Memorandum from Peter Dolton and Yvonne
Balfour, University of Newcastle upon Tyne, Department of Economics
This paper briefly reviews the different forms
of UK government intervention in the training of young people
over the last 35 years. The New Deal scheme introduced in 1998
is described and its progress tracked up to the end of 1999. Evaluation
of the New Deal, based on data relating to 144 small geographical
Unit of Delivery areas, is presented. The results show that the
policy has had strictly limited impact on the local level of unsubsidised
jobs created and that policy effectiveness is constrained by demand
The British Prime Minister, Tony Blair, claims
that youth unemployment, and the crime and other social problems
associated with it, cost taxpayers £10 billion a year. The
Labour Party's proposals contained in the document "New
Deal for a Lost Generation" suggests a way to tackle
this problem. Are the training policies proposed new or simply
a rehash of past failed attempts of government to solve the problem?
The New Deal should be evaluated in the context of the recent
history of the youth unemployment problem and the government training
policies which have preceded it over the last 20 years.
Many countries in recent years have introduced
large scale state training schemes in an attempt to alleviate
youth unemployment problems. It is unclear whether such training
schemes are an adequate substitute for a co-ordinated system of
private sector training which provide the appropriate training
investment incentives for both individuals and firms. From a more
positive perspective the education and training of a country's
young people is vital for future economic growth.
Training is a form of human capital investment
which yields a rate of return via a higher marginal product of
the trained labour. It is important to distinguish between "firm
specific" human capital which results from the acquisition
of skills which are of value only to a specific firm, and "general"
human capital which is valuable for any firm. Economic theory
suggests that individual firms would have no incentive to provide
general training if workers trained in general skills would, once
trained, leave the training firm to take a higher paying job elsewhere.
In contrast the more "firm specific" the human capital
that the individual acquires, the less incentive there is for
that person to leave the firm. It has been suggested that the
aggregate consequence of this "public good" dimension
is private sector under-investment in training because firms are
unable to appropriate the return on "general" rather
than "firm specific" investment. In practice the acquisition
of any human capital in unlikely to be entirely "firm specific"
and there should always be some scope for joint investment in
A further contributory factor to under-investment
may be that individuals face capital market imperfections in the
possibility of taking a loan against future potential earnings
after they have trained. There is also the problem that most young
people have imperfect information about the potential rate of
return to such investments and are typically risk averse with
a high rate of discount (and time preference).
One radical solution to this market failure
is intervention by government which may take the form of employment
subsidies to target specific industries or regions. Alternatively
the government could impose a system of taxes on firms which don't
train and a subsidy to those firms who do. The difficulties with
policing such a system abound. The alternative is to have a system
of large scale government provision of training. Clearly the justification
for a state training scheme relies partially on the argument that
training (and education generally) is a "merit good"
in the sense that its value may be greater for society than the
individual and therefore optimal investment in it requires some
state involvement. Formal evaluation of this proposition is difficult
and it is possible that state training schemes are not necessarily
the most appropriate way to spend any available subsidy.
2. TRAINING IN
THE UK SINCE
Historically Britain's system of training involved
five to seven year apprenticeships served by the individual with
a single employer. In 1964 the Industrial Training Act set up
a national system of Industrial Training Boards (ITBs) which had
the responsibility of improving the quantity and quality of training
within their industry. These had the power to give grants and
levy charges on firms according to whether they were training
their young employees appropriately or not. The idea was to reward
the companies who were training properly and penalise those who
either trained badly or relied only on poaching trained workers
from other employers. Since 1970 the involvement of the government
in Britain's youth training has been more or less continuous but
extremely complex. It has involved a plethora of new initiatives
with a bewildering array of titles. The "time line"
of these schemes is mapped in Table 1.
Over the 1973-79 period there were a variety
of special employment measures to try to introduce training for
young people and foster retraining amongst the long-term unemployed
eg the Training Opportunities Programme (TOPS). The most radical
departure came in 1978 with the setting up of the Youth Opportunity
Programme (YOP). This established the principle that all those
between the ages of 16 and 18 who had left school, were not in
full time education and were unable to get a job should have the
opportunity of training or participating in a government funded
programme. This scheme was extended with the setting up of the
Youth Training Scheme (YTS) in 1983. It started as a one year,
low level training scheme, but has gradually changed its nature
and become a two year scheme.
