Memorandum submitted by the Department
for Work and Pensions (DWP) (ES 10)
1. This memorandum provides DWP's written
contribution to the Work and Pensions Select Committee's inquiry
into the Government's employment strategy and the implications
of the economic cycle for the help available to jobless people.
The memorandum sets out:
the Government's employment strategy;
the impact of the Government's strategy
recent developments in the economy
and labour market; and
the implications of the economic
cycle for employment policy.
2. The Government's key labour market objective
is to achieve high and stable levels of employment so everyone
can share in growing living standards and greater job opportunities.
The aim is to reduce the total number of people without a job,
and the concentration of those without a jobwhether amongst
particular groups or in particular areas of the country.
3. The Government has put in place a national
framework to promote sustainable growth in the economy and jobsa
stable macro-economy; policies to promote competition, innovation
and enterprise; investment in higher levels of education and skills;
active labour market policies to match people to jobs and help
disadvantaged groups move from welfare to work; and policies to
tackle discrimination and make work pay. At regional and local
level, this is supported by specific policies to improve the operation
of local economies. This approach has contributed to significant
improvements in the labour market over recent years, though there
is still more to do.
4. While no country is immune from economic
cycles, or from the impact of world economic shocks, the UK labour
market continues to perform well compared to other major economies
and compared to our own recent economic history. There is little
evidence that either the economy in general or the labour market
in particular is weakening substantially.
5. While it is uncertain what the future
holds, the policies put in place since 1997 are, in the Government's
view, appropriate to tackle unemployment and to help people into
work, whatever the stage of the economic cycle. Because of the
dynamism and diversity of the UK labour market, these policies
ensure that jobless people can get the help they need to find
work in good economic times as well as bad.
6. The creation of Jobcentre Plus will extend
to inactive benefit recipientsincluding lone parents and
those on sickness or disability benefitsthe help that has
been available to unemployed jobseekers for a number of years.
By ensuring that as wide a spectrum of people as possible are
able to compete effectively for jobs, it will build on the aim
of employment opportunity for all. Experience also suggests that,
if the economy weakened, it is not the newly unemployed who would
be most affected but those furthest away from the jobs marketsuch
as the existing long-term unemployed and inactive benefit claimants.
This is why policies such as Jobcentre Plus, and other measures
targeted at particularly disadvantaged individuals and areas,
are the right ones to pursue whatever the stage of the economic
Policies for full employment
7. The Government's employment strategy
was set out in the Green Paper "Towards Full Employment
in a Modern Society" (HMSO March 2001). It defined full
employment as achieving "employment opportunities for all
over the next decadein every part of the country".
This means aiming not just for a high and stable level of employment,
but for a more even distribution of employment across different
parts of the country and different sections of the community.
This is a broader and more demanding definition of full employment
than those traditionally used in the past.
8. The medium term goal, as set out in the
Department's Public Service Agreement (PSA) is to increase employment
over the economic cycle. The longer-term aim, set out in the Green
Paper, is that over the next ten years, there will be a higher
proportion of people in employment than ever before.
9. The Green Paper was launched at a time
when claimant unemployment had fallen below one million for the
first time in a generation.
Helping more people into employment of course means seeking to
reduce further the number unemployed and on benefit. It will also
increasingly mean extending employment opportunity to people on
other benefits who in the past were often excluded from help to
get into work.
10. A range of different but interlinked
policies need to work if this is to be achieved. In particular,
the UKmore so than other countrieshas seen huge
swings in employment and unemployment over the last 25 years.
The effect of these sharp economic cycles on unemployment is shown
in figure 1.
11. It takes many years for an economy to
recover the ground lost during recessions such as those the UK
experienced in the early 1980s and early 1990s. After the recession
in 1990-92, for example, unemployment did not return to the level
it had reached just prior to the recession until mid-1997.
12. The damaging and prolonged impact of
past periods of economic instability explains why the Government
has placed such importance on achieving a strong and stable economy.
