Posts Tagged ‘Welfare’

The cost of youth unemployment

February 6, 2012 Leave a comment

Paul Gregg and Lindsey Macmillan

In hard times, young people face two hurdles to finding work.  First, firms tend to hold onto their existing experienced staff but stop recruitment to reduce their workforce. This collapse in new vacancies hits young people hardest. Second, with more unemployment comes more choice of potential employees for firms who are hiring. Firms favour previous experience placing young people in a catch 22 situation of not being able to get the experience they need to get work because they can’t get the work in the first place. For the least educated or those who are unlucky enough to experience long periods out of work now, it is increasingly hard to get that break that opens the door to the labour market.

As the number of youths who are out of work continues to rise the exchequer is left counting the cost. Each 16-17 year old in receipt of benefits costs an average of £3,660 a year whilst each unemployed 18-24 year old who claims costs an average of £5,600 a year. Even though many young people don’t claim benefits, just 19% of 16-17 year olds not in education or employment and 65% of 18-24 year olds with the sheer number of young people out of work, plus the additional tax and NI revenue lost through the lack of earnings, the numbers are non-negligible. In total, the current cost of youth unemployment to the exchequer is £5.3 billion per year. The productivity loss to the economy, often calculated as the wage foregone to measure the output lost, is £10.7 billion. The large numbers not claiming benefits and the low value of benefits relative to potential earnings makes an important point that work incentives are very strong for this group.

On top of these current costs, there are also long-term scars to youth unemployment in the form of future unemployment spells and lower wages. We can see from previous generations’ experiences of youth unemployment that the longer the period spent out of work in youth, the more time spent out of work later in life and the lower potential wages were when in work. This evidence on the future costs of youth unemployment comes from two UK birth cohorts that track all babies born in a window for the rest of their lives. By chance, the participants in the first cohort were aged 21 when the 1980s recession hit and in the second cohort, the participants were aged 20 when the 1990s recession hit. Around one in five young people in the first cohort spent over 6 months out of work before age 23, and it was similar in the second. Furthermore these people spent about 20% of their time unemployed 5 years later and 15% even 12 years later.

For males in the second birth cohort, an extra month out of work before age 25 raised the proportion of time out of work between age 26 and 30 by three quarter of a per cent; an extra year out of work in youth led to 10 months more unemployment later in life. It is a very similar story for wages with an extra month unemployed when young associated with 1% lower wages in their early thirties. It’s possible that these legacies may not reflect just the pure effect of youth unemployment but also that those experiencing more unemployment are less well educated and come from deprived backgrounds. The great advantage of the birth cohort studies is that so much is known about the young person’s childhood from their education to their attitudes and beliefs, their health, their wider circumstances and almost as much is known about their parents.  The evidence suggests that about half of the later lower wages and higher unemployment exposure stems from these background differences between people and about half is a result of the unemployment itself.

The cost to the individual’s future is therefore large. However, it doesn’t end there. There is also a future cost to the public purse in terms of future benefit claims and tax revenues lost from lower earnings as a result of this scarring. Estimates from the second birth cohort suggest that the average unemployed young man will cost the exchequer a further £2,900 in future costs with the average unemployed young woman costing £2,300 a year. Aggregating these up in the context of the current youth unemployment crisis leads to further future costs to the exchequer of £2.9 billion. The future productivity losses in terms of output lost are estimated to be £6.7 billion. If we add the exchequer costs together to give the combined future and current costs of youth unemployment (discounted to adjust future costs to be equivalent to today’s) the total cost to the exchequer is therefore £28 billion. These numbers suggest that doing nothing about youth unemployment is and will continue to cost us dear.

Disability benefit claims

July 27, 2011 7 comments

Paul Gregg

Department for Work and Pensions figures released this week suggest that only 7% of applicants for the new disability benefit, Employment Support Allowance (ESA), during the two years since its inception, are found unfit for work. The implicit suggestion is that the previous regime was widely abused by ‘scroungers and malingerers’. Yet the total number of claims for disability related workless benefits is almost exactly the same, at 2.6 million, in the latest data (November 2010) as it was in 2008, when the new benefit started. Even among claims less than two years old and hence all assessed under the new regime there are 640,000 claimants, which is exactly the same as in 2008. So, how can the impression of a big crackdown on claims under the new test, and the absence of any decline in numbers claiming be reconciled?

