Youth Unemployment and the Youth Contract - Work and Pensions Committee Contents

5  The Youth Contract: wage incentives and the Work Programme

110. Wage incentives—payments to employers from the Government designed to incentivise the recruitment of young unemployed people—are a key element of the Youth Contract measures. They will account for up to 160,000 of the total 430,000 potential additional opportunities for young people and possibly around a third of the total £1 billion budget. Wage incentives are available across England, Scotland and Wales. This chapter examines the design of the Youth Contract wage incentive scheme, including: whether there is sufficient evidence that wage incentives work; whether the new scheme is simple enough to encourage take-up by employers; the value for money implications of delivering wage incentives via the Work Programme; whether the scheme will address regional and sub-regional variations in youth unemployment; and whether it will be able to support the most disadvantaged young unemployed people.

The design of the Youth Contract wage incentive scheme

111. Over three years from April 2012, the Youth Contract will offer wage incentive payments of up to £2,275 to employers when they recruit an 18-24 year-old from the Work Programme (see below). The full payment is available when young people are placed into full-time jobs—defined as at least 30 hours per week. Payments of £1,137.50 are available to employers when they place a young person into a part-time job of between 16 and 29 hours per week.

112. The wage incentive payments are made, in full, after the young person has been in the job for 26 weeks. A part payment, after the young person has been employed for eight weeks, is available to employers of fewer than 50 employees to help them to cover any initial recruitment start-up costs. The part payment is eight weeks' worth of the full 26 weeks' incentive payment at either the full-time or part-time rate i.e. £700 for full-time jobs or £350 for part-time.

Do wage incentives work?

113. There is a lack of conclusive evidence for the efficacy of wage incentives. Iain Walsh, Head of Labour Market Intervention Strategy at DWP, noted that the evidence for the cost-effectiveness of wage incentives was "varied" and the then Minister for Employment acknowledged that the international evidence was "patchy". However, he also told us that Ministers had not "sat there with hot towels over our heads" considering the evidence in detail. Instead, DWP had consulted extensively with employers, Work Programme providers and other "key stakeholders" and had come to the view that "at a time when youth employment was still much too high, and where we want to level the playing field between an inexperienced person and an experienced person, that this was something that was worth doing". [94] He noted that wage incentives had never been tried in quite the same way and that the Youth Contract scheme was therefore in "test zone".[95]

114. The point was made to us that the design of the Youth Contract scheme was unlikely to incentivise businesses to create a significant number of new jobs.[96] Tony Wilson of Inclusion shared this concern but believed that wage incentives would have a positive impact on job creation "at the margins"—making the labour market more efficient, increasing businesses' productivity and therefore possibly leading to more recruitment in the future.[97] ERSA felt that wage incentives were "unlikely to play much of a role in job creation". However, Kirsty McHugh of ERSA told us that the most likely effect would be to bring forward businesses' recruitment decisions and believed that this would be a positive outcome: "If it means that young people are unemployed for a shorter period or have slightly more chance of getting that job over another candidate because of the wage incentive, all in all that is a plus".[98]

115. The Government told us it had "looked carefully" at the design of the Future Jobs Fund (FJF), which was part of the Young Person's Guarantee (YPG), introduced by the previous Government in response to the rise in youth unemployment in 2008 and 2009. The YPG was designed to ensure that all 18-24 year-olds who had been out of work for 12 months were offered "a guaranteed job, training or work placement".[99]

116. The FJF aimed to guarantee temporary (six-month) jobs for people in areas of high unemployment. Jobs had to be for at least 25 hours per week and pay at least the National Minimum Wage. They also had to be additional posts and be "of benefit to the local community". As a result of this stipulation the very large majority of FJF posts were created in the public and voluntary sectors. The FJF placed 105,220 previously unemployed people into temporary employment during the recession. The Government contributed up to £6,500 for each FJF job.[100]

117. When the current Government took office in May 2010, it decided that the FJF was an expensive option and, as noted in chapter 2, the economy was at that point also showing signs of recovery. It therefore decided, as part of measures to address the UK fiscal deficit, not to extend the programme beyond March 2011.

