Select Committee on Work and Pensions Appendices to the Minutes of Evidence


APPENDIX 3

Memorandum submitted by the Chartered Institute of Personnel & Development (ES 06)

SUMMARY

    —  The UK economy grew by 2.2 per cent in 2001 but conditions weakened considerably by the end of the year, with the economy stagnating. Looking ahead, the general mood is one of cautious optimism, albeit with a continuance of unbalanced growth as manufacturing struggles to recover. Zero growth in the fourth quarter of 2001 probably marked the trough in the current downturn, with the economy now being stimulated by low interest rates, much higher public spending and gradually improving trading conditions.

    —  The national employment rate for people of working age—as measured by the Labour Force Survey—fell by 0.3 percentage points in the year to Nov-Jan 2001-02. Despite this the ILO unemployment rate also fell—by 0.1 percentage points—because the economically active workforce contracted. The labour market overall cooled more slowly than the economy over the year, resulting in a fall in the rate of growth of productivity. However, output per hour worked started to recover by the end of 2001. This suggests that employers facing difficulty preferred where possible to cut hours worked and wage costs, rather than layoff permanent staff, in response to weaker economic conditions.

    —   Forward-looking surveys of employer recruitment intentions look extremely encouraging. Even so, with profit margins being squeezed, organisations will be keen to contain wage costs through increased productivity. This may limit employment growth this year even though the economy will be growing. Employers most likely to expand permanent employment in 2002 will be those in sectors where ongoing demand for labour is clear and robust, notably retail and the public services.

    —  The outturn for the economy has been generally more benign than expected when the terms of reference of the Select Committee's inquiry were set. Yet while these favourable conditions will assist the Government in its efforts to tackle structural joblessness, key challenges remain even within a tight labour market. If they are to succeed, government initiatives such as the New Deal must be closely attuned to employer needs, decisions, and practices.

    —  The employability threshold that jobless people must reach before they can even begin to climb the job ladder is rising. The primary role for employers in the New Deal should be in beefing-up the Gateway, followed by more specific intervention in more bespoke forms of job readiness training. In this respect the Ambition programmes being established in the retailing, construction and IT sectors represent an extremely important and welcome development.

INTRODUCTION

  1. The Work and Pensions Committee has requested evidence to assist its enquiry to examine the impact of the economic slowdown on the Government's employment strategy and to assess the employment assistance available to those facing unemployment.

  2. In this memorandum the Chartered Institute of Personnel and Development—which represents over 100,000 professional people management and development specialists working in all sectors of the economy—outlines its short-term assessment of the UK economic and employment outlook (sections 1 and 2). In this context, the memorandum also considers challenges to the Government's employment strategy and highlights the need to engage employers more fully in the delivery of its various New Deal initiatives (section 3).

SECTION 1: ECONOMIC BACKGROUND

  3. 2001 was an extremely difficult year for the world economy. Of the G7 economies the United States, Germany, France, Italy and Japan all experienced at least one quarter of falling output. The UK and Canada fared better although both experienced slower growth.

  4. The UK economy was stagnant in the fourth quarter, the first quarter in almost a decade that the economy did not expand. Some of the other smaller EU economies also fared relatively well. But output in the eurozone as a whole fell because of the dominance of the big three—Germany, France and Italy—which together account for over two-thirds of eurozone GDP.

Recession and recovery

  5. The economic contraction in the US and eurozone, and the slowdown in the UK, occurred in the second half of 2001. This corresponds with the terrorist attacks on New York and Washington. But the downturn in activity had set in well before September 11. The main cause was the fall-out from the abrupt reversal of the information technology investment boom of the late 1990s. September 11 was therefore an additional shock to an already fragile economic situation, propelling the aerospace, airline and tourists sectors into the same kind of tailspin as experienced by the information technology and telecoms sectors in 2000 and the first half of 2001.

  6. The period following September 11 was one of understandable economic gloom. However, recent months have witnessed greater optimism. The US economy appears to have avoided a technical recession—ie two successive quarters of falling output—and is starting to grow again. Having contracted by 1.3 per cent in the third quarter of 2001 the economy grew by 1.4 per cent in the fourth quarter, spurred on by a very encouraging productivity performance. Assuming that these data are not sharply revised downward the US has thus experienced its shallowest contraction in a generation.

