Is there a future for special employment measures in the 1990s?

Gregg, Paul

Introduction

Since unemployment began to rise again last year, the need for a response from government is once again being discussed. As the unemployment total rises toward 2 1/2 trillion and threatens to continue to rise next year, it will be repeatedly in the headlines for some time to come. One policy response to persistently high unemployment in the UK, and by governments around the world, has been. the use of Special Employment Measures. It is therefore surprising that direct special measures in Britain are now at a seven year low and are facing further funding cuts of around 18 per cent in real terms during the next financial year. Here we take a look at recent developments in Special Measures in the UK, and assess the adequacy of current programmes to meet the needs of the 1990s.

The prospects for unemployment

Unemployment has risen by 3/4 million since the spring of 1990 and the UK is entering what we expect to be an extended period of high unemployment, with claimant unemployment reaching close to 2.8 million in early-1993. Even after that we anticipate that it will not fall below 2.5 million until late-1995 (see projections in chapter 1 for details). Currently, just under 11 million claimants have been receiving benefit for longer than six months and half of those (about 600,000, a quarter of all claimants) for a year. These figures and their share of total claimants are set to rise rapidly in the next year or so, as people work their way up the duration ladder.

Movements in long-term unemployment lag behind those for the total claimant count. This is not as a result of a wave of new claimants becoming long-term unemployed after six months, for inflow rates to unemployment do not vary greatly across the business cycle. Instead, exit rates from short-term unemployment decline as recruitment by employers is reduced in a recession More people enter long-term unemployment and the decline in their exit rates means that less people are able to leave long-term unemployment. Hence, the full impact of the recession on long-term unemployment is not felt till after the recession is over. The longer the duration category the longer it takes for the effects to work through. High exit rates, from short-term unemployment that occurred two years ago are causing the proportion of the total count who have been unemployed more than two years, to continue to fall. Currently, around one in eight of all claimants has been unemployed more than two years, down from one in five a year ago. Chart 1 shows the projected rise in long-term unemployment > six months) as a proportion of total unemployment, according to the National Institute's forecast. It shows that at the beginning of this year, long-term unemployment had fallen to around 44 per cent of the total but that this will rise to just under 60 per cent towards the end of 1993. By then, around 1.6 million people will have been unemployed for over six months. Although this is somewhat lower than the peak in 1986, it will still present a thorny problem for the UK in the 1990s.

The unemployment trap

UK evidence shows that the chance of a person ceasing to be unemployed declines with unemployment duration, especially between one year and eighteen months. Philpott (1990) calculates that for 1989 a person who has been unemployed for two years has only the chance of leaving unemployment of a person of one year duration and 1/3 of that of a person of three months duration (see also Jackman et al, 1986). In terms of wage pressure, long duration unemployment is economically inefficient (see Layard et al, 1991) as extended durations prevent a person effectively competing with existing workers and the short-term unemployed. So why does long-term unemployment become a 'trap' which is so difficult to escape from? There is a considerable body of evidence that the low exit rate relates to three main problems. Firstly, while the long-term unemployed are not inherently the 'bad workers', they are likely to have no educational qualifications and few job-related skills. Skills which were held before entering unemployment are likely to be out of date and in areas of declining demand (White 1983, Jackman and Layard 1991). This may also mean that the long-term unemployed are unable to secure work which pays sufficiently high wages to justify ceasing to claim-this would be the case particularly if the work was part-time or temporary.(1) Secondly, demotivation sets in, so while job search is undertaken, it is often less intensive than for the short-term unemployed and less successful, (Robinson, 1990, Wadsworth, 1991). Thirdly, employers view the long-term unemployed adversely in the recruitment process, often using duration as a screening device in selection (Meager and Metcalf, 1987).

The effectiveness of SEMS

Open unemployment acts to moderate wage pressure and as such is one of the adjustment mechanisms in the labour market. There is evidence that special measures act in much the same way as normal employment in terms of their impact on wage pressure. There is therefore a wage cost where the unemployed going onto labour programmes are effective job seekers (see Edin and Holmund, 1991 and Calmfors and Nymoen, 1990). Hence SEMS are most effective when they are targeted on those individuals with a low potential to secure work (the very long-term unemployed, those in areas of very high unemployment, and those with no marketable skills or experience). Furthermore a SEM must be capable of improving the chances of a participant securing work on completion of the scheme, as well as reducing the re-entry probability into unemployment and raising the earnings potential for such people.