118. In our December 2010 Report, we acknowledged that the FJF was an expensive option but concluded that it was too early to judge its overall cost-effectiveness. Independent analysis of the FJF later found that its net cost per participant—taking into account tax revenues and benefits savings—was £3,946.[101] Despite its relatively high cost, we felt that the FJF may have been an effective way to offer supported employment to young people who faced the greatest barriers to finding work.[102]

119. The Youth Contract wage incentive scheme has an explicitly different focus: its aim is to encourage employers to "give young people a chance" in the regular labour market. It aims to boost young people's chances of gaining employment in the private and voluntary sectors—central government recruitment is excluded from the scheme. The Youth Contract will therefore not provide subsidised employment of the type offered by the FJF.

Concerns about take-up

120. Various types of payments to incentivise recruitment of unemployed people have been tried in the past. Some witnesses noted with concern that schemes of this kind had failed to help the number of people originally intended. Examples include:

·  A "National Insurance holiday" launched in 1995 had aimed to help 130,000 people a year but by 1996 had only received 2,300 successful applications;

·  The New Deal for Young People (NDYP) Employment Option (1998-2010) paid up to £1,560 for employing a young unemployed person for at least six months but this element of the scheme only applied to around 10,000 people per year, just 7% of NDYP participants; and

·  The recent JCP "Six Month Offer" (6MO, April 2009-June 2010) paid employers £1,000 for taking on anyone who had been on JSA for more than six months. Of the 46,000 6MO payments that were made only 8,400 payments were for 18-24 year-olds.[103]

The Youth Contract's target of 160,000 wage incentives over three years would therefore substantially exceed what has been achieved before.

121. Kirsty McHugh of ERSA described the target as "challenging" and a "big ask". She noted that 140,000 young people were forecast to be referred to the Work Programme in 2012. The Youth Contract target assumed that more than 50,000 of these young people would be recruited to wage-incentivised jobs.[104]

122. The TUC doubted the capacity of private and voluntary sector employers to provide so many opportunities. It was therefore not confident that the Government's target would be met. Nicola Smith of the TUC highlighted similarities between the Youth Contract wage incentive scheme and the NDYP Employment Option which, as noted above, failed to attract employers on the scale originally envisaged.[105] Other witnesses pointed out that the Youth Contract incentive payment was of almost exactly the same monetary value as that previously offered in the NDYP.[106]

123. Business organisations were more confident that the new scheme could overcome some of the problems encountered in the past. Neil Carberry, Director of Employment and Skills at the CBI, argued that previous low take-up had been a consequence of complexity in the schemes. Employers had been deterred by complex systems for claiming payments from DWP, for example. He also argued that National Insurance holidays had failed to have the desired impact because "people who care about National Insurance in a business are a long way away from people who have control over hiring".

124. Neil Carberry believed that the Youth Contract scheme was very simple by comparison with previous schemes; in particular, the claim form for employers was only two pages long. He also reported that initial feedback from employers was encouraging and was therefore "relatively confident" that the target set for the Youth Contract scheme was achievable. [107]

125. From a small business perspective, the Forum for Private Business (FPB) indicated that its members were happy with the level of incentive payment on offer and the arrangements for smaller employers to claim early part-payments to cover recruitment start-up costs. Alex Jackman of FPB did though note early indications that take-up was disproportionately low amongst the smallest employers. This was likely to be due to a lack of awareness of the scheme. He told us that the FPB, along with other business organisations, attempted to raise awareness through a variety of media including blogs, newsletters and magazines. However, it was still the case that only a minority of businesses would be aware of the Youth Contract.[108] Chris Bowman, a small business owner, said that he had not yet considered the Youth Contract scheme for his own business and that this was something he "needed to explore".[109]