New frameworks for both monetary and fiscal policy have been introduced
to deliver low inflation and sound public finances. Though economic
stability on its own is not enough to deliver employment opportunity
for all, it is the necessary foundation on which everything else
13. The Government's macroeconomic strategy
is supplemented by a number of other elements that have the common
objective of maximising the effective supply of labour; ensuring
the widest range of people have the chance to take up the jobs
on offer, including the unemployed, the economically inactive,
people with disabilities, lone parents, people from ethnic minorities
and older people.
14. While this approach has a clear social
purposetackling the exclusion faced by certain groups or
areasit also helps to support the aim of economic stability.
The more people who can be re-attached to the world of work, the
more chance there is of helping individuals take up the new jobs
that are coming up all of the time. If more vacancies can be turned
into jobs rather than remaining unfilled, then bottlenecks, skill
shortages and inflationary wage pressures can be easedallowing
the economy to run with higher levels of employment and output,
at lower inflation.
15. This means the macro-economic framework
and supply-side policies are interdependent. There needs to be
a successful economy to deliver sufficient job opportunities for
all of the population. Equally, policies to promote social inclusion
help to defuse the bottlenecks that could threaten the economy's
ability to grow, whilst ensuring that the benefits of growth and
rising living standards are spread as widely as possible through
society. Each set of policies supports the other and both are
needed to achieve the aim of full employment.
16. This section considers the impact of
the Government's strategy on the labour market including changes
in employment and unemployment since 1997.
In the analysis of unemployment that follows, the focus is primarily
on the claimant count, rather than the ILO measure of unemployment.
The claimant measure is the more appropriate when focusing on
welfare to work policies and in addition, it is a good indicator
of the economic cycle.
Labour market developments since 1997
17. The combination of a stable macro-economic
framework and supply-side reform has contributed to considerable
economic advances since 1997:
continued steady economic growth,
with the lowest sustained period of inflation and interest rates
since the 1960s;
the number of people in work is up
by over 1,300,000;
ILO unemployment is down by over
500,000 and long-term ILO unemployment more than halved;
claimant unemployment is down by
over a third and long-term (12 months and over) claimant unemployment
is down by over two-thirds. There are now less than 200,000 long-term
unemployed claimants, compared to a peak of over 1,300,000 in
long-term youth unemployment has
been almost eradicated (figure 2). The number of 18-24 years olds
unemployed for 12 months or more is less than 5,000, compared
to a peak of over 300,000 in the mid-1980s;
the employment rate of over 50s has
increased each year for the last four years and has grown faster
than average employment rates; and
the employment rate for lone parents
has increased from 45.6 per cent in spring 1997 to 51.5 per cent
in spring 2001 and the number of lone parents on Income Support
has fallen to its lowest level since 1992.
18. As a result the current UK employment
situation is relatively favourable, both compared to recent history
and to our European neighbours. The number of people in work is
at record levels and the number unemployed is at its lowest since
19. The UK's employment rate is much higher
than in the rest of the EU; while Europe as a whole is aiming
for an employment rate of 70 per cent by 2010up from 64
per cent nowthe UK already has 74.5 per cent of its working
age population in jobs. Employment rates are also well above the
EU average in every region of the UK and in most local authority
areas (figure 3). One reason for this is the wider and more diverse
range of jobs available in the UK than elsewhere; with a wide
range of hours worked and more shift, night and weekend work.
It is this diversity that allows more people to find the type
of job that suits their particular personal circumstances.
20. At a local level, figure 3 shows that
the spread of employment across the country is relatively even.
Figure 4 shows that this is also true of claimant unemployment.
Since 1997, unemployment rates have fallen fastest in the areas
with the highest unemployment to start with; consequently the
spread of unemployment across the country has become more even
over the last few years. There are also new jobs coming up all
the time, all over the country.