  7. The sad irony is that the tragic events of September 11 triggered a necessary relaxation of US monetary policy that might otherwise have been delayed, and in addition provided the political impetus to an additional relaxation of fiscal policy. Despite this some commentators still fear a return to weaker economic conditions in the US this year—the so-called "double-dip" effect. Others, by contrast, are far more optimistic and there is even talk of a hike in US interest rates in 2002 as growth picks up.

  8. The most likely outcome is that the US economy will recover this year at a relatively modest pace. Although consumer spending has been amazingly robust since September 11, household debt, an uncertain jobs market, and excess capacity in many industrial sectors will tend to limit growth prospects in the short-run. US employment dropped by 1.4 million in 2001 and is only just starting to recover. Moreover, US businesses and consumers may become more cautious given current political uncertainty in the middle east, the possibility of a second war with Iraq, and the implications of this for world oil prices.

Eurozone stays sluggish

  9. The eventual economic outturn in the US will be a major determinant of recovery prospects in both the eurozone and the UK.

  10. The eurozone is facing slightly greater inflationary pressure than the US and the European Central Bank operates a more rigid anti-inflation regime. Moreover, those member states experiencing recession and would benefit from lower interest rates—notably Germany which contracted in the third quarter of 2001 having stagnated in the second quarter—are also constrained by the fiscal rules governing membership of the single European currency.

  11. In the medium term the euro will be a spur to competition and further structural reform within the EU. This will boost growth by raising productivity and enabling better use of available labour, especially in the big three eurozone economies that at present have relatively low employment rates.

  12. This year, however, economic growth in the eurozone is likely to be at best sluggish. For the time being therefore the UK seems likely to fare better than the major EU economies. Indeed the UK is at present performing well by international standards.

The UK economy: unbalanced growth

  13. The economy grew by 2.2 per cent in 2001, just a little below trend. Nonetheless, conditions weakened considerably by the end of the year, with the economy stagnating. The main drag anchor was the manufacturing sector which experienced recession in 2001. Manufacturing output finished the year 2.3 per down on 2000 under the combined influence of the world economic slowdown and the continued strength of the pound relative to the euro. Throughout most of 2001 this was more than offset by growth in the service sector, the services industries as a whole expanding by 3.8 per cent during the course of the year. This reinforced the familiar `twin-track' pattern of growth that has characterised the UK economy in recent years. But by the end of last year, service sector growth slowed too bringing the economy to a halt.

  14. Looking ahead, the general mood is one of cautious optimism, albeit with a continuance of unbalanced growth as manufacturing struggles to recover. The general perception is that the zero growth in the fourth quarter of 2001 marked the trough in the current downturn, with the economy now being stimulated by low interest rates, much higher public spending and gradually improving trading conditions. This will enable an early recovery in the service sectors, while manufacturing output figures for February 2002 indicate that manufacturing may also have begun to recover.

  15. Overall the economy is expected to see a sustained recovery, with the pace of improvement becoming particularly noticeable in the second half of the year. Treasury forecasts published in the November 2001 pre-Budget report look to growth in the range 2.25-2.5 per cent in 2002, rising to a higher range of 2.75-3.25 in 2003. These forecasts were considered very optimistic when first published. The consensus of independent economic forecasters remains somewhat more pessimistic at the time of writing (with an average forecast of 1.9 per cent for 2002, rising to 2.8 per cent in 2003). But the number of optimistic independent forecasts has risen throughout the early months of 2002.

  16. Differences in forecasts tend to depend on differences of view over the outlook for employment, consumer behaviour, household debt, share prices, house prices, investment spending and exports.

  17. Pessimistic forecasts expect weak conditions in key export markets to result in higher unemployment, lower real wage growth and continued stock market fragility. This could limit economic growth as consumers retrench, in turn hampering prospects of an early recovery in private sector business investment which fell in 2001 (whole economy investment in the fourth quarter was almost 5 per cent lower than a year before). Optimists, by contrast, point to current low interest rates and higher public spending as a major stimulus to the domestic economy, offsetting the effects of weak export conditions. This stimulus will enable unemployment to stay low and support real wage growth. Further buoyed up by an active housing market, consumers will remain confident and help keep the economy ticking over.

