Select Committee on Education and Employment Fifth Report


NEW DEAL: AN EVALUATION

New Deal for Young People's impact on unemployment and employment

21. The Government's aim in launching NDYP was to "help young people aged 18-24 who have been unemployed and claiming job seekers allowance for six months or to find work and improve their prospects of remaining in sustained employment".[29] An important part of evaluating New Deal is establishing whether, and to what extent, it has achieved this goal. The Government's 1997 manifesto target was to help 250,000 young people off benefits and into work during the lifetime of the Parliament.

22. Unemployment in NDYP's client group reached a peak in 1993 and has been falling since then, well before the launch of NDYP. According to the Institute for Fiscal Studies, there was already "a clear trend of increasing employment and falling unemployment for 18-24 year-olds since 1994, long before the introduction of the New Deal" (see Table 1).[30]

Table 1: Youth unemployment (six months or more), April 1994 to April 2000

DATE
CLAIMANT COUNT UNEMPLOYED
April 1994
368,000
April 1997
177,500
April 1998
119,300
April 2000
 59,200

Source: Department for Education and Employment, Ev. p. 57.

23. Initially youth unemployment fell more sharply than unemployment in other age groups, perhaps partly reflecting the decline in the proportion of the total population aged between 18 and 24. Between 1996 and 1998, youth unemployment fell at the same rate as total unemployment. In April 1998 when NDYP was rolled out nationally, its client group represented eight and half per cent of the claimant count in Great Britain—that are some 119,000 young people who had been registered unemployed for at least six months.[31] Since NDYP was launched in 1998 "youth unemployment has fallen noticeably more quickly compared to that of other age groups".[32] Between 1997 and 2000 unemployment in the NDYP client group fell by 70 per cent; and between 1998, when NDYP was launched, and 2000 by 56 per cent. This compares favourably with the fall in the overall number of 18 to 24 year olds registered unemployed and with the fall in claimant unemployed across all age groups (see Table 2).

Table 2: Trends in unemployment since 1997

  
FALL 1997-2000
FALL 1998-2000
Fall in claimant unemployed in the NDYP client group
70%
56%
Fall in claimant unemployed in all 18-24 year olds
37%
23%
Fall in claimant unemployed across all age groups
49%
26%

Source: Department for Education and Employment, Ev. p. 57.

24. Since NDYP was introduced it has affected a large number of people. By the end of November 2000, there had been 568,400 starts on New Deal. Of these, 206,530 have moved into sustained employment (that is, a job lasting more than 13 weeks) and a further 62,680 have had at least one period of employment lasting less than 13 weeks.[33] In January 2001 the Government announced that it had met its manifesto target of getting 250,000 young people off benefits and into work.[34] Unemployment has also fallen in the other New Deal target groups more quickly than for those ineligible to join the programme (see table 3).

Table 3: Unemployment in eligible and ineligible groups, April 1998 to October 2000

  
APRIL 1998
OCT 2000
DECLINE
ELIGIBLE GROUPS (THOUSANDS)
NDYP client group
120
37
69%
NDLTU client group
195
110
44%
INELIGIBLE GROUPS (THOUSANDS)
18 to 25 year olds unemployed for < 6 months
226
205
9%
Those over 25 unemployed for < 12 months
707
532
25%
Those over 25 unemployed for 12 to 24 months
126
107
15%

Source: Ev. p. 127.

