threatened group comprise at least a proportion of the claimants in the IB blackspots in Britain's older industrial areas. Some of these are also older workers but the group is wider. The economy in these areas has picked up a lot since the depths of the early 1990s recession, and some IB claimants might be expected to find work if they looked—but not all. In these places the numbers claiming IB are simply so large that there is unlikely to be room in the local economy to accommodate them all, or even a sizeable minority. There is a danger here of forcing men and women onto a merry-go-round of frustrated job searches and training courses that lead nowhere, rather similar to the one that faced unemployed claimants in the 1980s and 1990s. For some individuals the stress of repeated failure may actually add to existing health problems.

  There is therefore at least a case for introducing a degree of selectivity about the requirement to prepare for work or face financial sanction—perhaps based on simple criteria like age, location, and former occupation rather than on yet another potentially contested medical assessment.

Rolling out Pathways to Work to the rest of the country

  This seems sensible, because it is hard to object to greater advice and enhanced access to training and rehabilitation. This is indeed likely to be what many new IB claimants would want themselves. Our research shows that more than a quarter of male IB claimants do initially look for work; only later do disillusion and disengagement set in.

  The provision of financial incentives to return to work (presently a £40 a week top-up for the first year for those entering low-paid work) is probably a useful part of the package, but to lure IB claimants into trying a new job it is at least as important that they have the opportunity to return to their old rate of benefit if the job does not work out for whatever reason. Employers too need to be encouraged to take on workers with health problems.

  We understand that the initial results of the Pathways to Work initiative are encouraging in that more new IB claimants are moving back into work. However, we would introduce a few words of caution. First, the proper way to measure the impact of Pathways to Work is not through the headline "return to work" figure but as the excess over what was happening previously, as quite a number of IB claimants do anyway return to work quickly. Second, there is a likelihood that in weaker local labour markets, such as those in older industrial Britain, IB claimants returning to work will find jobs at the expense of other jobseekers, thereby transferring unemployment from one person to another. Third, Pathways to Work has so far had the good fortune to be introduced in the context of a relatively strong national labour market.

Implementing the benefit changes for new claimants only

  We see sense in this. We understand that the changes in benefit structures would be introduced from 2008 onwards and would apply only to new claimants. The existing stock of IB claimants would be unaffected. Implicitly, this means that the Government is not expecting to move one million back into work either in the next couple of years or very quickly thereafter.

  A shift in the expectations placed on existing long-term IB claimants would often be unwelcome, especially where the claimant is approaching state pension age. Some of these claimants have been on IB for so long that they must be considered far removed from the labour market. New claimants, mostly with much more recent experience of employment and often an aspiration to return, are clearly a more propitious group to target.

  More significantly, the economy would have to grow very strongly in the areas where IB claimants are concentrated, and this cannot be expected to occur overnight. The rise in IB claims to present levels has taken a generation, prompted by two decades of job destruction in Britain's older industrial areas in particular. It is only reasonable to expect that even with all the right policies in place it will take the best part of another generation to get the numbers back down again.

  One fallacy does however need de-bunking. This is the assumption that because so many IB claimants are now in their late 50s and early 60s, the problem will simply fade away as this cohort reaches pension age. This misunderstands how labour markets work. Crucially, as this cohort finally drops out onto pensions they will not be freeing up jobs for the younger cohorts behind them, including new entrants to the labour market. In the absence of job creation (or out-migration or out-commuting) the local imbalances between labour demand and supply that prompted the rise in IB number will therefore persist. A new generation of workers therefore runs the risk of being marginalized, and if they have heath problems they too will access incapacity benefits.

THE REFORMS IN CONTEXT

  As will be apparent from the comments above, we support much of what the Government is proposing. However, that is not the same as saying that these "labour supply side" interventions will solve the IB problem. They are perhaps necessary, but insufficient by themselves.

  In the context of the national economy of ten years ago, when claimant unemployment was still two or three million, the most pressing problem was one of an inadequate demand for labour, especially in the areas where IB claimants were concentrated. But the economy has moved on. Claimant unemployment has fallen everywhere, and even in Britain's older industrial areas is now at historically low levels. As the economy has grown it has been the active jobseekers, such as those on JSA, who have been brought back into work first. In contrast, economic growth has so far almost entirely by-passed IB claimants, who have nearly all given up looking for work. Only since 2003 has there been evidence of a fall in IB numbers, and then only on a modest scale. This is a dichotomy we predicted.[16]

  Even in traditionally weaker local labour markets there is therefore now evidence of recruitment difficulties alongside continuing huge numbers on IB. This points to an absence of symmetry in the way the economy and the benefits system interact: whereas job loss ultimately lies at the root of much of the increase in IB numbers, job creation does not automatically bring the IB numbers down again.

  We therefore agree that if IB numbers are to be brought down, claimants will need to be re-motivated, re-skilled and re-engaged with the labour market. In this respect the Government is correct. However, there must also be jobs for these people to go to. Indeed, in the absence of enhanced job creation in the areas where IB claimants are concentrated the Government's efforts are likely to make little headway.