  18. As the optimistic view has gained greater credibility in recent months, some commentators are even starting to worry that the UK economy will overheat once export conditions start to improve. This has led to speculation that the Bank of England will raise interest rates later this year. While such a move might be necessary to ensure that inflation does not exceed the Government's inflation target it would probably be unhelpful for UK exporters—because of the consequences for the exchange rate—or other businesses seeking to finance debt and/or investment spending in the context of tough market conditions and tight profit margins. Manufacturing companies' profitability is currently running at a ten year low, while service company profits have been squeezed to 1995 levels.

  19. In the event much may depend on the Chancellor's decisions on taxation in the Budget due to be presented to Parliament on 17 April. An increase in personal taxation to fund still higher spending on key public services would reduce the need for higher interest rates to choke-off consumer demand. This would arguably be a preferable course of action from the perspective of manufacturing and investment, albeit in the short-term it runs the risk of deterring consumption spending at a time when consumers are helping to sustain the economy.

SECTION 2: UK LABOUR MARKET CONDITIONS

  20. With economic growth slowing in 2001, the UK employment rate fell slightly and the labour market contracted.

Jobs during the slowdown

  21. The national employment rate for people of working age—as measured by the Labour Force Survey—fell by 0.3 percentage points in the year to Nov-Jan 2001-02. All the reduction took place in the second half of the year. Despite this the ILO unemployment rate also fell—by 0.1 percentage points—because the economically active workforce contracted.

  22. The fall in employment rates was concentrated in a number of regions—the North West, Yorks and Humberside, Eastern England, London, the South West, Wales, Scotland and Northern Ireland. This regional pattern obviously to some extent reflects the weakness of manufacturing employment, which fell by 3.5 per cent during the course of the year. The only sector to fare worse than this in 2001 was agriculture where employment fell sharply (by 6 per) as a result of the foot and mouth epidemic. In the construction sector, by contrast, employment rose by 6.7 per cent, while total employment in the service sectors rose by 0.4 per cent. Within services the net job gains were all in the retail and hospitality sectors and the public sector.

  23. The labour market overall cooled more slowly than the economy over the year, resulting in a fall in the rate of growth of productivity. The annual rate of increase of output per worker dropped from 2 per cent to 0.8 per cent during the course of the year. However, output per hour worked started to recover by the end of 2001. This suggests that employers facing difficulty preferred where possible to cut hours worked and wage costs, rather than layoff staff, in response to weaker economic conditions.

  24. According to the Labour Force Survey, total hours worked in the economy fell by 0.7 per cent over the course of the year, while pay settlement levels began to decline (averaging just 2.5 per cent by January 2002). Pay monitoring organisations have in addition identified an increase in the number of pay freezes, particularly in engineering, electronics and the hotels sector. Spring bonuses are also likely to be less in evidence in 2002. Similarly, temporary rather than permanent workers have borne the brunt of job cuts. The level of temporary employment in Nov-Jan 2001-02 was 113,000 lower than a year before, a reduction of 6.5 per cent. The share of temporary workers in total employment fell from 7.1 per cent to 6.5 per cent.

The short-term employment outlook

  25. Assuming current forecasts of economic growth in 2002-03, employment is expected to start to expand again this year. Previous forecasts of a substantial rise in unemployment now seem unlikely to be fulfilled. Indeed, recent forward-looking surveys of employer recruitment intentions look extremely encouraging.

  26. For example, the March 2002 Report on Jobs, published by the Recruitment and Employment Confederation, highlights the first rise in permanent job placement for 10 months and a pick-up in national newspaper job advertisements. The improvement is driven by the public sector but there are also tentative signs of more private sector recruitment. The latest quarterly survey of employment by Manpower in turn projects employment growth in virtually all sectors of the economy in 2002—including all but high-tech manufacturing—with both private and public service sectors expected to expand quite markedly.

  27. Despite this optimism, the pattern of employers' response to the economic slowdown could influence the speed with which employment recovers in 2002-03. The labour market remains tight, unemployment having remained low through the slowdown. With profit margins being squeezed, companies will be keen to contain wage costs by way of increased productivity. This may limit employment growth this year even though the economy will be growing.