Remaining labour market challenges
21. However, despite these substantial improvements
there is still more to do. The next phase of the Government's
reform programme centres on the remaining concentrations of labour
market disadvantage that need to be tackled:
there are still nearly five million
people of working age on benefit, four million of whom are on
"inactive" benefits, principally sick and disabled people
and lone parents.
though the number of people flowing
onto inactive benefits has been falling, the longer average length
of stay on these benefits means that 80 per cent have been claiming
them for more than a year (figure 5). This compares to less than
20 per cent of unemployed claimants with durations of more than
despite having one of the world's
highest employment rates, worklessness is concentrated amongst
older people, ethnic minorities, disabled people and lone parents;
there remains a concentration of
labour market disadvantage in a small number of areas within each
region. These areas of low employment are concentrated in the
major citiesparticularly London and Liverpoolsome
seaside and coastal towns and some, though not all, coalfield
and other industrial areas particularly in Wales and the North
The Government's employment policies
22. The employment strategy is reflected
in a spectrum of policies, tailored to the varying needs of a
diverse client group, and designed to address the variety of reasons
why people find it difficult to return to work:
establishing an effective system
for maintaining continuous attachment to the jobs market and matching
people to jobs;
welfare to work policies that focus
on particular groups who face disadvantage in the labour market
and help them back into work;
specific local initiatives designed
to boost the infrastructure and human capital of particularly
education and training to equip people
with the skills they need to take up jobs;
promoting diversity in the jobs market,
so there are a range of different types and patterns of work available
to suit individuals' different needs;
tax and benefit reforms that make
work pay, including the introduction of the National Minimum Wage.
23. In doing so the aim is to cement the
improvements since 1997, while introducing further reforms to
tackle the remaining challenges highlighted above.
24. The UK has been in the lead on policies
to integrate the payment of benefit and the maintenance of a strong
work focus in the systemusing the benefit system and the
public employment service to maintain regular contact with jobseekers,
bring them into regular contact with jobs and ensure they stay
motivated and job ready. International evidencefor example,
surveys of member countries' policies by the OECDhas supported
the UK approach. As a result, our lead is increasingly being followed
elsewhere. But although this system works well, it does not currently
work for everyone.
25. That is why the Department is setting
up Jobcentre Plus; extending the sort of help already available
to unemployed people, so that we have, in one place, help with
work and help with benefits, for all those of working age. This
includes those on "inactive" benefits, many of whom
are sick or disabled, older people, or lone parents. For some,
increasing the work focus will be enough for them to see there
are vacancies they can take up. For others, particularly those
who have been outside the labour market for a long time, further
help will be available through the New Deal programmes.
26. To be successful Jobcentre Plus will
need to build on the lessons learnt from the "ONE" pilots,
including those highlighted in the Work and Pensions Select Committee's
recent Report. As the Committee recommended, Jobcentre Plus needs
to create a new culture where all benefit claimants of working
age have the support and encouragement to move towards independence
27. Jobcentre Plus and the New Deals for
people on inactive benefits will build on the success of the New
Deals for the claimant unemployed that, together with the steady
growth we have seen since 1997, have made such significant inroads
into long-term unemployment. The New Deal for Young People has
contributed to the virtual eradication of long-term youth claimant
unemploymentthose unemployed for one year or more.
The New Deal for 25 and over has contributed to a two-thirds fall
in long-term adult claimant unemployed since 1997.
28. Even with the more established labour
market programmes, the Department is continually seeking to improve
their operation. The New Deal for the older claimant unemployed
was reorganised in April last year and, since then, the number
of 25s and over unemployed for two years or morethe group
most affected by the changeshas fallen by 30 per cent.
In the New Deal for Young People, we have introduced greater flexibility
for personal advisers and reduced the programme's administrative
National and international developments
29. There are uncertainties in the international
economy, but the UK has so far fared better than other countries
and better than in the past.
30. There is evidence that the labour market
slowed in the second half of 2001, though not significantly. Compared
to the previous three months, employment fell by 19,000 in the
June-August 2001 quarter, and by 24,000 in the July-September
quarter. After reaching 947,000 in September 2001, claimant unemployment
rose by a few thousand a month in the following three months,
driven by a pick up in new JSA claims. There was also some increase
in the level of redundancies recorded by the Labour Force Survey,
albeit from a historically low level.
31. However, the labour market remains in
a historically strong position to cope with global economic developments.
Nationally employment is 125,000 higher than a year ago and unemployment
is also down over the year on both the ILO and claimant count
measures. New Jobcentre vacancies are at high levelsover
10 thousand every working day.