  If this new job creation in older industrial Britain fails to occur, we would expect the Government's proposed reforms to work out very differently across the country. In most of the South:

    —  Extra labour supply arising from the re-engagement of IB claimants should find a ready labour demand because many employers face recruitment difficulties.

    —  But most IB claimants aren't in the South, so the impact on headline totals will be modest.

    —  And in the South, IB claimants are probably a harder-to-help group, with greater disabilities, because in this part of the country most people with lesser health problems are already in work.

  In contrast, in large parts of the North:

    —  It is hard to see extra labour supply being absorbed outside a few in-demand occupations.

    —  In so far as IB claimants find work, they will often do so at the expense of other jobseekers, including JSA claimants. Total claimant numbers may therefore fall very little.

    —  IB claimants returning to the labour market will exert further downward pressure on pay and conditions at the bottom end.

  Long observation of the UK economy does not suggest that wage levels across the regions adjust smoothly to bring labour demand and supply into balance. Wage adjustments are slow at best, and regional wage levels seem to have only a modest impact on the location of economic activity. We do not therefore subscribe to the view that additional labour supply, arising from the re-engagement of IB claimants, would automatically lead to an increase in labour demand, except in very limited circumstances.

So is Regional Policy up to the Task?

  Our assessment of the incapacity benefit problem emphasises the role of regional economic development as the essential complement to the reform of Incapacity Benefit, without which the reforms are unlikely to succeed. We recognise that regional policy is beyond the scope of this Committee inquiry. However, it is important that the Committee does not take it for granted that the necessary policies are all in place. We would conclude by making four points:

    —  The present Government has been very successful in overseeing the creation of large numbers of new jobs, even in Britain's least prosperous areas, but this has been founded on a sustained period of national economic growth driven in particular by consumer spending and rising debt. This period of economic growth now appears to be drawing to a close.

    —  The enlargement of the European Union means that after 2006 the UK's less prosperous areas will receive much less from the EU Structural Funds to promote regional development, as the funds shift eastwards.

    —  At the same time, new EU State Aid rules will come into force that will further restrict the ability of the UK Government to provide financial assistance to firms to create or protect jobs in less prosperous areas.

    —  The Government's efforts to promote economic growth across all the regions, through the Regional Development Agencies for example, could end up widening regional disparities in job opportunities by enhancing the successful areas rather than pulling up the weaker performers.

Table 1

SHARE OF ADULTS OF WORKING AGE CLAIMING INCAPACITY BENEFITS, AUGUST 2004, GB DISTRICTS

% of working age
Top 30
Easington (Co Durham)20.5
Merthyr Tydfil (S Wales)20.5
Blaenau Gwent (S Wales)19.2
Glasgow16.5
Neath Port Talbot (S Wales)16.5
Rhondda Cynon Taff (S Wales)16.2
Knowsley (Merseyside)15.7
Caerphilly (S Wales)15.6
Liverpool15.4
Barrow in Furness14.6
Inverclyde (Scotland)13.9
Stoke on Trent13.8
Barnsley13.7
Bridgend (S Wales)13.7
N Lanarkshire (Scotland)13.6
Sedgefield (Co Durham)13.5
Torfaen (S Wales)13.5
Blackpool13.1
Manchester13.1
Halton (Cheshire)12.8
Hartlepool12.7
St Helens12.7
Wear Valley (Co Durham)12.5
Swansea12.4
Carmarthenshire12.2
Sunderland12.2
Burnley12.1
Salford12.0
Blackburn11.9
Derwentside (Co Durham)11.9
  
Bottom 5
Elmbridge (Surrey)2.5
Forest Heath (Suffolk)2.4
Surrey Heath2.2
Wokingham (Berks)2.1
Hart (Hampshire)1.8



  Figures refer to Incapacity Benefit, NI credits for incapacity and Severe Disablement Allowance

Sources: DWP, ONS

Table 2

JOBLESSNESS BY REGION


as % of working age population

Claimant unemployed (1)
ILO unemployed (2)Incapacity claimants (3)
Wales
2.3
4.511.5
North East
3.0
5.511.0
North West
2.5
4.810.2
Scotland
2.9
5.510.0
Yorkshire & Humber
2.5
4.27.8
West Midlands
2.8
4.67.4
East Midlands
2.1
4.36.7
South West
1.5
3.56.1
London
3.4
6.76.0
Eastern
1.8
3.95.1
South East
1.5
3.74.6
GB
2.8
4.77.4


(1)  April 2005
(2)  January-March 2005
(3)  August 2004

Sources: ONS, DWP

Christina Beatty and Professor Steve Fothergill

27 September 2005



13   P Alcock, C Beatty, S Fothergill, R Macmillan and S Yeandle (2003) Work to Welfare: how men become detached from the labour market, CUP, Cambridge. Back

14   C Beatty and S Fothergill (2004) The Diversion from "Unemployment" to "Sickness" across British Regions and Districts, CRESR, Sheffield Hallam University. (Also forthcoming in Regional Studies). Back

15   See C Beatty and S Fothergill (2004) op cit. Back

16   C Beatty, S Fothergill and R Macmillan (2000) "A theory of employment, unemployment and sickness", Regional Studies, vol 34, pp 617-630. Back


 
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