126. The then Minister for Employment told us that he had written to 350,000 employers, setting out what was available through the Youth Contract. DWP was also working with trade associations and distributing leaflets at recruitment roadshows and job fairs. Work Programme providers, for whom wage incentives were a "sales tool", would also have an important role in disseminating information to employers. The Government would continue to "spread the word" in every way it could but the Minister argued that methods which might potentially reach every employer would be "extremely expensive".[110]

127. We wanted to know whether—if it becomes clear that take-up will undershoot the target—the budget for wage incentives would be reallocated to other elements of the Youth Contract. The Minister for Employment confirmed that there was "no constraint on doing that".[111]

128. The Government's target of 160,000 wage incentives over the next three years will significantly exceed anything achieved by comparable schemes in the past. We note the relative simplicity of the Youth Contract scheme and hope that this will encourage employers to take part. We accept that a national marketing campaign would be an expensive option; however, the Government should consider targeted regional media campaigns should take-up be low in areas which would stand to derive particular benefit from the scheme.

Delivering wage incentives via the Work Programme

129. As noted in the previous chapter, most young participants in the Work Programme (WP) are aged 18 and over and are referred from JCP to the WP after nine months of their JSA claim. The Government decided to deliver wage incentives through the WP as it believes that this will focus support on those who need it most i.e. longer-term young unemployed people. In a one-off evidence session on the WP in March 2012, the then Minister for Employment told us that the decision had been taken in order to "keep things as simple as possible".[112]

130. DWP also contends that wage incentives will give WP contractors a further tool to support young people into sustained employment—a key objective of the Youth Contract. Its view is that, because WP contractors only receive their fees and payments in full once previously unemployed people have remained in employment for two years, they will be incentivised to offer young people "the continuing support they need to remain in work". As the Minister noted in March, the wage incentive is only intended to cover part of a young person's salary for the first six months. The WP provider will continue to be incentivised to sustain that young person in work for a further 18 months. [113]

131. Nevertheless, some witnesses expressed concern at the prospect of "double funding" of both employers and WP providers.[114] At the same 26-week point at which most employers will receive their incentive payment of £2,275, WP providers will receive a "job outcome fee" of up to £1,200. After 30 weeks WP providers will receive their first "sustainment" payment of up to £170, followed by a potential further 12 sustainment payments after every subsequent four weeks.[115]

132. Work Programme providers told us that the wage incentive would not change the way in which they worked. Their focus would continue to be addressing barriers and preparing young people for employment. We did not get a clear sense from providers of the types of interventions they would offer to justify sustainability payments where young people are placed into wage-incentivised jobs. However, the Minister expected providers to be "at the end of a phone, talking to [the young person] regularly, making sure they have not developed problems in employment, making sure they are not likely to drop out."[116]

133. Some witnesses were unperturbed by any prospect of "double funding". Neil Carberry of the CBI warned against "worrying too much" about the funding available to WP contractors and argued that the focus ought to be "obsessively on work outcomes". His view was that the potential savings to the Exchequer of placing large numbers of young unemployed people into "real jobs in the real economy" would outweigh any potential value for money concerns.[117]

134. Nicola Smith of the TUC conceded that if the scheme performs as desired the benefits would clearly outweigh the costs, but she remained concerned about payments to WP providers. She noted that it would be difficult to establish whether the incentive payment to the employer or the job outcome payment to the WP provider had brought about the job outcome. She was therefore concerned that payments for job outcomes that "may well be the result of" the wage incentive would constitute "deadweight" spending i.e. using Government money to pay for outcomes that would have happened anyway. Her view was that this would be "clearly poor value for the taxpayer".[118]

135. The Minister insisted that public money would not be paying for the same outcome twice. The wage incentive payment was simply designed to "level the playing field" for inexperienced young unemployed people applying for jobs in competition with more experienced people. The role of WP providers was much longer term and their fees and payments were structured to support sustainable outcomes.[119]

136. Delivering wage incentives through the Work Programme has some advantages. It ensures that support will be focused on longer-term young benefit claimants who are more likely to have significant barriers to work and therefore require more intensive help. The Work Programme payment structure is also designed to encourage sustainable outcomes. If large numbers of young unemployed people are recruited through this delivery method it will bring significant benefits to the Exchequer through increased tax revenue and reduced welfare spending.