For the first time since the 1950s, the UK has the lowest unemployment
rate of all the major (G7) developed industrialised countries.
And while ILO unemployment in the UK has fallen over the last
year, five of the other six major economies have seen year on
year increases. Seven of the other fourteen EU countries have
also seen ILO unemployment increase on the year. Most of these
increases started in the first half of 2001, though there have
been further rises in a number of countries since the autumn of
32. Though the outlook remains uncertain,
the latest UK labour market figures show some signs of improvement.
Employment growth has resumed, up by 23,000 in the three months
to January 2002. Although ILO unemployment also rose, this was
because the increase in the number of people in the labour force
(31,000) was bigger than the increase in employmentthe
8,000 rise in ILO unemployment reflects the difference between
these two numbers.
33. In addition, the latest claimant count
figures show a 5,000 fall between January and February 2002, following
a 9,700 fall the previous month. At 947,200 (3.1 per cent), claimant
unemployment is 50,000 lower than this time last year. Over the
last six months the average monthly fall in the claimant count
is close to zero, though over the last three months the average
fall is 4,400 a month.
34. Finally, having increased to around
230,000 a month between August and November 2001, the number of
people making new claims for unemployment benefit has fallen back
in each of the last three months. This is significant as new claims
are highly responsive to the economic cycle; in the early 1990s
recession, for example, they proved an accurate harbinger of the
recession, rising from around 240,000 a month to a peak of 400,000
Local labour market developments
35. Analysis at a more detailed local level
can also give insights into how the economy and labour market
are performing. The claimant unemployment series is useful for
this kind of analysis as there are detailed breakdowns at local
level. It is also one of the most up-to-date statistics available.
36. Though the effect of the labour market
slowdown noted above has not been evenly spread across the UK,
figure 6 shows that most parts of the country are in an as good
or better position now than a year ago. Compared to January 2001,
423 Parliamentary constituencies have seen a further fall in their
claimant unemployment rate, 81 are unchanged and 155 have seen
an increase. In most constituencies where unemployment has gone
up over the year, the increase is small.
37. This pattern looks somewhat different
from what has happened in past UK economic cycles. When the labour
market slowed prior to the early 1990s recession, unemployment
initially rose sharply across the whole of southern England, spreading
to the rest of the UK after a lag. At the moment, there is a less
clear-cut north-south pattern. Most regions have seen overall
falls in unemployment of around 0.3-0.5 percentage points in the
last year though within several regions, especially London, Scotland
and the South East, there are areas where unemployment has increased
since this time last year.
38. So, despite recent evidence of labour
market weakening, most parts of the UK continue to enjoy lower
levels of unemployment than this time last year and the pattern
of change across the country does not match that which preceded
the downturn of the early 1990s. This suggests recent labour market
problems reflect particular local factors rather than a more generalised
Labour market flows
39. In considering the implications of the
economic cycle for employment policy, it is important to emphasise
that there are, and always have been, huge labour market flows
going on all the time. Every month, well over 500,000 people move
into a new job; some move directly from one job to another, others
take up work from unemployment or economic inactivity.
40. The Labour Force Survey (LFS) suggests
that every year there are some 10,000,000 moves between employment,
unemployment and inactivity. Many of these flows are cancelled
out by other people moving in the opposite direction; the result
is that changes in the stocks of employment, unemployment and
inactivity from one quarter to the next are much, much smaller
than the underlying flows that drive them.
41. This pattern is also reflected in the
unemployment statistics. A large number of people make claims
for unemployment benefit every year. In the year to February 2002
there have been about 2,700,000 new claims for JSA. Again, changes
in the stock of unemployment are dwarfed by the gross inflows
Over the same period about 2,750,000 people have left claimant
unemployment; consequently the stock of unemployed people has
fallen by around 50,000 over the year, from 1,000,000 to 950,000.
42. What these figures show is that, whatever
the stage of the economic cycle, the labour market is constantly
dealing with people who are entering, leaving or changing jobs.
Evidence also suggests the UK is not unusuallarge amounts
of job change are a common feature of industrialised countries.