In 1990, YTS was replaced with Youth Training
(YT) which guarantees a place to all 16-18 year olds who are without
a job. YT is modelled closely on the YTS Scheme, except that YTS
did not promise 100 per cent coverage and did not have unemployment
benefit penalties for non-participation. YT also offers more flexibility
in the length and nature of the training schemes than did YTS.
A common feature of both programmes is the offering of incentives
for unemployed youths to join. For example, it is impossible for
people aged between 16-18 to claim unemployment benefit if they
refuse a YT place, but the training allowance they receive if
they do participate is slightly higher than the unemployment benefit
they would otherwise receive.
Since 1995 YT has been gradually replaced with
National Traineeships and Modern Apprenticeships. Both schemes
provide employers the opportunity to employ and train young people
up to NVQ
for National Traineeships (16-18 age group), and NVQ level 3
for Modern Apprenticeships (19-24 age group).
The plethora of new initiatives and schemes
associated with training, special employment measures and "enterprise"
during the last 15 years is remarkable with the emphasis shifting
to the provision of Employment Training (ET) through the Training
and Enterprise Councils (TECs). These TECs have been set up on
a regional basis and run by private enterprise employers to attempt
to solve the problems of local labour markets. The idea is to
deliver suitable training programmes though local colleges and
tailor ET and YT to local demands. Therefore TECs amount to regionally
based employer clubs for the provision of training.
The one common thread through all these initiatives
has been the need to tackle youth unemployment. Little objective
evaluation of the training which has been received on these schemes
has ever been undertaken. In addition, the extent to which schemes
like ET constitute an optimal allocation of state subsidy to training
is debatable. In addition it is still unclear whether the provision
of training is more efficiently provided by the state than the
3. THE YOUTH
The transition from school to work for young
people in the late 1970s and 1980s became more difficult than
at any time in post-war Britain. This period saw youth unemployment
rise from 10 per cent in 1978 to 27 per cent by 1984 back down
to 10 per cent in 1989 rising to 21 per cent by 1992. Subsequently
this has fallen to 11 per cent currently. The period also saw
the collapse of British manufacturing industry and with it the
decline in the numbers entering manufacturing apprenticeships
from 290,000 in 1975 to 45,000 in 1996. Successive governments
have chosen to spend large sums, up to £1.3 billion by 1998,
at 1985 prices, on youth training schemes which, at their height
involved nearly half a million young people each year from 1981
The true extent of government involvement in
training schemes in their different guises has been massive. Numbers
on YOP rose to a peak of over half a million by 1981. Numbers
in YTS averaged 400,000 over the 1983 to 1989 period. YT has involved
up to 300,000 young people annually over the 1990 to 1995 period.
The average unit cost of training over the 1987 to 1995 period
at 1995 prices, at around £2,500 per placement per year,
which is nearly double the cost of having that person on the unemployment
register. This prompts the question of whether such expenditure
and government intervention can be justified on simple cost grounds?
Perhaps the clearest way of understanding what
has happened to the youth labour market in the UK over the last
15 years is to consider the activity rates associated with each
cohort of 16-18 year olds over the period 1975 to the present.
School staying on rates have remained roughly the same at 16-17
per cent over this period and the proportion of the cohort entering
further or higher education has risen slowly from 11 per cent
in 1975 to around 35 per cent in 1996. The biggest changes have
occurred in the split of the remainder between the destinations
of work, unemployment and government training schemes. The proportion
in a job has fallen from 61 per cent to 41 per cent whilst the
proportion who are unemployed rose from 9 per cent in 1975 to
17 per cent in 1986 and 1987. Most dramatic of all has been the
proportion involved in one of the government training schemes.
These schemes did not exist prior to 1978, but by 1989 the proportion
of young people entering YTS was as high as 16 per cent. These
changes represent a huge difference in the prospects of young
people. Prior to 1975 the pattern was one of entering employment
or staying on in full time education, with only a minority being
unemployed. By the late 1980s the job choices for 16-18 year olds
had been curtailed with only a minority able to enter the labour
market directly. For a sizeable minority, up to 25 per cent, the
choice is unemployment or a government training scheme.
4. THE ASSESSMENT
The simple human capital interpretation of training
schemes is that they constitute an investment which will yield
a social and private rate of return. However if the investment
in mass state training schemes is to be assessed a more detailed
analysis of the costs and benefits of this investment need to
Direct measurement of the effects of training
is complex. The short-run effects may involve the increased probability
of getting a job and enhanced earnings, although these effects
may be quite small. What could be much more important are the
potential long run effects. These could be in the form of enhanced
labour force participation (possibly in more suitable jobs) over
the whole work history and the long-run growth in earnings of
the additional human capital.