The answer is three fold. Firstly, although only 7% of new applicants go on to be deemed unfit for work, another 17% are eligible for ESA, but deemed that with the correct support and improvements in health they may get back into work. ‘May’ being the important word here. I designed the structure of support for this group under the ‘Work Related Activity Group’ banner, which will be delivered under the new Work Programme. How successful it will be is yet to be demonstrated. So, 24% of new claims go on to be eligible for ESA, not 7%.

The second key point is that a large number of applicants never got onto Incapacity Benefits (IB), the forerunner of ESA, either. Some people simply got better before the assessment phase was completed and so never got tested, or were denied access through the test applied at the time. People start a claim for disability related benefits but begin in an assessment phase, during which they receive the same benefits as they would for unemployment. It is only after this is completed, at around 13 weeks, that the recipient receives the eligibility decision as to whether they move on to the full ESA benefit. A lot of people withdraw before the test occurs and always have; 36% of applicants in the new figures. A useful guide to this would be what proportion of claims under 13 weeks go onto the main benefit. However, as so many claims go to appeal, during which time people remain as though they are still in the assessment phase, a better picture emerges after 6 months. The figure below highlights the survival rates for claims before and after the new ESA regime was introduced in late 2008. It shows the proportion of claims under 13 weeks old, and hence in the assessment phase, which are still live a further 3 months, 6 months and so on after their commencement. After 3 months some 72% of applicant’s claims are still live and after 6 months this falls to 50%. Of key importance here is that this was around 80% and 60% respectively under IB pre-October 2008. Hence, ESA has reduced the numbers of applicants reaching at least 6 months duration by 10%, and this appears to persist through to the longest duration data we have. So the new regime is leading to around 10% fewer people, after the appeals process is completed, being passed as eligible for ESA. A story far removed from just 7% being found unfit for work.

The third reason this has not had any effect on the total number of claims under 2 years duration, and thus assessed under the new test, is that the total number of new claims has risen from around 130,000 per quarter in 2008 to around 160,000 now. This is almost certainly as a result of the recession but past experience suggests it will take quite a long time to abate fully. So, between 1 and 2 years duration we now have the first quarter of data that is fully under the new regime. After all the assessment and appeals have been completed we can derive that the number of claims has fallen to 206,000 from about 235,000 prior to the reform. This is around 12% lower, but this is currently offset by shorter duration claims. As time progresses and the impact of the recession diminishes the new ESA tests will make a clearer difference to the total number of claims. However, it will be a long time before this is very visible. What will be more important over the next 3 years will be the re-testing of existing IB claimants, as well as the removal of eligibility to ESA for those claiming for more than 1 year and who are not eligible for means tested benefits.

Figure 1 Proportion of Claims of 0-13 weeks duration that are still live after intervals specified

Figure 1 chart








The Work Capability Assessment and helping the disabled back to work

April 11, 2011 1 comment

Paul Gregg


In 2008 the previous Labour government introduced a new benefit for the sick and disabled called the Employment Support Allowance (ESA). The new benefit replaced two existing benefits for new claims on its introduction but at its heart were two major differences. First, was a new test called the Work Capability Assessment (WCA), to determine eligibility for the benefit and for the majority of claimants, called the Work Related Activity Group (WRAG) there was to be a new regime of personalised support and engagement to help people back to work (which I designed). The new regime initially applied only to new claimants but this week existing claimants are starting to be re-tested under the new WCA test and may potentially be reclassified as Fit for Work.

