5 The Youth Contract: wage incentives
and the Work Programme |
110. Wage incentivespayments to employers
from the Government designed to incentivise the recruitment of
young unemployed peopleare 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
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 jobsdefined 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
He noted that wage incentives had never been tried in quite the
same way and that the Youth Contract scheme was therefore in "test
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.
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.
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".
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".
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.
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
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 participanttaking
into account tax revenues and benefits savingswas £3,946.
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.
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 sectorscentral 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
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
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.
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.
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
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. 
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
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".
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
127. We wanted to know whetherif it becomes
clear that take-up will undershoot the targetthe 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".
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".
130. DWP also contends that wage incentives will
give WP contractors a further tool to support young people into
sustained employmenta 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. 
131. Nevertheless, some witnesses expressed concern
at the prospect of "double funding" of both employers
and WP providers.
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.
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."
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.
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".
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
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 yearsor
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.
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.
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
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.
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
143. However, while some large employers and public
sector organisationsand some well-informed disabled peopleare
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. 
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.
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
Focusing support on unemployment "hotspots"
146. There are currently 18 Work Programme prime
contractors delivering 40 contracts across 18 regions.
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.
Gateshead Council argued simply that areas of "greatest disadvantage"
should be allocated more wage incentives.
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 incentivethere 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.
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.
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 reasonssimplicity 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.
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".
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
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."
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.
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
Q 383 Back
CBI, Ev 113, para 12; ERSA, Ev 136, para 2.1 Back
Q 23 Back
Q 312 Back
Ev 123, para 34; see also HM Treasury, Budget 2009 Back
Work and Pensions Committee, First Report of Session 2010-12,
Youth Unemployment and the Future Jobs Fund, HC 472, chapter
Inclusion, Future Jobs Fund: An independent national evaluation,
July 2011, para 4.28 Back
HC (2010-12) 472, chapter 4 Back
Inclusion, Ev 103. See also TUC, Ev 158, para 6.5 Back
Q 282 Back
Q 73 Back
Q 18 [Tony Wilson]; Q 24 [Genevieve Knight] Back
Qq 71-72 Back
Q 77 Back
Q 76 Back
Q 391 Back
Q 393 Back
Ev 134, para 48; Oral evidence taken before the Work and Pensions
Committee, 19 March 2012, Q 100 Back
Oral evidence taken before the Work and Pensions Committee, 19
March 2012, Q 100 Back
SCVO, Ev w50; Gateshead Council, Ev w29, para 6.1 Back
Fourth Report of Session 2010-12,Work Programme: providers
and contracting arrangements, HC 718, chapter 4 Back
Q 399 Back
Qq 96-97 Back
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
Q 398 Back
Q 78 Back
See, for example, "Disabled jobless to miss out on Clegg
help", The Independent, 3 May 2012. Q 54 [Ralph Michell
and Tony Wilson] Back
HC Deb 23 May 2012, col 74WS Back
Q 85 Back
Liz Sayce, Getting in, staying in and getting on, June
2011, para 4.2 Back
HC Deb, 4 July 2012, col 60WS Back
Ev w38, para 53 Back
Ev w29, para 4.1 Back
Q 300 Back
"Nick Clegg announces youth jobs hotspot plan at CBI summit",
CBI press release, 27 June 2012. Back
Q 262 Back
Q 263 Back
Q 35 Back
Q 416 Back