  28. In the context of both a profits squeeze and at best a modest recovery, manufacturing employers may have little option but to shed workers. Some sector forecasts suggest that the number of jobs lost from manufacturing this year could even exceed the 145,000 jobs lost in 2001, although the earlier than expected recovery in the US economy could help stem the haemorrhage.

  29. Most employers in other private sector organisations will increase hours worked by existing staff and/or hire more temporary workers during the early stages of recovery, the reverse of what happened in response to the slowdown. Employers most likely to expand permanent employment in 2002 will be those in sectors where ongoing demand for labour is clear and robust, notably retail and the public services.

SECTION 3: CHALLENGES FACING THE GOVERNMENT'S EMPLOYMENT STRATEGY

  30. The terms of reference of the Work and Pensions Committee inquiry is predicated on assumption that the UK economic slowdown would pose a challenge to the Government's strategy for tackling structural unemployment and the high rates of economic inactivity of key groups in society.

  31. The outturn for the economy has been generally more benign than expected when these terms of reference were set. Unemployment looks set to remain low, employment is forecast to recover, and the labour market is tight by the standards of recent decades. However, while these favourable conditions will assist the Government in its efforts to tackle structural joblessness, key challenges remain even within a tight labour market.

  32. Prospects for jobless people depend not only on the strength of the economy but also critically on the recruitment, development and restructuring decisions made by organisations as they strive to raise their productivity and performance in increasingly competitive conditions. If they are to succeed, government initiatives such as the New Deal must therefore be closely attuned to employer needs, decisions, and practices.

The rising employability threshold

  33. It is nowadays usual even in times of expansion for organisations to shed less effective workers, while striving to recruit, develop, motivate and retain workers with skill and potential. This process provides considerable entry-level opportunities for jobless people. But it also requires them to be equipped with appropriate entry-level abilities and the potential for further development.

  34. Entrants that make the grade can look forward to a good degree of job stability and—depending on the organisation they work for—the ability to progress to higher-level skills. Those that don't make the grade either fail to gain access to jobs or fail to find a secure foothold in work. This helps explain different perceptions of job security in today's labour market—increased job turnover in entry-level positions even though average job tenure is much the same as it was a generation ago. But most important of all it increases the employability threshold that jobless people must reach before they can even begin to climb the job ladder. However, it is far from certain that the various New Deal initiatives are at present capable of helping jobless people reach that level.

Is the New Deal working?

  35. On the face of things the New Deal has been a success. It is largely self-financing and devoid of identifiable negative side effects. This benign outcome vindicates the government's decision to kick-start the New Deal by aiming at a relatively easy target—18-24 year olds unemployed and on Jobseekers Allowance for six months or more. The latter group were not only relatively small in number but also exhibit a high average outflow rate from unemployment compared with other groups of jobless people on benefit. But while a focus on the young unemployed has enabled the government to demonstrate the general merit of the New Deal approach, the economic impact has inevitably been small.

  36. In macroeconomic terms the net rise in sustainable output and employment generated by the programme is miniscule, notwithstanding the evident personal benefit to those individuals who would otherwise still be on the dole. As the National Audit Office has noted, in the expanding labour market of 1998-2001 most of the young New Dealers needed only to be eased into jobs, the net value of the programme being observed at the margin amongst the minority of people harder to help. Likewise, although the effect on the long-run employment prospects and earning power of New Dealers is not yet discernible this is also likely to be limited.

  37. The far more difficult task of helping the older long-term unemployed, lone parents and people on incapacity benefit into work is barely underway. The real test of whether the New Deal is capable of making a big economic impact is still to come.

How much employer engagement?

  38. If the New Deal is to pass the test it will have to engage employers far more effectively than at present and at every stage of the welfare to work process. Without this the New Deal could end up being no more successful than the largely ineffective public job and training schemes of the 1980s and early 1990s. The Government is clearly aware of the risk. Hence the emphasis on a "demand led" New Deal in the 2001 green paper Towards Full Employment—which essentially means improved employer engagement in the process of determining the content of the programme.

  39. According to the green paper "Involving employers in the development of the New Deal and understanding better the requirements of employers in particular industries are key ways to break down the barriers that prevent people moving quickly into jobs". This is a laudable objective; as the green paper also says ". . . the better a programme meets employer needs, the better it will be at helping unemployed people to meet those needs and to succeed in the workplace." Yet despite some welcome examples, it is far from obvious that the New Deal is more than a blip on the radar screens of many employers. So what are the prospects for an employer led New Deal?