There are two major reasons why getting this transition process right is critical. First, this is a large and vulnerable group and thus the introduction of the new benefit eligibility test has the potential to cause huge anxiety and distress to people. Many, especially those with mental health problems, may well fall into the sizable crack between ESA and JSA (unemployment benefit) and end up destitute, homeless or worse. Second, those denied access to the benefit are likely to end up on unemployment benefits which are not designed to help sick people back to work. Under the new Work Programme providers are paid to get claimants into sustained work are divided into three groups, the first are mainly adult unemployed who receive help after 12 months claiming benefits. Here the payment to a provider for getting them into work for a year will be of the order of £3500. Those “being found fit for work” and hence signing on as unemployed rather than disabled  will normally be allocated to this group, although if they were previously claiming Incapacity Benefit they will get the help after 3 months. For those on ESA the package of support starts immediately and providers will be paid about £14,000 if they get someone into work for two years. Getting the sick and disabled in the right category thus matters greatly in terms of the chances of helping them into work. Those on unemployment benefits with significant barriers to work may well be ignored by providers as offering little hope of a pay off given the high investment needed to get them back to work.

Given the imperative of getting people into the right category, common sense would suggest the Government should move slowly and check at each stage that any changes were working. So starting with new claimants makes sense and a five year review process was specified in the original legislation I believe. Yet the developments so far have been deeply flawed. Concerns with the WCA test emerged in late 2009/early 2010 with strong reports of major problems, especially around individuals with cancer, mental health problems and variable conditions. It also emerged that a huge number of cases were going to appeal, jamming the system, and often being overturned. The Government responded with changes to address these issues, but there were no subsequent checks that the problems had been dealt with. In fact, the cries of anguish continued unabated. In the summer of 2010, Prof. Malcolm Harrington was commissioned to undertake the first major review and it was quickly apparent that he saw the need for extensive changes to the process of the decision making after the test was undertaken. Furthermore, the DWP was also internally reviewing the medical test. Yet the first trial of the WCA test on existing disability claimants went ahead in Burnley and Aberdeen on the old test and the old decision process. So now as the medical test goes national the new regime outlined by Harrington and the DWP internal review is being implemented with no prior testing. The Government claims these changes have fixed the earlier problem and undoubtedly the Harrington Review will have made a difference, but surely it should be tested and checked before being applied nationally. It is baffling why the trials in Burnley and Aberdeen were not delayed just 4 months to test run the new regime. Likewise it is clearly essential to track the progress of those denied access to the new benefit, especially among those previously claiming Incapacity Benefits, to study what is happening to them. Are they moving to JSA, getting jobs or suffering acute deprivation without any financial support?  By tracking people according to what conditions they are presenting with, we can assess which conditions are not being picked up well, if groups fail to move into work. But again no such research or tracking is apparently being undertaken.

The process seems to have been characterised by undue haste, a lack of testing and immediate assessment. It may be that this derives from a view that those denied benefit will be healthy and undeserving of support, rather than emphasising the risk of vulnerable people being treated inappropriately. This has become an interactive process of changes being followed by a chorus of complaints, revision, a wait to see if complaints diminish, and further revision when they don’t. The current national roll out will not be the end regime but just the latest iteration in my view. This is no way to introduce such a fundamental reform affecting so many vulnerable people.

The Work Programme

April 4, 2011 2 comments

Paul Gregg


The Work Programme is the Government’s replacement for Labour’s Flexible New Deal which in turn was preceded by various New Deal programmes. The new programme will have three new features which are distinctive and potentially positive. First, it will operate a single programme for multiple client groups but with three different major fee rates. Providers running the programme will receive fees for helping clients into sustained work with the regular adult unemployed forming the bulk of the cheapest group. The young unemployed are the main group in the middle tier and those with significant disabilities forming the most expensive tier. This step has been planned for some time with the move to Employment Support Allowance replacing Incapacity Benefits and the development of a welfare to work strategy for the disabled. However, this integration is the first time that the UK has operated a clear unified programme which offers real hope of reducing long-term marginalisation of this group from the labour market. The second major advance is that the full payment to providers for getting people into work will not be paid until a person has been in work for a year rather than 6 months, and two years for the sick and disabled. This will encourage providers to think more about job matching and indeed job quality as better paid permanent jobs have a far greater likelihood of paying out. Third, the programme is fully “black box”: there is no prescribed provision or minimum service agreement. This will facilitate use of new group/team based working rather than one-to-one fortnightly meets which dominated the minimum service agreements and are probably poor value for time and resources. Team or group based working has a good history of helping through peer support as well as being low cost.