25. One way of estimating the impact of NDYP on youth unemployment is to compare youth unemployment rates with unemployment rates in other age groups. In the two years before the introduction of NDYP, the ratio of youth unemployment to other unemployment was stable. Riley and Young's analysis shows that, since the introduction of NDYP, this ratio has fallen steadily. They argue that "if the ratio of youth to other unemployment had remained stable through to March 2000, it would have been 30 thousand higher than it actually was".[35] A closer examination of youth unemployment rates relative to other age groups, such as that performed by the National Institute of Economic and Social Research, suggests that NDYP may not be the only cause of the decline in youth unemployment since 1998. Table 4 shows estimates of youth unemployment rates compared to other age groups. Although it shows that youth unemployment has declined relative to other age groups, it is also clear that the magnitude of that fall varies depending on which age group youth unemployment is benchmarked against. As Riley and Young point out, this "illustrates the uncertainties involved in determining the magnitude of the NDYP effect".[36]

Table 4: Estimates of change of youth unemployment

  
BENCHMARK GROUPS
  
AGE 25-29
AGE 30-49
Difference in percentage terms
-2.5%
-13.3%
Difference in thousands
-9,000
-48,000

Source: National Institute of Economic and Social Research

Increasing employment

  26. As there is no 'fifth option' under NDYP—it is impossible for participants to remain on the unemployment register—and as participation on the part of those eligible is compulsory, it is inevitable that NDYP has a downward effect on the numbers of long-term unemployed young people.[37] It is therefore also important to examine employment rates in the youth labour market. Riley and Young estimate that, after two years, NDYP had increased employment in the youth labour market by 15,000 to 17,000.[38] Dr Young told the Sub-committee that "the youth employment figure is about 17,000 higher than it would have been ... in addition to that, there are people on New Deal options who are counted in the official employment series as being in work ... if you add those in, the total is around 30,000".[39] This is consistent with the findings of the Labour Force Survey which shows that between Spring 1997 and Spring 2000, employment among 18 to 24 year olds rose by 1.5 per cent or 50,000.[40]

The effects of NDYP on the overall economy

  27. The changes in the youth labour market caused by NDYP have effects elsewhere in the economy. Riley and Young argue that "The people moving from unemployment to work have extra money to spend, those moving to full-time education acquire extra skills, those searching harder for work reduce wage pressure in the economy overall" and that "these additional effects may magnify the impact of NDYP on the youth labour market and there are other possible channels through which the beneficial impact of New Deal may be negated".[41]

28. It is widely accepted that in the UK the balance between long and short-term employment is linked to wage pressure. Sustained periods of unemployment reduce motivation to search for work and result in an erosion of skills; thus long-term unemployment puts less downward pressure on wage rates than short-term unemployment.[42] One of the purposes of NDYP is to encourage the long-term unemployed actively to search for work and thus assume behaviour more often associated with short-term unemployment. NDYP has also reduced long-term unemployment in comparison with short-term unemployment.[43] It may therefore reasonably have been expected to increase downward pressure on wages. Dr Young, however, told the Sub-committee that he found some evidence that wages were slightly higher than might be expected but that this was probably a result of the minimum wage rather than any nefarious effect of NDYP.[44] Regional analysis suggests that where New Deal is most prevalent, the downward pressure on wages is greatest.[45] The National Institute of Economic and Social Research concluded that "reactivating the long-term unemployed does seem to be having the effect on wage pressure that you would expect".[46]

29. Riley and Young argue that, largely as result of the downward pressure on wages but also partly as a result of job subsidies and the provision of work on the Environmental Task Force and the Voluntary Sector, NDYP has had a beneficial impact on the economy as a whole, allowing it to expand by just under 0.1 per cent each year, equivalent to an increase in Gross Domestic Production of £500 million in 1998-99. They suggest that this has resulted in the creation of around 25,000 extra jobs in the first half of 2000 alone, of which 10,000 were taken by people outside the NDYP client group.[47] Under this analysis, the significance of the effects of NDYP on wage pressure become apparent. We note that the National Institute of Economic and Social Research is not planning further work in this area.[48] We recommend that the Government should monitor closely the impact of New Deal on wage pressures.

Impact on public finances

  30. In 1997 the Government levied a £5.2 billion Windfall Tax on the privatised utilities to pay for its welfare to work programme.[49] The NDYP was to have been the main beneficiary but, as table 5 shows, the actual costs of NDYP have been significantly less than those anticipated.