So whatever the stage of the cycle, we need labour market policies
that can deal effectively with these flows.
43. There are many new jobs coming up all
of the time. Over 2,500,000 new vacancies are advertised through
Jobcentres each year. Jobcentre vacancies are an important, but
not the only, part of the recruitment process. Many more vacancies
are notified through other routes such as newspapers, private
employment agencies and the Internet.
44. Jobcentre vacancies also cover a wide
range of industries and occupations. A breakdown of the figures
by industry shows that new vacancies are predominately in services,
just as total employment is now dominated by service sector jobs.
Nevertheless, even in manufacturing large numbers of new jobs
are coming up; around 300,000 manufacturing vacancies have been
notified to Jobcentres in the last year. These figures reflect
that even in a sector where employment has been in net decline,
new firms will still be setting up, while some parts of the industry
will be doing well and expanding. In addition, replacement demand
will come from employers who have had employees quitting or retiring.
45. Thus new job opportunities are coming
up across the economy all the time, requiring a wide range of
different working patterns, personal attributes, skills and qualifications.
This dynamism and diversity in the labour market provides an opportunity
to help many of those who leave a job to find another job that
fits their needs and experiencethis is true even in the
downswing of the economic cycle.
Active labour market policies across the economic
46. Although these reforms have helped to
promote continued, steady, economic growth, it is not possible
to abolish the business cycle completely. Successful policies
can reduce the amplitude of the cycle but, during periods when
the economy weakens, active help for individuals remains necessary
and important. However, as noted above, the latest evidence suggests
the UK labour market remains in a relatively strong position.
47. Most people who become unemployed flow
off quickly. Currently, of all those who make a new claim for
unemployment benefit around 60 per cent leave within three months,
over 75 per cent within six months and over 90 per cent within
a year (figure 7). These offlow rates fluctuate over the economic
cycle, though there appears to have been some underlying improvement
since the mid-1980s.
48. As suggested earlier, downturns in the
economy usually see more people joining unemployment. But, though
the number of new Jobcentre vacancies also varies depending on
the state of the economy, typically the number of people who take
up a job does not vary as much over the economic cycle as the
number who leave a job.
49. Even in the recession of 1990-92 there
were still around 2,000,000 new Jobcentre vacancies each year.
Despite these large numbers, employment fell by over a million
in that recession because the numbers leaving jobs was still substantially
greater than the numbers taking up work.
50. Nevertheless, the continued availability
of new jobs means that, in a downturn, most individuals who become
unemployed still leave quickly. In the early 1990s recession,
for example, about half left within three months and two-thirds
within six months (figure 8).
51. Active labour market policies exist
partly to facilitate this transition back to work. Evidence suggests
that active benefit administration combined with jobsearch measures
are central to maintaining offlow rates from unemployment, by
keeping people motivated and attached to the labour market. If
such a system is in place and working wellas it is in the
UKit remains possible to get most people out of unemployment
Jobcentre Plus, New Deals and other policies
52. The creation of Jobcentre Plus means
that, in time, all people, both unemployed and inactive, will
on making a claim for benefit have a work-focused interview to
discuss the opportunities available for taking up work. While
job vacancies, information and advice are provided to all benefit
recipients, the most disadvantaged groups receive extra help and
support specific to their needs.
53. In addition to the help already in place,
Rapid Response policies have been introduced to ensure that resources
can be quickly directed to areas where structural or cyclical
changes may lead to increases in the number of people flowing
into unemployment. Rapid response offers a coherent, tailored
package to assist those affected by redundancy to make the transition
into new jobs. £9 million has been allocated over three years
to develop and run a targeted, coordinated service. A further
£6 million has been given to extend some of the more successful
aspects of the service.
54. Policies are also being introduced to
provide more focused and flexible help to those facing multiple
barriers to employment. These include an initiative which focuses
on helping drug users, Progress2work and the piloting of a new
programme, StepUP which provides a guaranteed job to those clients
who have been unable to find a job six months after completing
a New Deal for Young People option or the New Deal 25 plus Intensive
Activity Period (IAP).