There is abundant evidence from the UK and elsewhere that SEMS have been, and can be, cost effective in tackling these problems. Deakin and Pratten (1982) estimated that the Temporary Employment Subsidy saved around 39 per cent net of the jobs it covered. Haskel and Jackman (1988) found evidence that even the Community Programme, a cheap measure to absorb the long-lerm unemployed raised outflow rates for this group. Payne (1990) provides the strongest UK evidence for any one scheme with results showing that the (first) Job Training scheme (JTS) was highly effective in raising its participants employment potential, earnings and even meeting skill needs in industry. JTS was a small scheme, just 70,000 places at its peak, with high training costs per place.

The experience of other countries is also encouraging. Edin and Holmund (1991) for Sweden, Disney (1989) summarising evidence for Germany, Zweimller and Ebmer (1991) for Austria and Boudet and Persson (1991) for France, as well as Jackman, Pissarides and Savouri (1991) for OECD countries, all show that SEMS are effective when well targeted. The OECD council argues that priority should be given to training, placement and rehabilitation programmes for those on benefits, in order to break benefit dependency cycles (OECD 1990). The conclusion that active labour market policies can work and have worked, has prompted a number of calls for overhauling the current UK system, including the commitment of more resources (see Layard and Philpott, 1991, for a recent example).

Currently, the main UK vehicle for tackling the problems faced by the long-term unemployed, is Employment Training. ET has generated criticism on all three of the aspects described above. The length of time provided for each training course (22-29 weeks seems to be the norm) is considered by many to be far too short. It simply represents the shortest possible time in which a participant could secure a National Vocational Qualification. Lack of resources also creates problems, with an allocation of only 217-50 per person per week for training. its short duration and low budget, per trainee week, tend to mean that it is only useful in topping-up or refreshing existing skills held by the unemployed, rather than allowing those without usable skills to fully retrain. In addition, take-up problems have arisen due to the fact that ET creates little income gain to participants compared with that of remaining unemployed.

ET is relatively expensive per head, and its success in meeting the desired number of placements for target groups has been poor. Furthermore, the latest Employment Training leavers survey, for the year up to September 1990, showed that only 35 per cent of participants went on to enter employment. This fell to 25 per cent for those who had been unemployed for over a year prior to taking on Employment Training placement. Around half of the long-term unemployed ended up claiming benefits again. Similar proportions applied to the two target groups for Employment Training placements. (2) Hence, ET does not seem to be fulfilling its aim of finding work for the unemployed.

Recent SEM development: a change of heart

Gregg (1990) detailed the historical trends in the development of Special Employment Measures up to 1989 and contrasted these with developments overseas, notably the US and Sweden. It described the term unemployment become a 'trap' which is so difficult to escape from? There is a considerable body of evidence that the low exit rate relates to three main problems. Firstly, while the long-term unemployed are not inherently the 'bad workers', they are likely to have no educational qualifications and few job related skills. Skills which were held before entering unemployment are likely to be out of date and in areas of declining demand (White 1983, Jackman and Layard 1991). This may also mean that the long-term unemployed are unable to secure work which pays sufficiently high wages to justify ceasing to claim-this would be the case particularly if the work was part-time or temporary.(1) Secondly, demotivation sets in, so while job search is undertaken, it is often less intensive than for the short-term unemployed and less successful, (Robinson, 1990, Wadsworth, 1991). Thirdly, employers view the long-term unemployed adversely in the recruitment process, often using duration as a screening device in selection (Meager and Metcalf, 1987).

The effectiveness of SEMS

Open unemployment acts to moderate wage pressure and as such is one of the adjustment mechanisms in the labour market. There is evidence that special measures act in much the same way as normal employment in terms of their impact on wage pressure. There is therefore a wage cost where the unemployed going onto labour programmes are effective job seekers (see Edin and Holmund, 1991 and Calmfors and Nymoen, 1990). Hence SEMS are most effective when they are targeted on those individuals with a low potential to secure work (the very long-term unemployed, those in areas of very high unemployment, and those with no marketable skills or experience). Furthermore a SEM must be capable of improving the chances of a participant securing work on completion of the scheme, as well as reducing the re-entry probability into unemployment and raising the earnings potential for such people.

There is abundant evidence from the UK and elsewhere that SEMS have been, and can be, cost effective in tackling these problems. Deakin and Pratten (1982) estimated that the Temporary Employment Subsidy saved around 39 per cent net of the jobs it covered. Haskel and Jackman (1988) found evidence that even the Community Programme, a cheap measure to absorb the long-lerm unemployed raised outflow rates for this group. Payne (1990) provides the strongest UK evidence for any one scheme with results showing that the (first) Job Training scheme (JTS) was highly effective in raising its participants employment potential, earnings and even meeting skill needs in industry. JTS was a small scheme, just 70,000 places at its peak, with high training costs per place.