Another view of government led training schemes
is that employers use them as a screening or signalling device
to filter out the most promising trainees in order to decide which
to employ. Many employers have a low regard to YTS schemes in
terms of the value of the training but stress their role as helping
in the selection of the most able and promising employees. This
is partially possible as the person can be relatively costlessly
appraised whilst working "on-the-job" which will invariably
be better predictor of future productivity as an employee. The
value of training schemes as screens or filters for the labour
market is difficult to assess.
One of the most widely held beliefs motivating
the use of government led training schemes is that they can be
used as a counter-cyclical policy to ameliorate the worst effects
of recession on youth unemployment. More specifically one perceived
advantage of youth training schemes in times of high youth unemployment
is that they may contribute to downward market pressure on the
relative wages of young people.
Another potential benefit of training schemes
is that they may act as a political palliative to help the economy
and society cope with the adverse high consequences of youth unemployment.
The existence of a scheme like YTS can deflect criticism away
form a government and may also alleviate social unrest and criminal
activity which have other additional public costs.
One important negative component in the evaluation
of training programmes are the scheme's "displacement effects".
These occur because the presence of a scheme in which the government
funds employers to train, will affect the incentives of the employers.
Most notably the displacement effects can be divided into the
"deadweight loss" where employers substitute programme
trainees for, say, apprentices that would otherwise have been
taken on, so that in effect the firm's training bill is paid for
by the government with no net increase in training provision,
and the "substitution effect"where programme
trainees are substituted for some other kind of workers (e.g.
part timers or older workers) and unemployment is created elsewhere.
A clear difficulty with the assessment of wage
(or employment effects) of training programmes is that often the
participation on a programme is not voluntary and hence random.
For example, it is quite possible that individuals of lower ability,
with fewer educational qualifications, poorer family backgrounds,
fewer contacts, and lower self confidence and motivation find
getting a job most difficult and are hence more likely to enter
a training scheme. Therefore a straight comparison of participants
with non-participants in terms of their labour market progress
could well be invalid.
A second qualitative assessment problem is whether
the effect of all training schemes are the same. In the same way
as there are different types of jobs there is also great heterogeneity
in the types of training that people may experience in different
schemes and with different employers. Some schemes offer formal
apprenticeships and formal qualifications whereas others, in contrast,
offer training with little or no formal training and no certificated
qualifications. It is inevitable that a sorting process will develop
which matches the more able young people with the best placements.
Hence the economic assessment of such heterogeneous training programmes
is extremely complex.
5. THE NEW
In October 1997, the Labour government published
its first initiative under its Welfare to Work Strategy. Entitled
"New Deal for 18-24 year olds" it marks a change in
the way in which the government will deliver employment-focused
services to unemployed young people. This is not seen as a short-term
measure but a long-term strategy to reduce unemployment, increase
the flexibility, and raise the quality of the work force. The
New Deal was launched in January 1998 in 12 Pathfinder Areas as
a test before the national launch in April 1998.
It was projected that the scheme would involve
up to 250,000 people at one time and cost up to £3.1 billion
annually. The scheme is designed for those who have been unemployed
for six months or more although in some cases, such as those groups
with particular disadvantages, they can join the New Deal programme
before they have been unemployed for six months. The following
four options are offered as a condition of continued receipt of
Job Seeker's Allowance (JSA):
(i) Employment Option (EO)employers
receive a subsidy of £60 per week for up to six months and
a training allowance of £750 towards the cost of training
their New Deal employee. The equivalent of at least one day per
week must be allowed for training towards a recognised qualification;
(ii) Full-time Education or Training (FTET)this
can last for up to 12 months and is primarily designed to provide
help for those without NVQ 2 or equivalent level qualifications;
(iii) Voluntary Section Option (VSO)a
placement for up to six months working within a voluntary sector
organisation also including the equivalent of at least one day
per week working towards an approved qualification; and
(iv) Environment Task Force (ETF)a
placement providing work for up to six months improving the environment
also including the equivalent of at least one day per week working
towards an approved qualification.