Table 5: Planned expenditure on New Deal for young people £ million

BUDGET OF:
1997-98
1998-99
1999-00
2000-01
2001-02
TOTAL
JULY 1997
100
700
830
770
704
3150
MARCH 1998
100
580
650
640
640
2620
MARCH 1999
50
300
820
690
690
2550
MARCH 2000
50
210
320
440
460
1480

Source: Budget Documentation, as shown in ESR 62, p. 35.

The initial estimate for total expenditure on NDYP over five years was £3,150 million. The most recent estimate is £1,480 million, less than half the original expectation. The Minister told the Sub-committee that the costs had been lower than the original estimates for two main reasons. First, unemployment in the NDYP client group had fallen more quickly than had been expected and secondly, that when the initial costs projections had been made, it had been expected that 40 per cent of clients would leave the programme during the Gateway and that 60 per cent would move onto one of the options. In practice some 60 per cent of clients to date have left from the Gateway. The Minister also added that to some extent, the options had cost less to provide than was originally expected.[50]

31. In 1999, the National Institute of Economic and Social Research estimated that NDYP was likely to be self-financing.[51] More recent analysis by the Institute finds that the overall impact of NDYP on public finances, after adjusting for costs and other consequences of the programme, such as a reduction in Jobseeker's Allowance payments and an increase in taxation receipts, concludes that "for every £5 spent on the programme about £3 comes back" so there is "a 60 per cent return on expenditure".[52]

32. Total annual expenditure on NDYP is expected to remain fairly constant despite a fall in the number of expected clients.[53] The Minister explained that there were two reasons for this: first, that the intensified Gateway will be more expensive to deliver, largely because of the introduction of gateway-to-work courses which are expected to cost around £700 per client and, secondly because the hardest to help, those with multiple barriers to employment, were likely to form an increasingly large proportion of NDYP clients.[54] Mr Lewis, Chief Executive of the Employment Service, added that, as a consequence, the personal adviser service would be more "richly" resourced.[55] We recommend that the Government should monitor closely the extent to which cost per client increases as NDYP evolves and those with multiple barriers to employment become an increasingly large proportion of the total number of NDYP clients.

Deadweight

  33. While the acceleration in the decline of youth unemployment since 1998 and the overall numbers of young people who have found sustained employment after participation in NDYP suggests that NDYP has been effective in helping young people into work, it is inevitable that a some of those young people would have found work without New Deal: either as a result of natural labour market turnover or because of the general expansion in the economy. As the National Institute of Economic and Social Research pointed out, using figures up to September 2000, "Although 254.5 thousand had gone into jobs through NDYP, some of these would have done so in the absence of the programme. Hence it is wrong to claim that all of these young people had found work because of NDYP" (their emphasis).[56] Schemes involving an employment subsidy are typically associated with high levels of deadweight. A 1995 study by National Economic Research Associates found that, in subsidy schemes in OECD countries, deadweight levels of over 50 per cent were the norm.[57] In 1997 the OECD argued that subsidies have significant deadweight effects.[58] The Trades Union Congress (TUC) told the Sub-committee that "studies in Australia, Belgium, Ireland and the Netherlands revealed deadweight levels of up to 90 per cent".[59] In December 2000, the National Institute of Economic and Social Research estimated that "of those leaving unemployment, between 50 and 80 per cent would have done so in the absence of the programme".[60] This is consistent with estimates of the degree of deadweight in NDYP of 60 per cent, and of 80 per cent in NDLP.[61]

Substitution

  34. Assessment of New Deal has also resulted in debate over the extent to which participants have been recruited into jobs that would otherwise have gone to other workers or unemployed people who are not part of the programme—a phenomenon known as substitution. It has been argued, by Professor Hasluck for example, that substitution is not always undesirable: "if the object of the programme is to give a target group access to jobs they would not otherwise have, then substitution ... could be said to be the goal of the programme".[62] The TUC similarly argued that "The New Deal programmes were designed deliberately to take advantage of substitution".[63]