The experience of other countries is also encouraging. Edin and Holmund (1991) for Sweden, Disney (1989) summarising evidence for Germany, Zweimller and Ebmer (1991) for Austria and Boudet and Persson (1991) for France, as well as Jackman, Pissarides and Savouri (1991) for OECD countries, all show that SEMS are effective when well targeted. The OECD council argues that priority should be given to training, placement and rehabilitation programmes for those on benefits, in order to break benefit dependency cycles (OECD 1990). The conclusion that active labour market policies can work and have worked, has prompted a number of calls for overhauling the current UK system, including the commitment of more resources (see Layard and Philpott, 1991, for a recent example).

Currently, the main UK vehicle for tackling the problems faced by the long-term unemployed, is Employment Training. ET has generated criticism on all three of the aspects described above. The length of time provided for each training course (22-29 weeks seems to be the norm) is considered by many to be far too short. It simply represents the shortest possible time in which a participant could secure a National Vocational Qualification. Lack of resources also creates problems, with an allocation of only 217-50 per person per week for training. its short duration and low budget, per trainee week, tend to mean that it is only useful in topping-up or refreshing existing skills held by the unemployed, rather than allowing those without usable skills to fully retrain. In addition, take-up problems have arisen due to the fact that ET creates little income gain to participants compared with that of remaining unemployed.

ET is relatively expensive per head, and its success in meeting the desired number of placements for target groups has been poor. Furthermore, the latest Employment Training leavers survey, for the year up to September 1990, showed that only 35 per cent of participants went on to enter employment. This fell to 25 per cent for those who had been unemployed for over a year prior to taking on Employment Training placement. Around half of the long-term unemployed ended up claiming benefits again. Similar proportions applied to the two target groups for Employment Training placements.(2) Hence, ET does not seem to be fulfilling its aim of finding work for the unemployed.

Recent SEM development: a change of heart

Gregg (1990) detailed the historical trends in the development of Special Employment Measures up to 1989 and contrasted these with developments overseas, notably the US and Sweden. It described the process of development as being evolutionary rather than revolutionary, but a clear pattern emerged. In the mid- to late-1980s, there were moves toward training and compulsion, and away from schemes to maintain/raise employment levels or cut labour supply.

Table 1 gives the numbers of participants in currently-operational adult schemes over the last two years. The Job Release Scheme was closed to new participants from late-1988 and, with its cousin the Job Splitting Scheme, has now all but disappeared. Numbers on these schemes, which are aimed at reducing labour supply (normally of older workers who might wish to retire earlier or those want to move to part-time work) have declined from a height of 90,000 participants in 1984. The Job start Allowance failed to become established as a significant scheme and is now also dying out. Even the Enterprise Allowance Scheme has been in decline since late- 1987 and now accounts for only half of the participants which it covered at its peak. (3)

The most important measure since 1987 has therefore been Employment Training (ET), but this has also been in decline in the last year or so. It never managed to achieve the numbers originally anticipated of 300,000 places (amounting to near 600,000 participants during a year). The novelty of ET when instigated was the emphasis placed on training being employer-provided. However, in practice, only around 40 per cent of placements are employer-based and about a third project-based, hence very similar to the old community programme.(4)

ET has encountered problems in attracting both trainees and employers to participate in the scheme. It has also suffered from a general lack of funding, and, in particular, frequent budget revisions have disrupted coherent planning. At the end of last year, the government reduced the money available to ET by nearly 20 per cent in real terms. This was partially reversed, with an extra [BRITISH POUNDS]120 million being allocated to it in February and an extra [BRITISH POUNDS]35 million in June. This turnaround of budget cuts in ET, is aimed to act as a stop-gap to cater for the recent influx of claimants, and they will be phased out next year.

The extra places made available this year have been focused on certain target groups of claimants rather than women returners or special needs groups(5). In the Autumn Statement the Chancellor announced that funding for ET would be reduced from [BRITISH POUNDS]912 million this year, after these revisions, to [BRITISH POUNDS]807 next, a cut of around 18 per cent in real terms.