In the lead up to the introduction of this programme,
the government have repeatedly emphasised that there is no fifth
option in this mandatory programme and failure to take up one
of the four options will mean the loss of the unemployed person's
JSA. The Secretary of State for Education and Employment, Mr David
Blunkett, stated at the launch of New Deal in January 1998: "Staying
on benefit will no longer be an option".
Given the objectives of New Deal to help young
people find and keep jobs, employers' and other providers' reactions
to the programme are a crucial factor in helping to determine
its success. Employers have a vital role to play not only in providing
unsubsidised employment opportunities and in their willingness
to provide subsidised employment and training but also providing
work experience placements for those clients who have chosen the
FTET option and who must have the equivalent of 26 days work experience
in a realistic work environment.
The Gateway period is the first stage of the
process of assisting people into employment and lasts for a period
of four months. Each young person is assigned a "Personal
Adviser" who identifies for them the help they may need in
becoming more employable, eg preparing CVs, giving specialist
career advice, perhaps help with basic skills and building self-confidence.
An intensive job-search period begins and after four months, if
an unsubsidised job is not found, one of the four above options
must be chosen.
Once participants have finished their option
and they still have not found an unsubsidised job, they move on
to Follow-Through. Once more they have further help and guidance
in job search or they may move onto another option.
shows a month by month breakdown of New Deal starters and their
destinations, whether to unsubsidised jobs, other benefits, other
known destination (likely to be training and education) and an
unknown destinationperhaps jobs, but not recorded as such.
These figures are taken from the 10 Briefings published by the
Unemployment Unit and Youthaid.
The first figures available start from July 1998 (after the nationwide
launch of New Deal in April). The figures produced from January
1998, (the implementation of New Deal in the Pathfinder areas)
are only broken down into the four options, ie Employment, FTET,
Voluntary and EFT, and not any breakdown of destinations.
These statistics need to be interpreted with
care as the total starts and categorized leavers figures are reported
cumulatively whereas the numbers in the options are reported as
the number of people in that state in that month. These figures
are net figures as they represent the stock of those in an option
in that month, ie it subtracts the flow of new leavers but adds
the flows of new entrants.
Figure 1 and Figure 2 show the cumulative numbers
and percentages on options, respectively, month by month since
January 1998. Bearing in mind that the New Deal scheme did not
go national until April 1998, it is interesting to note that the
numbers on the options were almost equal from January to April
1998 and then there was a rise in the numbers in the Employed
Option in June 1998. In September 1998 there was an increase from
41 per cent in the FTET option to 70 per cent. This is explained
by September being the beginning of the academic year, and New
Deal is not tied to this. FTET places were available on courses
which could not accommodate a staggered entry throughout the year.
At the beginning of the New Deal national launch 37 per cent had
entered the FTET option with 40 per cent in the Employment option
and 12 per cent and 11 per cent in the Voluntary and Environmental
option respectively. The Employed option never again reached its
peak of 40 per cent and it dropped to a low of 12 per cent in
September 1998 when FTET was at its highest (when the autumn term
for colleges begins) and then levelled off at 23 per cent and
never going above 27 per cent. The FTET option on the other hand
has become fairly stable at about 42 per cent, with its lowest
at 38 per cent in July 1999 (when the academic year traditionally
ends and most courses complete).
Figure 3 and Figure 4 show the cumulative and
percentage outflows from New Deal by destination, month by month.
There was an increase of 14 per cent more leavers in October 1998,
compared to a fairly steady increase of 2 per cent over the year.
Of the leavers in October 1998, 55 per cent went to an unsubsidised
job, 7 per cent went to known destinations and 28 per cent went
to unknown destinations and 11 per cent to other benefits. In
October 1998, 21 per cent more people were getting jobs outside
the New Deal scheme and 20 per cent more were "disappearing"
to unknown destinations. However, a survey of unknown leavers
suggests that around half the unknown leavers were unemployed.
Many of these had been picked up by the system and returned to
New Deal. More than a quarter of the sample were working, around
5 per cent were in training, and the remainder were in "other",
which includes those caring for families, sick, pregnant, doing
voluntary work or in prison. Essentially, the one thing which
is known about the leavers from New Deal who have left to "unknown
destinations" is that they have not started to claim JSA
within 13 weeks of leaving New Deal as they would have been picked
up by the system and returned to New Deal. However, throughout
the year from November 1998 to October 1999 there was a steady
flow of starters and leavers with the exception of June 1999 when
there was a higher increase in leavers and July 1999 when there
was a higher increase in starters. This could be attributed to
a seasonal variation including holidays and the traditional end
to the college year for training and educational courses.