What is missing, in my view, is discussion of a number of issues which have not been dealt with previously, and a couple which are particular to the new programme. For young people, even though youth unemployment is high, very few NEETs will be on the Work Programme. Only around half of 18-24 year olds not in work or education are signing on for Job Seekers Allowance and only a minority of these have a single spell of claiming that is sufficiently long to join the Programme.

Hence most will miss treatment because they get spells of short term work or training or don’t sign on. In terms of benefits spending this may appear acceptable, but we know that these individuals who fail to connect to sustained work go on to have very poor earnings and frequent spells of unemployment when older. A window based on the person’s recent history of worklessness is necessary for entry to the programme, rather than single spell duration and those not on JSA need to be identified and tracked to facilitate re-engagement.

A further long standing problem is that DWP contracts on a fixed price for all those in a group. The risk is that the provider will focus on the easiest to help and not invest in the hardest. This is sometimes called parking; parking is likely to occur within the three group bands, although there are small extra payments for some groups within bands but is probably most problematic among the disabled where the huge variation in conditions and costs associated with getting them back to work may mean many are written off as too costly to help. The fees on offer are tight for providers and the poor labour market conditions will mean providers will struggle to match cost. In many cases winning the current contracts may well prove to be loss leaders until the next round of contracts. This means DWP may be getting very good value right now but there has to be a risk that some providers may withdraw or need contract top ups to keep going, as happened in Holland when this structure was introduced in the 1990s.

Welfare is an engine of mobility

September 22, 2010 1 comment

Sarah Smith

Nick Clegg declared earlier this week that “welfare needs to become an engine of mobility, changing people’s lives for the better, rather than a giant cheque written by the state to compensate the poor for their predicament.” Few would disagree that welfare should bring about real, positive changes in people’s lives but let’s hope that Nick Clegg and his advisers are aware of the evidence that – at least some of – the welfare reforms introduced by the last government seem to have done just that.

In October 1999, a package of reforms was introduced to help low income families with children. These included the Working Families Tax Credit which boosted incomes for working families as well as increases in payments to non-working families with children. The scale of the rise in government support going to families with children was unprecedented over more than thirty years. Per-child spending increased by 50 per cent in real terms between 1999 and 2003, most of it targeted at the poorest one-quarter of families.

There is now a substantial body of evidence that these reforms brought about real improvements in the lives of tens of thousands of people. A number of studies have looked at whether the reforms raised levels of employment – and using different datasets and different methodologies there is a consensus (a fairly rare thing in applied work) that the reforms succeeded in getting 60-85,000 lone parents into work and encouraged a further 40,000 to increase their hours of employment.1

Going beyond the immediate employment effects, a CMPO study has looked at the effect of the reforms on measures of well-being among lone parents and on the outcomes of their children (including self-esteem, (un)happiness, relationships with their mother, risk taking behaviour and aspirations) and found that the reforms have had significant positive effects2. At least in part, these effects come through the positive impact of the reforms on mother’s employment, but this is not the whole story. Another important channel is that increasing the money available to lone parents softened the harsh financial blow of separation – and did so without any obvious effect on the probability of becoming a lone parent. Sometimes, compensating people for their predicament (separation and divorce) is exactly what the welfare state should do – and with good reason.

This is not to say that the current welfare system cannot be improved. But in the search for a welfare system that can deliver real improvements in people’s lives, the current government should not wipe the slate clean and could learn some useful lessons from what has worked in the past.


1. See for example, Francesconi, M and van Der Klaauw, W. (2007) “The socioeconomic consequences of in-work benefit reform for British lone mothers”, Journal of Human Resources, Gregg, P. and Harkness, S. (2003) “Welfare Reform and Lone Parents Employment in the UK.” CMPO Working Paper Series 03/072, Brewer, Mike, Alan Duncan, Andrew Shephard, and Maria J. Suarez. (2006). “Did working families’ tax credit work? The impact of in-work support on labour supply in Great Britain.” Labour Economics, 13(6): 699-720.

2. Gregg, P., Harkness, S. and Smith, S. (2009) “Welfare reform and lone parents in the UK”, Economic Journal