18 November 2011

A Million Man Problem: Reforming Welfare to Work

The labour market statistics released this week indicate that headline unemployment jumped from 2.57 million to 2.62 million.  Such growth is worrying: the increase of 0.2 points from the figures released in October is only the fourth time unemployment has hit 8% since the three months to November 1996.
Below the surface, two even more troubling trends emerge.  Firstly, youth unemployment continues to grow, with the number of unemployed 16 to 24-year-olds breaking the one million barrier for the first time (albeit with 286,000 in full-time education, with many seeking part-time employment to supplement student loans).  Secondly, with over 633,000 claimants having been unemployed for in excess of six months, the tendency is towards long-term unemployment.
The detrimental effects of prolonged periods of unemployment are increasingly being recognised.  This is particularly true of the impact on young people, vulnerable not only to having their confidence rocked but also to future wage scarring.  That the government is increasingly focussing attention on such groups as the long-term workless and the unemployed youth is therefore unsurprising.
Implemented this summer, it remains too early to offer a valid evaluation of the coalition’s Work Programme.  However, there are three reasons to believe that the government’s plan of action will prove fruitful in easing the growing problems.  First, the Work Programme has been devised with the benefit of prior experience, learning both from past efforts and similar ventures elsewhere.  Thus, second, contracts are constructed to encourage providers to target vulnerable groups.  Third, the Work Programme is designed in such a way that the government is able reward those providers who perform to the highest standards, while penalising those who function poorly.
Aiming to deliver sustained employment opportunities to hard to reach groups, the Work Programme uses a payment-by-results model that has become familiar in the welfare to work market.  Several of these previous strategies have been condemned as inefficient, with the Pathways to Work initiative producing results worse than would have been expected had no intervention taken place, while the Flexible New Deal resulted in average costs exceeding £31,000 per job provided.  The coalition’s strategy, however, is able to benefit from DWP’s prior experience, adopting a more targeted approach in keeping with Institute for Government recommendations.  This responsiveness to labour market trends and previous shortcomings in service provision may be the key to future successes, delivering results while achieving value for money.
The most fundamental adaptation to address these failings concerns financing which, rather than coming from the Departmental Expenditure Limit set every three years by the Treasury, will come from DWP’s Annually Managed Expenditure budget – the source of back-to-work benefits.  In effect, anticipated savings in future benefits payments will fund the Programme, with the government banking on future savings outstripping current expenditure.  This is a considerable gamble, though provides a strong incentive to make the Programme work.
The Work Programme does share common characteristics with the earlier Flexible New Deal, in particular a focus on hard to reach groups while enabling private and third sector organisations to provide employment services.  Principally targeting those claiming back-to-work benefits for a sustained period, the Work Programme operates a “black box” contracting model.  Built on the premise that local providers are best placed to identify the particular requirements of each Contract Package Area, the engagement of local organisations is encouraged, customising provision to accommodate individual needs.
DWP have paid much attention to policy design – an aspect of the policy process that is often neglected.  In the past, providers have often been guilty of “gaming” the system, focussing attention on those clients with the greatest employment potential to maximise results-based revenues.  In response, under the Work Programme, DWP will use a carrot and stick approach to incentivise specific outcomes.
For instance, a differential payments schedule will reward providers with higher premiums for obtaining results for those deemed hardest to help.  Thus, prime contractors will receive £1,200 at the 13 week stage for placing a Jobseekers’ Allowance claimant in work.  For Employment Support Allowance claimants formerly on Incapacity Benefit, the corresponding payment is £3,500, thereby incentivising against helping only the easiest and most accessible.
Similarly, to encourage competition, DWP will be able to alter the proportion of clients attributed to prime contractors after two years.  More clients will be assigned to the most successful providers, with further ‘incentive’ bonuses being payable to those surpassing set performance levels.  To promote swift action, client attachment fees paid annually by DWP to prime contractors will decrease incrementally, reaching zero after three years on the Work Programme.
The steps taken by the coalition to address the problems of youth unemployment and sustained worklessness appear to be grounded in sound logic.  A look towards Australia reinforces this positive appraisal, with analysis of an early manifestation of the Job Network programme indicating that the cost of placing a client into work fell by as much as 69% (albeit undertaken prior to modifications to prevent gaming).  Furthermore, both employers and jobseekers gave favourable feedback, indicating a potential for success.
The coming months will be critical for the future shape both of the labour market and welfare-to-work services  The Work Programme is an example of the sort of adaptive policy making which has worked well in the past.  As such, it may be able to deliver the hoped for outcomes.