Figure 5 shows, by month, the numbers of starters
and leavers to the New Deal programme since the national launch
in April 1998, Apart from the increase in leavers as described
in Figure 4, the numbers have maintained a steady flow and output
with there being more starters than leavers as described in Figure
4, the numbers have maintained a steady flow and output with there
being more starters than leavers except in the months of October
1998, June 1999, August 1999, September 1999 and October 1999.
The DfEE has claimed that over 169,000 young
people have now found a job through New Deal. The published figures
available suggest that around 120,000 of these are unsubsidised
jobs. The government's pledge of helping 250,000 into a job is
well on its way to being met. However, these figures include both
sustained jobs and moves to jobs that have not been sustained.
Out of the 169,000 young people who have left New Deal for jobs,
nearly 43,000 have returned to claiming benefit within 13 weeks.
In other words more than a quarter of those who got jobs became
unemployed again within three months. These are the people who
have once more entered the "revolving door" of benefits
and short-term jobs.
"I think evaluating these schemes is
virtually impossible actually because of the fact there are so
many other things going on in the economy at the same time that
are affecting these market . . . I do not think it is at all easy
to evaluate" (Professor Patrick Minford, Education and
Employment Committee, Eighth Report).
Until the scheme has been in operation for some
time it is difficult to predict how it will operate. Critics claim
that the most promising recruits to the scheme will be hand picked
by the employers and self select themselves into the full time
education and training option. This will leave the hard core of
the less able and disaffected to opt for the Environmental and
Voluntary Task forces. Such a hierarchy of destinations within
the New Deal could then be divisive and mitigate against the possibility
of overall success.
What has induced the government to believe that
the New Deal will be more successful than its predecessor schemes
of TOPS, YOPS, YTS, YT and ET? The answer is that the scheme is
slightly different and cannot be compared very easily to its predecessors.
The first essential difference is that the New Deal is aimed at
an older age group, i.e. 18-24, whereas most of the earlier schemes
were for those aged 16-19. The second is that it is the long-term
unemployed who are being targeted rather than those who have just
left school. Clearly the rapidly rising participation rate in
the 16-19 age group has left the government less concerned about
the welfare of this age group and hence it has turned its attention
to the long term unemployed who are slightly older.
A third major difference between this scheme
and some of its earlier predecessors is that it has the important
element of compulsion to participate if future receipt of benefits
are to be guaranteed. Rights and responsibilities must be accepted.
Options are given and choices must be made. The option of not
participating is not available as benefits will be cut if individuals
do not take up one of the four options available to them.
In this sense the scheme has an important similarity
with the Restart
scheme and the Workfare schemes which have operated in the USA.
There is evidence that such a mandatory element to a publicly
funded system will create incentives to participate in a way which
would be impossible to induce in a voluntary scheme. People will
have to go back into the labour market and take the jobs which
are available. However, the certainty of high participation does
not ensure that the outcomes of the scheme will be any more valuable
then previous schemes which have had voluntary participation.
Critics of the New Deal have been quick to point
out that unemployment in the UK today is falling rapidly and that
there is no need to spend such vast sums of money on this scheme.
When (as of January 1998) there are only 120,000 unemployed young
people in the target age group this argument has a certain force.
In common with many of the schemes introduced
by previous governments it is also contended that this scheme
will not create "real jobs" in the sense that the people
who get offered placements will only be displacing older workers
who do not come with such a subsidy from the government. The substitution
and dead-weight loss effects of these schemes are hard to measure
but one cannot help notice the large number of opportunities which
have already been created by the large retail chains who employ
large numbers of young people and casual labour to do fairly menial
tasks. It is hard to argue that these employers will not just
be taking the subsidy and cheating the system by not offering
permanent jobs at the end of the statutory New Deal period. In
this sense the concept of "welfare to work" is difficult
to implement since it does not, in practice, provide any guarantee
of actually getting a job.
Another difference with the New Deal programme
and that of past training schemes is the advertising campaign
that led up to its launch. This included general media publicity
such as television advertisements with employers backing the scheme
and newly employed trainees taking part in the advertising campaign.
The slogan "As more sign up, fewer sign on" was
an attempt to alert the public to the benefits to everyone of
the success of the New Deal policy. There was also a considerable
amount of press coverage and marketing done by local Employment
offices in an effort to portray the New Deal as something different
to try to encourage as many people as possible to give it their
positive support. According to David Blunkett, Secretary of State
for Employment and Education "very few people have not
seen the advertising campaign for the New Deal . . . It's working."