These changes seem to reflect a shift in strategy by the Employment Department from adult training measures toward schemes assisting job search. (6) The schemes which have been devised to replace Special Employment Measures are Job Clubs, the Job Interview Guarantee Scheme, and Restart courses. These emphasise the need to help the unemployed in gaining regular employment as part of a package run by the Employment Service. These Back to Work' plans include regular interviews and monitoring of progress in finding work.(7)

The main supporting schemes to this process are:

Job Clubs

Started in 1989 in trial inner city areas aimed at helping claimants by providing advice and aid for job search, including help with costs such as travel, photocopying, postage. They endeavour to offer a positive environment for job search by interrelation with other claimants, rather than the isolation and demoralisation which can occur with extended job search from home.

Restart courses

These are aimed at those with longer periods of unemployment (over six months) and are intended to revive search activity and help with specific problems which hinder job search, such as, literacy difficulties. From January 1991 attendance on Restart Courses became mandatory.

Job Interview Guarantee

This is an agreement between the Employment Service and an employer with a vacancy, to interview a long-term claimant who has just finished his/her training course (including ET training programmes).

JIG is expected to have 86,000 participants this year at a cost of [BRITISH POUNDS]9.6 million, including costs of running two-week job preparation courses. It is hoped that this will put 28,000 of the participants in work. Up to the 2nd of August 8,744 of the 37,000 participants were in jobs, only a 24 per cent instead of the target 33 per cent success rate. In addition to these three schemes, there are special programmes for the disabled and for those who live in inner city areas.

New initiatives

In June, the government announced three new initiatives on top of existing measures. Two of these will form part of the Employment Service advice framework-Job Search Seminars and the Job Referral Service. These are aimed at claimants who have been unemployed for 13 weeks. Before these initiatives, claimants were allowed up to 13 weeks, in order to search for a specific occupation, for which they had relevant experience. After 26 weeks, the number of programmes to aid claimants considerably expanded with potential offers for Restart courses, Job Interview Guarantees, Employment Training. It was therefore felt that at 13 weeks the options were too limited.

Job Search Seminars are close to the Job Club model but with more limited facilities and hence a lower cost to the Government. It is hoped that these schemes between them will secure job entry in around 50 per cent of cases. They will take the form of 2 or 4 half-day seminars, covering job search skills in terms of identifying job opportunities, filling in application forms, and interview techniques. There will be post-seminar support for up to four weeks. The Job Referral Service is akin to a Restart interview, but with the emphasis on job placement rather than other schemes. It will be a means by which claimants are encouraged lo apply for specific vacancies, which the Employment Service believes suitable, and it is designed to encourage wider job search. It is planned that these services will have around 110,000 participants in a full year.

The other new initiative is a new SEM, called Employment Action (EA). EA is to be a temporary measure and continuation of it will depend on the state of the labour market over the next few months. As such, it does not represent a significant deviation from the trend of declining use of direct SEMS. EA is highly reminiscent of the project-based places on Employment Training in that it will be run by the Training and Enterprise Councils and will be on a benefit plus [BRITISH POUNDS]10 payment system. The principal difference is that the Employment Action scheme will have no training element, apart from skills which are picked up in day-to-day working. There will, however, be some job search advice. Participation on the scheme will normally be for up to six months. The exact nature of the work carried out will be determined by the TECS but it is likely to be akin to the old Community Programme. The number of Employment Action places will be 37,500 and it started operation in October. EA has been the primary reason for the small rises in unemployment in September and particularly October. In the Autumn Statement the prospective budget for EA was raised by [BRITISH POUNDS]9 million for next year.

There are two main reasons for shifting from special measures to schemes which aid job search. The primary one seems to be the relative cheapness of search aids and their reasonable success rate in securing work or training for participants. it was thanks to the expansion of these schemes that the Minister for Employment was able to claim that as many as 650,000 unemployed people were receiving government-provided assistance in June. The full integration of the various Employment Service-provided programmes into a unified advisory service, has only been running since April (New Framework for Advising Claimants) and so a full assessment of its success is difficult at this stage. The second reason is the inadequacy of ET in meeting its targets.

The progressive running down of direct SEMS and their replacement with aids to job search, requires the fulfillment of a number of conditions, if it is to be fully justified as a sufficient strategy to help the unemployed. First, that search aids are in themselves effective; second, that they are effective in all periods, and for all groups of unemployed, that need assistance; third, that current SEMS are ineffective in themselves, or at least relatively ineffective, given their cost which could be better spent in other ways; fourth, that reforming SEMS to make them cost effective, is not a reasonable prospect.