35. The relatively small proportion of the overall labour market accounted for by the youth labour market means that NDYP's substitution effect would be expected to be small. The National Institute of Economic and Social Research examined the substitution effect of NDYP in New Deal for Young People: First Year Analysis of Implications for the Macro-economy in 1999. It found that there was little evidence of NDYP having any significant effect on unemployment other than in its client group although it pointed out that "as more people pass through the NDYP programme, or if the economic background turns less benign, this could change".[64] Although substitution caused by NDYP to date has been mitigated by the relatively small size of the youth labour market, this could change if economic conditions worsen and the competition for jobs increases. We recommend that the Government should continue to monitor substitution under NDYP closely.

Sustainability

  36. That young job seekers should move into sustained employment was a key part of the Government's aim for New Deal for Young People (see para 17). The Government (as did the previous Government) defines sustained employment as that which lasts 13 weeks or more. Figures up to November 2000 show that 40 per cent of all those who leave NDYP have entered sustained, unsubsidised jobs.[65] To the end of November last year, 269,210 young people had entered employment on leaving New Deal. Of these, 206,530 young people had entered sustained employment (87 per cent of which was unsubsidised).[66] This still leaves a sizeable minority—some 22 per cent—of participants who have found a job through New Deal but have not obtained sustained employment. Taking into account the fact that many of those on New Deal may experience more than one job start before finding sustained employment (for instance a period on the employment option followed by an unsubsidised job is a common experience) the number of sustained jobs that had been gained through New Deal rises to 221,680 but the number of short spells of unemployment rises sharply to 149,490. On this basis, around 40 per cent of all placings into work through NDYP are unsustained.

37. The Unemployment Unit and Youth Aid has repeated expressed its concern at the high level of short-term and insecure employment.[67] Mr Paul Convery, the Director of the Unemployment Unit and Youth Aid, told the Sub-committee that he was "alarmed by the fact that some 40 per cent of placings into work through New Deal have not become sustained jobs".[68] Mr Victor Adebowale, the Chief Executive of Centrepoint, agreed.[69] Several witnesses argued that the targets set for New Deal were a contributory factor in the high level of unsustained placements. For example, the Public and Commercial Services Union explained that by putting too much emphasis on any job outcome, rather than on starting clients on the right career path for them, the targets (in particular Core Performance Measure A[70]) resulted in a higher level of unsustained placements.[71]

38. The Greater Manchester Low Pay Unit argued that "a constant moving in and out of employment means that young people will quickly become disillusioned with the programme and view it as a 'revolving door' rather than an opportunity to secure a job. Arguably constantly moving in and out of short-term employment will also demoralise and reduce the confidence of young people as they question their ability to find secure employment".[72] We stated our concern over the relatively high level of moves into unsustained employment when we reported on New Deal: Two Years On.[73]

39. Mr Leigh Lewis, Chief Executive of the Employment Service, told the Sub-committee during an earlier inquiry that he did not believe that sustained employment should be the only goal for NDYP participants. He told the Sub-committee that "if you end up at absolutely one end of the spectrum rather than the other, you are probably defeating your overall objectives".[74] Similarly the Minister drew the Sub-committee's attention to evidence that indicates that those young people who undertake a short spell of employment are more likely to find sustained employment in the long term.[75] The Government said that for those "young people whose job is not sustained, the experience may still transform their confidence, their ability to work and their prospects of getting another job with recent work experience to show to their next employers ... The Government's view is, therefore, that jobs that are not sustained are still of value to the young person. The point of New Deal is that it increases a young person's employability".[76]

40. We agree that there is benefit in providing young people with short-term work experience. Nevertheless, we remain concerned that the proportion of moves into unsustained employment remains as high as 40 per cent. As the Minister has told us on more than one occasion, young people on New Deal are ambitious and aspirational and that New Deal must be aspirational for them.[77] Those aspirations will not be met by a cycle of continual short-term employment in entry level jobs, registered unemployment and participation in New Deal.