A final crucial difference with this Welfare-to-Work
scheme was the political climate at the time of its introduction.
Most specifically there are elements of a crusading programme
which was to be available to all and an opportunity to solve the
problems of unemployment and was reflected in the Chancellor of
the Exchequer's speech at the launch of the New Deal Pathfinder
in January 1998:
"I believe this is a national crusade
. . . The government believes in helping thousands more from welfare
into work in the years to come as part of the long haul towards
our goal of full employment."
At the national event launch in April 1998,
Andrew Smith, Minister for Employment also suggested:
"To succeed, New Deal has to be a national
crusade, pulling together employers, trade unions, community groups
and young people themselves. By working together, we will open
up new hope, new opportunities for young people."
With a change of government after a period of
17 years, the New Deal training scheme was optimistically viewed
as the vehicle to overcome the problems of youth and long-term
unemployment. At a time of major political change the New Deal
policy was seen as a radical departure in labour market policy.
7. AN EMPIRICAL
The Measurement of the outcome of New Deal is
not straightforward. Evaluating ALMP at the level of the individual
in a non-experimental context is beset with problems (see Blundell
and Dias (1998) for a summary). Most obviously, in individual
cross section data, each individual can only be observed in one
state, i.e. as a recipient of ALMP or not. The inability to observe
the counterfactual when allocation to treatment is not random
means evaluation at the individual level is therefore problematic.
What we suggest in this paper is a method of aggregation to the
level of the small geographical areas which administer the New
Deal and use the variation in the administering proportion of
different utilisation of the four New Deal options by these Units
of Delivery (UoD) to capture the marginal effects of the different
possible configurations of the use of the alternative options
involved in New Deal. The data used is taken from the government's
Department for Education and Employment (DfEE) website Core Performance
Tables relating to the New Deal. The data refers to all 144 Units
of Delivery in the country and relates either to the cohort who
began the New Deal between April and June 1998 or the cohort who
began New Deal between July and September 1998.
Analysis and evaluation of unemployment measures
and ALMP based on local, regional or state data is not new (see
Barnow (1992), Friedlander and Gueron (1992), Coles and Smith
(1996) and Gregg and Wadsworth (1996)) but it offers certain advantages.
In particular such an assessment will enable us to get an estimate
of the possible effects of each option on the treated by exploiting
the different balance of treatments available in different UoD.
This type of evaluation strategy is a particular type of assessment
which uses a "pure" local average treatment effect
(see Imbens and Angrist (1996)) where the treatment itself can
now be thought of as a vector of possible choices of the different
option utilisation rates across the different UoD. As the government
changes New Deal funding and the external local and national labour
market conditions change as New Deal develops then the UoDs will
choose different levels of involvement in the options accordingly.
Hence the form of the treatment (different allocations to the
four options) is chosen by the recipients (UoDs) as the government
changes the financial and other conditions of the treatment (New
There are a variety of ways of potentially measuring
the impact of New Deal at the level of the Unit of Delivery. We
explore just three such measures and statistically assess the
explanatory power of the available regressors. These measures
are: the number of people entering unsubsidised jobs, the number
entering subsidised jobs and the number not returning to Job Seeker's
Allowance within 13 weeks of entering a job. These three variables
report slightly different measures of New Deal. The numbers into
subsidised jobs refers to the number of jobs created by the local
economy without any government financial involvement. The subsidised
jobs number still incorporates an element of New Deal central
funding and is therefore a less satisfactory outcome measure of
New Deal. The final measure of those not returning to JSA is different
again as it measures those not returning to registered unemployment.
This could mean that they are leaving New Deal for full time education
or training or leaving the labour market altogether.
The range of possible theoretical models to
explain the pattern of these variables by UoD is limited. We take
as our stimulus the work from the theoretical matching and job
creation and destruction literature (see Mortensen and Pissarides
(1994), and Davies et al (1997)) and add to this the growing
influence of the assessment of ALMP in this type of model (see
Calmfors and Lang (1995), Bellman and Jackman (1996) and Richardson
(1999)). The empirical investigations from this literature have
used the number of matches of job seekers to vacancies as the
dependent variable and regressed its log on the log of the number
of vacancies and the log of the unemployment level. Various other
controls are added to these regressors to account for observational
heterogeneity. Our three candidates of the dependent variable
can all be considered as detailed matching variables of varying
quality. We adapt this model (see Coles and Smith (1996)) to the
data available by UoD sites during the New Deal period. Our estimation
The random effects Panel Instrumental Variables
(IV) regression results are presented in Table 3. These results
are IV estimations since the size of the New Deal Cohort and the
Unit Cost variables must be treated as endogenous and are therefore
instrumented by various other exogenous characteristics of the
UoD. (Details of the instrumenting are provided in Dolton (2000)).
