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Ed Holmes is the Senior Research Fellow for Economics and Social Policy at the think-tank Policy Exchange.

HOLMES EdThe divergence of productivity and economic growth on the one hand, and employment on the other, has left economists scratching their heads since the financial crisis. Despite improving employment figures, productivity per head and the size of the economy remain well below that anticipated in 2010. However, the number of people who are in or looking for work is actually around 600,000 higher than that predicted by this stage of economic recovery. This is in stark contrast to previous recessions: the previous one in the 1990s saw just under 900,000 fewer people in the labour market at around the same stage after the recession (despite a much brisker recovery). So what is going on?

There have been several explanations – ranging from the labour market being more flexible than in previous recessions (with flat or falling real terms wages taking the strain) to better job matching, to changes in the tax and benefits system.

What is clear is that employment has been a relatively bright spot since the recession. The problem is that these rosy headline numbers deflect from underlying structural problems – which remain formidable. Around 900,000 people have been out of work for more than twelve months and almost one million under 25 years old are unemployed.  Youth unemployment has been on an upward trajectory since the early 2000s, with just under 60 per cent of young adults leaving education without achieving five A*-C GCSEs, including English and Mathematics. Lack of skills is a particular concern, because growth – both in wages and number of jobs – for semi-skilled and unskilled jobs has failed to keep pace with productivity over the last 20 years, and this looks likely to continue with more automation and globalising labour market competition.

Outcomes for the most vulnerable and those in deprived regions remain grim, with workless households exceeding 30 per cent of the total in some parts of the country. The longer people are not in employment, the more difficult getting them back into work becomes as motivation is sapped, workplace skills are lost and new problems arise.

There is a significant risk that some claimants may drop out of the labour market completely, as we saw in previous recessions. The Government has made a good start to avoiding this by toughening up rules for benefit eligibility and trying new approaches, such as work experience for the long-term unemployed and paying external providers by results through its Work Programme. But it is not clear this will be enough.

A key problem is that, while payment by results is an efficient mechanism overall to get the most people into sustained employment, providers may not have sufficient incentives to devote sufficient time and resources to the hardest-to-help unemployed who may otherwise be ‘parked’ with little prospect of returning to work, despite the continuing cost to the taxpayer. Though the performance of the Work Programme has improved greatly, over half of the long-term unemployed are still forecast to return to the jobcentre.

Preventing this group from dropping out of the labour market completely is crucial. A key priority must be to change the basis on which support is provided. All too often, this is still based on the primary benefit an unemployed person claims and the length they have claimed it, with often vulnerable people effectively ‘parked’ with the jobcentre for up to a year. As we have suggested, this is not an effective way to structure support. Providing such support from the start of a claim would be more effective both for the claimants and the taxpayer if it is well targeted. The roll-out of Universal Credit, which will provide real-time information on earnings, and Department of Work and Pensions pilots of more sophisticated diagnostic tools to identify underlying barriers to work, provide a big opportunity to develop a better approach. Improved targeting of incentives, focusing on sustaining people in work and progression in wages, are now much more attainable goals for policymakers.

It is also imperative that smaller and specialist providers are given a financially viable way to provide this support and are not squeezed out by the bigger players. One model which we outlined in our report Route2Work would allow more viable financing to provide support for the long-term unemployed. This would work by providing these organisations upfront funding on the basis of expected payments through the new Universal Credit system, which could then be ‘clawed back’ according to what is claimed. This would allow the Work Programme, social enterprises and specialist charities to provide intensive and personalised support, building the employment skills or simply joining up health and social care provision with existing support in a much more effective way without additional cost to the taxpayer.

Overall, our labour market has a remarkably good record in the aftermath of the financial crisis. There are still underlying structural problems that need to be addressed – especially in tackling long-term worklessness and preventing vulnerable claimants dropping out of the labour market entirely. But with better evidence, incentives and experience of what is most effective, we can now start making it even better.

58 comments for: Ed Holmes: How to stop the long-term unemployed from falling out of the labour market

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