137. However, delivering wage incentives via the Work Programme has value for money implications which will require careful monitoring by DWP. The Government will need to assess, during the first year of the scheme, whether young people placed in wage-incentivised jobs are receiving ongoing support from Work Programme providers at a level which justifies sustainability payments. If it proves to be the case that employers themselves offer all the support that the young employee needs, this would call into question the cost-effectiveness of the approach. The Government would then need to review the value of using Work Programme providers to implement the scheme over the remaining two years—or at least whether continuing to make sustainability payments for wage-incentivised jobs can be justified.

Supporting the most disadvantaged

138. The TUC argued that the Youth Contract scheme would favour young unemployed people who were available and ready to move into mainstream employment immediately and without support. It was concerned that the scheme would be insufficient to incentivise employers to recruit young people "who are the very furthest from the labour market" and therefore likely to require greater support in the workplace. Nicola Smith argued that the Youth Contract was focused on mainstream private sector jobs in which the recruitment criteria would be exactly the same for the young person attracting a wage incentive as for any other candidate. Her view, similar to that expressed by us in December 2010, was that the Future Jobs Fund, which had an emphasis on additional jobs with demonstrable community benefit, was possibly better able to offer extra in-work support to people who needed it.[120]

Wage incentives, Work Choice and Access to Work

139. We were also keen to examine the likely impact of wage incentives on young disabled people who are unemployed. The Government's contracted employment programme for unemployed disabled people, Work Choice, runs in tandem with the mainstream Work Programme. The original Youth Contract announcement omitted Work Choice from the wage incentive scheme. This omission was criticised in the media and by witnesses to our inquiry who could see no reason why young unemployed disabled people should not also attract a wage incentive.[121]

140. The Government moved quickly to address the issue, announcing on the day of our first evidence session that Work Choice participants would be included in the scheme. They will attract £2,275 payments in the same way as Work Programme participants.[122]

141. Some witnesses felt that this was not enough and favoured a higher incentive payment for disabled people. For example, from a small employer's perspective, Chris Bowman expressed his surprise that the payment had been set at the same level for Work Choice participants because employing a disabled person could potentially incur greater costs for the employer.[123]

142. Witnesses representing welfare-to-work organisations noted that disabled people entering a wage-incentivised job would also be able to apply for Access to Work funding. Access to Work is a government programme which supports disabled people to enter and remain in work. It provides money for disabled people to pay for the aids and adaptations they need to take up and keep a job, including specialist equipment and support workers. It is provided to employees, or unemployed people about to start a new job, where the aids and adaptations they need go beyond the "reasonable adjustments" an employer is required to make under the Equality Act 2010.[124]

143. However, while some large employers and public sector organisations—and some well-informed disabled people—are aware of Access to Work, an independent review in 2011 found that general awareness was low. Liz Sayce, the Government's independent reviewer, pointed out that in 2009-10 Access to Work helped 37,300 disabled people and of these only around 16,400 were new to the programme, yet an estimated 300,000 people became unemployed each year as a result of ill health or disability. [125]

144. The Government is currently conducting a 12-month targeted marketing campaign to encourage use of Access to Work by under-represented groups, including 16-24 year-olds.[126]

145. The Youth Contract wage incentive is designed to "level the playing field" between young inexperienced people and experienced people competing for the same jobs in the mainstream employment market. Unlike previous programmes, it will not guarantee subsidised employment to long-term young unemployed people. It may be less likely therefore to help those who are furthest from the labour market, such as young people with disabilities. We welcome the Government's decision to include Work Choice participants in the Youth Contract scheme. However, we note concerns that the wage incentive level of £2,275 may be insufficient; more may be necessary to encourage employers to recruit young disabled people. DWP should include a review of the effectiveness of wage incentives for young disabled people as part of its evaluation strategy.