The summary statistics for these regressions all justify the random
effects specification in the sense of the significant r coefficient
which represents the proportion of the variance in the dependent
variable due to the unobserved heterogeneity term. In each equation
the overall R2 indicates the justification for the random
effects model over the simpler alternatives. These results present
quite a distinct picture of the effect of New Deal which vary
according to the dependent variable which is adopted. If we consider
the results for the equation relating to the number of New Deal
leavers to unsubsidised jobs or the number not returning to JSA
within 13 weeks the results are very similar. These results are
tabulated in the first and third columns of coefficients of Table
3. The results suggest that there is a "size of unemployed
pool" effect in that the number of unemployed people in the
UoD is positively related to the outcome. This result is found
with all performance measures and simply captures the size effect
that bigger UoDs (in terms of the number of New Dealers) have
a larger potential number of matches or placements. We also find
that the relative size of both long-term unemployment and youth
unemployment also negatively influence the level of unsubsidised
jobs and those lasting more than 13 weeks which are provided in
the UoD. Intuitively this finding is plausible in the sense that
the higher is the level of long-term unemployment and the higher
is the level of youth unemployment the lower will be the level
of permanent jobs provided.
In addition the average amount spent by government
at each UoD is positively related to the outcome. The results
imply that there are no economies of scale in the provision of
New Deal places. This suggests that the higher per capita expenditure
on the programme the larger will be the number of private sector
(unsubsidised) jobs which are created. This suggests that public
sector funds are not "crowding out" non-government expenditure
by the private sector in terms of the provision of jobs.
The level of unsubsidised jobs is heavily influenced
by regional demand side factors since the higher are regional
earnings are the higher will be the number of unsubsidised jobs
provided. In addition if the labour market is tight
then there is buoyant enough demand to increase the number of
unsubsidised jobs. The good news for policy makers who advocated
the New Deal, in terms of the creation of unsubsidised jobs, is
in the significant coefficient on the relative size of the employment
option. However, the coefficients on the relative size of the
other options are all statistically insignificantindicating
that it is only the size of the employment option which matters
in the determination of the level of unsubsidised jobs. The first
column of Table 3 also shows that a higher proportion of men and
a lower proportion of disabled are recipients of unsubsidised
The second column of Table 3 presents the regression
coefficients for the number of leavers of New Deal to subsidised
jobs. This exit is clearly distinct from that to unsubsidised
jobs as the employer is not bearing the full cost of the employment
and there is less likelihood that the job will have a long tenure.
The numbers of these leavers is highly correlated with the numbers
on the Employment Option which is understandable since this is
consistent with the New Deal placement being extended under a
wage subsidy. The coefficient on the per cent Disabled term indicates
that higher levels of take-up of job subsidies are consistent
with a higher level of employment of registered disabled people.
This may be because the subsidy reduces the risk to the employer
of "trying out" a disabled person in a job in a temporary
capacity. It also presents a convenient way of employers satisfying
equal opportunity policies with respect to quotas of disabled
people. In contrast the proportion of people of New Deal recipients
who are from the ethnic minorities is negatively correlated with
the number of subsidised jobs which are provided. This could be
a result of either discriminatory practices on the part of subsidised
job providers or it could be that people from the ethnic minorities
are simply not accepting these openings. It is impossible to distinguish
between these two competing explanations.
The policy implications of our results must
be tempered by the limitations of the estimation techniques used.
