Memorandum submitted by the Chartered
Institute of Personnel & Development (ES 06)
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 ageas measured by the Labour Force Surveyfell
by 0.3 percentage points in the year to Nov-Jan 2001-02. Despite
this the ILO unemployment rate also fellby 0.1 percentage
pointsbecause 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.
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 Developmentwhich represents over 100,000
professional people management and development specialists working
in all sectors of the economyoutlines 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 1: ECONOMIC
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
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 threeGermany, France and Italywhich
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
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 recessionie two successive quarters of falling
outputand 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 yearthe 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
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
ratesnotably Germany which contracted in the third quarter
of 2001 having stagnated in the second quarterare also
constrained by the fiscal rules governing membership of the single
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
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
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 exportersbecause of the consequences for the exchange
rateor 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
SECTION 2: UK LABOUR
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 ageas measured by the Labour Force Surveyfell
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 fellby 0.1 percentage pointsbecause
the economically active workforce contracted.
22. The fall in employment rates was concentrated
in a number of regionsthe 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
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 2002including all
but high-tech manufacturingwith 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
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
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
34. Entrants that make the grade can look forward
to a good degree of job stability anddepending on the organisation
they work forthe 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 marketincreased
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 target18-24 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
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
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 Employmentwhich 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
employers90,000 at the last countthat 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
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