Focusing support on unemployment "hotspots"

146. There are currently 18 Work Programme prime contractors delivering 40 contracts across 18 regions.[127] It was not clear to us how or whether the 160,000 wage incentives available over the next three years would be divided across these regions to reflect variations in youth unemployment rates. Some witnesses were critical of the apparent lack of specific mechanisms to focus support on areas where youth unemployment and NEET rates are particularly high (unemployment "hotspots"). Greater Manchester New Economy argued that wage incentives should be divided according to the proportion of young JSA claimants in each region.[128] Gateshead Council argued simply that areas of "greatest disadvantage" should be allocated more wage incentives.[129]

147. Kirsty McHugh of ERSA told us that DWP had consulted Work Programme providers on how wage incentives should be allocated. It had decided that they would not be allocated per WP contractor or on a regional basis. The scheme would simply be open to employers across the country to apply for the incentive—there were no regional caps. The only restriction was the "roughly 50,000" wage incentives per year, although there was likely to be some flexibility on this over the three-year period if necessary.[130]

148. The Government moved to address criticism of the scheme's lack of focus on areas of highest unemployment by announcing in June that young JSA claimants in 20 local authority areas would attract the wage incentive at the six-month point in their claim instead of the usual nine-month point. The amount on offer to employers would be the same—£2,275. This was introduced first in the North East of England at the end of July and was due to be extended to other unemployment "hotspots" in parts of the Midlands, the North of England, south Wales and Scotland. Another significant difference is that JCP will offer the wage incentive direct to employers rather than being required to refer claimants to Work Programme providers.[131]

149. We wanted to know why the Government had decided on a flat rate of £2,275 and whether it had considered offering higher payments to employers in "hotspots". The then Minister for Employment told us that the Government had taken the flat-rate decision for two reasons—simplicity and the ability to get the scheme up and running quickly:

    The problem with something like this is, as I have learned on more than one occasion since becoming a Minister, the more complicated something becomes, the more difficult it is to bed it into DWP's systems and the longer it takes. The joy of this was it was very simple; it was easy to explain. There is a flat payment of £2,275 payable after six months.[132]

150. We were also concerned that, without regional caps, take-up was likely to be much higher in areas where the labour market was more buoyant, increasing the likelihood of deadweight spending whilst failing to focus support on areas that need it most. The Minister told us he would respond quickly if it turned out that money was being spent "in the wrong places" and "consider whether there was a way to do it differently".[133]

151. The Youth Contract as originally announced lacked focus on unemployment "hotspots". The decision to offer wage incentives earlier and directly to employers in areas of high youth unemployment is welcome. This approach will allow direct comparison with the efficacy and cost-effectiveness of wage incentives delivered via the Work Programme. We recommend DWP conducts a comparative study of the two approaches to establish which produces the most cost-effective and sustainable outcomes. We recommend it undertakes and publishes this study by the end of July 2013, one year after the introduction of the JCP scheme. It should act quickly to roll-out JCP delivery of wage incentives if this proves to be the most cost-effective delivery method.

152. If the Youth Contract is to succeed, the money available for wage incentives needs to be spent in areas of greatest need. Further measures may be necessary to encourage take-up in areas of high youth unemployment and to minimise deadweight spending where youth employment is relatively buoyant. Regional caps calculated on the basis of the proportion of young people on JSA may be required. DWP should also consider increasing the level of incentive payment available to employers if take-up is low where youth employment is most depressed. We recommend that DWP reviews the need for regional caps and differential regional incentive payments in April 2013, a year from when the Youth Contract was introduced.