55. Since higher unemployment tends to be
driven by a pick up in new JSA claims, the impact of a downturn
on the JSA New Deals would follow with a lag, as the rise in inflows
led to a rise in the numbers subsequently flowing into long-term
unemployment. New Deal for Young People and New Deal 50 Plus would
be affected first, as entry to these programmes occurs at the
six months point. The impact on New Deal 25 Plus would follow
somewhat later as entry occurs at 18 months. In both cases this
lag would provide time for resources to adjust to the expectation
of higher numbers. With new JSA claims having fallen back in recent
months, there is no expectation at present that the number of
people joining the JSA New Deals is set to start rising.
56. Historically, the numbers making claims
for non-JSA benefits have been less affected by the economic cycle
than the number of new claims for unemployment. Nevertheless,
it is people who are already jobless, particularly those who are
furthest from the labour market such as inactive benefit recipients,
who would suffer the most in the event of an economic downturn.
In that situation it would make sense to maintain, or even increase,
the focus on policiessuch as Jobcentre Plus and New Dealthat
are aimed at helping the most disadvantaged groups in the labour
market. In this way, the aim would be to make sure that people
who are already out of work still have a fair chance of getting
a job, even during a slowdown.
57. For those who, despite such help, still
struggle to get a job during a downturn, maintaining attachment
to the labour market through welfare to work policies is a sensible
way to ensure that they remain ready and motivated to take up
work when the upswing of the economic cycle returns.
Past Economic Cycles have led to large
Swings in Unemployment
ILO unemployment is March-May quarter, except
latest figure which is November 2001 to January 2002.
Claimant unemployment is seasonally adjusted,
annual average, except latest figure which is February 2002.
Long-term Youth Unemployment has been
Claimant unemployment, July estimate, prior
to 1980 figures are for
Most local areas have an employment rate
well above the EU average
Local authority areas ranked from lowest to
highest employment rate
Unemployment has become more evenly spread
across the country
Parliamentary Constituencies, ranked by unemployment
rate, from lowest to highest
Most working age benefit claimants are
JSA figures relate to February 2002, and others
to August 2001. Note that some people can work and still claim
benefit eg about 100,000 people in the sick and disabled category
are in work and claiming Disability Living Allowance.
Claimant Unemployment Rate by Parliamentary
Constituency: Change January 2001 to January 2002 (Percentage
Most people who become unemployed leave
Exit rates from unemployment vary little
over the economic cycle
1 There are two main sources of information on unemployment;
the claimant count and the Labour Force Survey (LFS). The claimant
count records the number of people claiming Jobseeker's Allowance
(JSA). The LFS measures ILO unemployment. People are ILO unemployed
if they are out of work, have actively sought work in the last
four weeks and are available to start work in the next two weeks;
or if they are out of work, have found a job and are waiting to
start it in the next two weeks. Back
In line with the Office for National Statistics (ONS) Labour
Market First Release, all labour market statistics given are for
the United Kingdom, unless otherwise stated. Some of the figures
in this memorandum may change when ONS publish regular revisions
to Labour Force Survey (LFS) and claimant unemployment figures
due to LFS re-grossing or the annual review of seasonal adjustment. Back
The number of 18-24 year olds, unemployed for over a year has
fallen by 95 per cent, from 100,500 in February 1997 to stand
at 4,700 in February 2002. Back
The number of people aged 25 or over and unemployed for over
a year has fallen from 562,000 in February 1997 to stand at 161,000
in February 2002. Back
Publication of the National Statistics vacancy series is currently
deferred, due to the effect the roll out of Employer Direct has
had on the series. The impact of Employer Direct means that it
is difficult to use the number of notified vacancies to judge
the trend in the labour market. Nevertheless, DWP management information
indicates that vacancies remain at a high level. Back
The stock of claimant unemployment is the number of people unemployed
on a particular date. For example, the claimant count figures
for February 2002, relate to a count of claimants taken on 14
February. By contrast, the numbers becoming unemployed (the inflow)
and the numbers leaving unemployment (the outflow) are calculated
by summing all the flows recorded in the month leading up to the
count date. Back