41. The Minister told us that the Government was placing "increasing importance on retention and people not just getting into a job but staying in work".[78] We note that the Employment Service (ES) is piloting retention targets in some areas and that job sustainability is now a condition of payment for some New Deal providers. The Sub-committee have questioned the use of 13 weeks as the definition of sustained employment. While we accept that it is standard definition used by this Government and the last, we have sympathy with those who argue that 26 weeks would be a better definition. After six months in employment, new opportunities such as access to training and eligibility for promotion, are available.[79] Under the New Deal Innovation Fund 26 weeks is used as the definition of sustained employment in some pilot programmes. We welcome the increasing emphasis on helping young people into sustainable employment. Job retention and career progression should be built into future measures of achievement for New Deal.

42. Definitive data on the number of NDYP participants who gain employment and who are still in employment after 26 weeks are not available, although the Minister estimated that around 75 per cent were still in employment after three months. She also told the Sub-committee that 80 per cent had not returned to benefits after 26 weeks.[80] We recommend that the Government should collect information on the length of employment retention to inform the development of policy aimed at increasing employment retention.


29  Department for Education and Employment, New Deal Design, 1997. Back

30  Institute for Fiscal Studies, Green Budget, February 2000. Back

31  ESR 33, p. 7. Back

32  ESR 33, p. 8. Back

33  Statistical First Release, (SFR 4/2001) January 2001, p. 1. Back

34  Working Brief, December 2000/January 2001, Issue 120, p. 8. Back

35  ESR 62, p. 22. Back

36  ESR 62, p. 23. Back

37  Q. 85. Back

38  Q. 78; ESR 62, p. 25. Back

39  Q. 78. Back

40  Ev. p. 117; Labour Force Survey Quarterly Supplement No. 10, August 2000. Back

41  ESR 62, p. 26. Back

42  Q. 104. Back

43  ESR 62, p. 27. Back

44  Q. 104. Back

45  Q. 109. Back

46  Q. 108. Back

47  ESR 62, p. 33. Back

48  Q. 96. Back

49  ESR 62, p. 35. Back

50  Q. 183. Back

51  ESR 33, p. 24. Back

52  Q. 117. Back

53  Q. 186. Back

54  Q. 187. Back

55  Q. 187. Back

56  ESR 62, p. 6. Back

57  Ev. p. 126. Back

58  Ev. p. 126. Back

59  Ev. p. 126. Back

60  ESR 62, p. 20; Hales J, Evaluation of the NDLP: Early Lessons from Phase One Prototype, November 2000. Back

61  ESR 33, p. 14; Ev. p. 126. Back

62  Hasluck C, Employers and the Employment Option of the New Deal for Young People: Employment Additionality and its Measurement, ESR 14, 1999; See also Keeping Track of Welfare Reform, p. 16. Back

63  Ev. p. 126. Back

64  ESR 33, p. 17. Back

65  Statistical First Release, (SFR 4/2001), January 2001, p.1. Back

66  Statistical First Release, (SFR 4/2001), January 2001, Table 12. Back

67  See, for example, Working Brief, August/September 1999, issue 107, p. 10. Back

68  Q. 155. Back

69  Q. 155. Back

70  Core Performance Measure A measures total job outcomes. Back

71  Ev. p. 109. Back

72  Ev. p. 117. Back

73  New Deal for Young People: Two Years On, para. 6. Back

74  Recruiting Unemployed People, HC 58-vi, Q. 265. Back

75  Q. 182. Back

76  Eighth Special Report from the Education and Employment Committee, Session 1999-2000, The Government's Response to the Eighth Report from the Committee, Session 1999-2000, New Deal for Young People: Two Years On, HC 969, Annex, para 5. Back

77  See, for example, Q. 311. Back

78  Q. 190. Back

79  Q. 311. Back

80  Q. 189. Back


 
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