Black and minority ethnic groups

153. As noted in chapter 2, youth unemployment rates are particularly high within some minority ethnic groups. The problem is most keenly felt by young black men aged 16-24, over half of whom are unemployed. Runnymede Trust referred to this as a "crisis" and was concerned that "there just does not seem to be a clear plan that seeks to address the particular problems that people from black and minority ethnic communities may be facing."[134]

154. We wanted to know if the Government had considered specific measures to address this issue, either through targeted wage incentives or elsewhere in the Youth Contract. DWP acknowledged that the unemployment rate amongst young black men was much higher than for the economically active youth population as a whole but believed that this was often due to characteristics other than ethnicity. Iain Walsh of DWP argued that factors including low educational attainment and location of black and minority ethnic people in areas of deprivation had a significant adverse impact on employment rates. He believed that there were measures within the general Youth Contract approach to tackle these issues. It was the Government's policy to "mainstream" help for black and minority ethnic people but to give providers the flexibility to take specific steps to tackle the issue where necessary. Therefore there was no attempt to focus wage incentives on particular minority ethnic groups but Jobcentre Plus could, for example, use its Flexible Support Fund to tailor local projects for particular groups.[135]

155. Unemployment rates amongst some ethnic minority groups are disproportionately high, particularly amongst young black men. Further, targeted measures may prove necessary to tackle this. As part of the Youth Contract evaluation strategy DWP must monitor its impact on the employment rates of different ethnic groups. We recommend that DWP assesses the Youth Contract's effectiveness in tackling high youth unemployment amongst minority ethnic groups after it has been operating for 12 months and responds quickly to introduce additional measures if this is shown to be needed.

94   Q 403 Back

95   Q 383 Back

96   CBI, Ev 113, para 12; ERSA, Ev 136, para 2.1 Back

97   Q 23 Back

98   Q 312 Back

99   Ev 123, para 34; see also HM Treasury, Budget 2009 Back

100   Work and Pensions Committee, First Report of Session 2010-12, Youth Unemployment and the Future Jobs Fund, HC 472, chapter 4 Back

101   Inclusion, Future Jobs Fund: An independent national evaluation, July 2011, para 4.28  Back

102   HC (2010-12) 472, chapter 4 Back

103   Inclusion, Ev 103. See also TUC, Ev 158, para 6.5 Back

104   Q 282 Back

105   Q 73 Back

106   Q 18 [Tony Wilson]; Q 24 [Genevieve Knight] Back

107   Qq 71-72 Back

108   Q 77 Back

109   Q 76 Back

110   Q 391 Back

111   Q 393 Back

112   Ev 134, para 48; Oral evidence taken before the Work and Pensions Committee, 19 March 2012, Q 100 Back

113   Oral evidence taken before the Work and Pensions Committee, 19 March 2012, Q 100 Back

114   SCVO, Ev w50; Gateshead Council, Ev w29, para 6.1 Back

115   Fourth Report of Session 2010-12,Work Programme: providers and contracting arrangements, HC 718, chapter 4 Back

116   Q 399 Back

117   Qq 96-97 Back

118   Qq 95-97. Note: deadweight in wage incentive schemes, and in welfare-to-work more generally, is regarded as very difficult to measure. See, for example, National Institute of Economic and Social Research, New Deal for Young People: Implications for Employment and the Public Finances, 2000, p 18 Back

119   Q 398 Back

120   Q 78 Back

121   See, for example, "Disabled jobless to miss out on Clegg help", The Independent, 3 May 2012. Q 54 [Ralph Michell and Tony Wilson] Back

122   HC Deb 23 May 2012, col 74WS Back

123   Q 85 Back

124   Liz Sayce, Getting in, staying in and getting on, June 2011, para 4.2 Back

125   IbidBack

126   HC Deb, 4 July 2012, col 60WS Back

127   See  Back

128   Ev w38, para 53 Back

129   Ev w29, para 4.1 Back

130   Q 300 Back

131   "Nick Clegg announces youth jobs hotspot plan at CBI summit", CBI press release, 27 June 2012. Back

132   Q 262 Back

133   Q 263 Back

134   Q 35 Back

135   Q 416 Back

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Prepared 19 September 2012