  40. On the face of things the support of the employer community looks spectacular. The latest manifestation is the 21-strong National Employer Panel established by the Department for Work and Pensions in October 2001 with the express objective of enhancing employer thinking on how to improve the effectiveness of the New Deal and other welfare to work programmes. This stratospheric level enthusiasm is in turn matched by the tens of thousands of employers—90,000 at the last count—that have signed-up to participate in the New Deal.

  41. Despite this many employers, especially those in local labour markets close to full employment, have found the New Deal difficult to connect with. New Dealers have either been in short supply or not sufficiently job ready. Ironically, whereas the New Deal needs employers to recruit New Dealers into subsidised or unsubsidised jobs in order to increase their employability, employers want to recruit into those jobs people whom they consider to be basically employable to start with.

  42. This problem has perhaps been most acute for very small employers. The latter view the New Deal as a cheap way of filling vacancies and assume that New Dealers will turn up at their door ready to slot in. Larger employers, by contrast, are less interested in the public cash attached to New Dealers, but have nonetheless been disenchanted with the quality of what is being offered to them. Though these employers have publicly kept faith with the programme this has often been for reasons of corporate social responsibility rather than out of strictly commercial motives. The New Deal still barely rates a serious mention in the world of corporate HR; when people management gurus speak of "the war for talent" they do not have New Dealers in mind. Indeed, organisations restructuring their workforces are more likely to shed than recruit individuals with the skill set of the typical New Dealer

Getting the message right

  43. Given the evident disjuncture between what employers want and the characteristics of most New Dealers, it is arguable that the New Deal should be clearly repackaged to employers as a basic employability programme. Identifying the New Deal with "employability" in a very general way sends out a potentially misleading message. An employer-led New Deal should instead be geared to what the programme is best placed to achieve given the various barriers faced by most long-term unemployed and economically inactive people.

  44. The message deficit stems primarily from a failure to distinguish between two distinct aspects of employability. First, there is "access employability" which involves the ability of people to gain access to jobs at their existing level of human capital, or leastways with only relatively remedial forms of training. Over and above this is what is called "performance ability" which refers to how well people perform in jobs and their continuing personal development in terms of long-run employment prospects and earning power.

  45. The New Deal is essentially a "bottom-rung" access employability initiative aimed at employers who are seeking to recruit people with no more than the essential threshold of entry-level skills. Building on those skills within the workplace to enhance performance ability is of course of vital importance but this should not be the prime objective of welfare to work programmes.

How best to engage employers

  46. Given this the government is wasting its time trying to involve employers whose main interest is in recruiting people to skilled job vacancies. The latter are best engaged in helping the government achieve its broader objective of improving the quality of workplace training and learning. Purposeful engagement with the New Deal is thus most likely to come from employers in a relatively small number of sectors, especially those operating in the various "high touch" personalised service markets, (such as retailing which already accounts for around 1 in 3 jobs taken by New Dealers).

  47. Unfortunately, the initial remit of the National Employer Panel could perpetuate the confusion between access and performance ability. In launching the Panel, for example, the Secretary of State for Work and Pensions commented: "It's vital that we work closely with employers to meet their needs for skilled workers . . ." Many employers will take this to imply that welfare to work is about generalised skills training rather than access focused job readiness training. This impression must be countered by making it clear that the employer role should be first and foremost about equipping jobless people on benefit to gain an initial foothold on the job ladder.

  48. The primary role for employers in the New Deal should be in beefing-up the Gateway, followed by more specific intervention in more bespoke forms of job readiness training. In this respect the Ambition programmes being established in the retailing, construction and IT sectors represent an extremely important and welcome development.

  49. Although employers are already involved to varying degrees in advising on the Gateway, the process is too one way. Little is done to challenge the perceptions and practices of employers themselves. Lack of access to jobs often reflects the way in which employers' recruit, such as the unconscious discrimination that acts as a barrier to the hiring of people with certain backgrounds and characteristics. The Gateway should therefore aim to change employer mindsets as well as changing the behaviour of welfare claimants.

April 2002



 
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