However, taken at face value they are clear and of limited comfort
to New Deal advocates. Firstly, on the positive side it would
appear that the level of investment by the government in terms
of the higher unit cost of providing New Deal places yields a
return in terms of the number of unsubsidised or (semi) permanent
jobs which are created. The other side of this coin is that there
would appear to be little scope for economies of scale in this
provision. The major positive funding is that the relative scale
of the Employment option is highly positively significant in the
provision of either unsubsidised or (semi) permanent jobs. This
is of importance in that it suggests the focus of New Deal should
be to get young people into job placements and it is only this
option which really matters. This is of course bad news for the
hopes which were placed in the value of the provision of placements
into Voluntary Service and the EFT. More obviously it would appear
that demand side factors and the structure of the unemployment
in a UoD have a large effect on the potential for job creation
in the New Deal scheme. This is reflected in the importance of
the relative scale of youth and long-term unemployment in the
determination of the effectiveness of the New Deal in creating
jobs in the UoD.
The assessment of training programmes and the
policy implications of different training arrangements are very
difficult to appraise rigorously. Do mass schemes like the New
Deal and YT achieve much more than simply push down the unemployment
figures and possibly lower relative youth wages? If the state
intervenes it should provide good quality training which constitutes
a rapid investment in the human capital of our young people. Throughout
much of the debate about the role of state training schemes the
focus has been the assessment of the effects of the supply side
response to the introduction of a government training scheme.
No mention has been made of the macro-economic demand side conditions
which may impinge on the impact of a training programme. These
aggregate macroeconomic conditions will dramatically affect the
employment and earnings prospects of New Deal trainees as they
attempt to enter the labour market.
Notwithstanding the economic arguments we must
remember that one of the main motivations for instituting national
training schemes may be political.
The "get tough" policy in which the continued receipt
of the Job Seeker's Allowance is dependent on participation in
the New Deal could be attractive to floating voters. There may
also political value in getting young people off the unemployment
register with the added probability of the training being valuable
and securing a future job.
Our limited review of the available aggregate
monthly data relating to inflow to and outflow from New Deal provides
an insight into the complex pattern of entry into the different
options and exit to the available destination states. The figures
presented indicate the sheer scale of the New Deal programme and
provide an insight into the complexity of any attempted evaluation.
The last section of the paper analysed the matching
process out of New Deal at the level of UoD. The analysis confirmed
the importance of demand side factors in the impact of New Deal
on matching and suggested only a limited role for the importance
of the relative size of the Employment Option. There is a suggestion
that the level of NVQ level 2 attainment could be important in
the exit rate to both unsubsidised jobs and jobs which last more
than 13 weeks.
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3 This research was funded by the ESRC Grant number
See Dolton (1993) for details. Back
National Vocational Qualifications (NVQs) are nationally recognised
qualifications for work which people actually do in their jobs.
They are not examinations or tests; they prove that you can carry
out particular work-based activities to a national standard. These
standards have been set by awarding bodies, employers and educationalists. Back
NVQ Level 2 equal in equivalence to four GCSEs (General Certificate
of Secondary Education). These are the exams taken by most 16
year olds in secondary schools, at the end of compulsory schooling. Back
NVQ Level 3 in equivalence to two A Levels. Normal university
entrance would be three A Levels. It is therefore not quite equivalent
to university entrance qualifications. Back
Gardiner (1997) provides unit cost details of a large number
of state ALMP in the UK which permits basic comparative analysis. Back
All qualifications must be validated by the Qualification and
Curriculum Authority (QCA). Back
Qualifications are funded by the Further Education Funding Council
(FEFC) and must therefore be approved by them. Back
Not all figures were published in the same format and for this
reason the figures for June 1999 were taken from the Performance
Tables published by the Unemployment Unit and Youthaid. These
Performance figures were not available for every month and this
creates difficulties when comparing month by month. Back
In order to make effective analysis of these figures the following
had to be averaged: November 1998-to Unsubsidised jobs and Other
Known; December 1998-Other Known; April 1999-left New Deal to
Unsubsidised jobs, Unknown; May 1999-Unknown; June 1999-left New
Deal, to Unsubsidised jobs, other known, Unknown. Back
Care is required in distinguishing between stock and flow samples
(see Lancaster and Chester (1981)). Back
See Dolton and O'Neill (1996a and 1996b). Back
Unfortunately we cannot observe vacancy rates at the level of
the UoD so we use vacancy outflow data at the regional level to
approximate our missing ideal vacancy data. As a consequence it
is not possible to make the usual inferences about whether there
is constant returns to scale in the matching function from the
estimated coefficients. This is not however the focus of this
The tight labour market variable is one retrieved from the government
website. Its measure is wider than unemployment since it takes
account of the urban or rural nature of the UoD and its demographic
There is a long history of the political character of ALMP. See
King (1995) for a comparative review in the UK and the USA. Back