Effectiveness of aids to job search

Aid and encouragement in job search, encapsulated in the Employment Service programme, combined with the move to re-integrate benefit offices with Job Centres, raises the pressure on claimants to seek work and the potential of making that job search effective. it is probable that the measures introduced so far, have removed from the claimant count, a number of people with dubious availability-for-work status and encouraged search activity amongst others. Raising the job search effectiveness of claimants has probably had the side effect of increasing the number of non-claimants unable to secure work as a result of the more effective competition. Evidence of this comes from the rapid fall in the number of claimants not searching, relative to the small fall in the number of non-claimants searching, in the last two Labour Force Surveys. in this way, the Employment Service advice system, and changes in benefit entitlement, have undoubtedly invigorated the positive action of searching amongst claimants. Consequently, the evidence is that these measures combined with the Employment Service advice package (the Back to Work' plan) has helped to reduce unemployment in the period 1986-89.

Clearly, the Employment Service search aid programmes will help overcome demotivation and most of the recent government initiatives have been targeting this problem. However, the bulk of the evidence shows that demotivation only becomes critical after very extended periods of unemployment (2 or more years, Wadsworth, 1991). The JIG offers a mechanism for overcoming employer resistance, at least as far as securing an interview is concerned. Further, the evidence of subsequent take-up of a long-term unemployed person participating in JIG is encouraging. However, helping with job search skills does not help the unemployed to acquire work-related skills and therefore the claimants will be applying for the same set of low-skilled jobs. An exception is that Restart courses can help with literacy problems, but these are mostly aimed at how such problems affect job search. By failing to address problems of skill deficiencies among the long-term unemployed, search aids are likely to skim off the better quality unemployed who are employable without additional help, leaving behind a pool of the less able or less fortunate. This process is sometimes known as creaming.

Aiding job search is likely to be highly pro-cyclical in its impact, since placing the claimant into jobs, and in particular the long-term unemployed, is much easier when vacancies are numerous. In recessionary periods, such as now, the efficiency of these schemes is likely to decline as they do little to alter the total amount of labour demanded or supplied. They may help to reduce average duration of unemployment spells by raising exit rates, which would of course be desirable. They may, in addition, reduce the number of claimants by substituting claimants for non-claimants amongst those searching for work. The rapidity of the rise in unemployment, in the last year, or so, implies that such measures are less effective in times of deficiency in the number of vacancies available.

As described earlier, ET, is not proving successful or cost-effective at least in the eyes of the Treasury. As well as the expansion of job search aid, the government is introducing a training voucher scheme for those currently in work. if training the unemployed is not worthwhile, perhaps training other workers to meet industry's needs may release unskilled work for claimants and hence prove more cost-effective. However, while it appears that the short duration, low budget training of ET is proving to be of only marginal help to the unemployed, the evidence for the old JTS (Payne, 1990) and from abroad, is that higher-cost training is more beneficial. Furthermore, jobs released by training-up existing workers are unlikely to be filled by the long-term unemployed for the reasons discussed earlier which explain low exit rates for such people.

In summary, search aids are effective, but only for some of the unemployed, some of the time. Letting long-term unemployment rise now, will only make tackling the problem later more difficult and costly. The curtailment of Employment Training provision and the currently-available Job Club and JIG provision will not supply enough places to absorb the projected increase in long-term unemployment. Already, the latest information of the results of Restart interviews indicates that only 16 per cent of interviewees proceeded into work, Employment Training, or a Jobclub/restart course. Even this limited success rate will decline as the numbers of unemployed claimants (and particularity long-term claimants) swell, while provision of places remains static.

Conclusions

In the absence of a radical expansion of government measures to aid the long-term unemployed, Britain faces the prospect of a repeat of the early-1980s. Then, the structure of unemployment shifted dramatically toward extended and debilitating durations of benefit dependence for a majority of unemployed claimants. Aid to individuals' and companies' job search on its own through Job Clubs, Restart interviews, and so on, is not sufficient to avoid this prospect. Not only is this damaging to the individuals and communities involved, but it represents a major (and avoidable) source of inefficiency in the operation of the UK labour market. This in turn implies costs for the whole of society.

Given the imminence of a sharp rise in long-term unemployment the shift in government strategy away from training of the unemployed is perverse. Aid to job search is a valuable part of any programme to combat long-term unemployment. It is probably particularly appropriate in trying to prevent those with durations between six and twelve months from reaching the extended lengths of duration (around eighteen months). These are widely identified as periods when the debilitating effects on effective job search set in. There is a need, however, to develop an integrated package, combining help with job search, with targeted measures designed to rehabilitate the long-term unemployed into the main stream of economic activity. Postponement of action will simply make the problem more intractable as average durations rise.

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NOTES

(1) Family Credit can enable most households to be better off in employment, but it can be marginal, and lack of information and delays in benefit-receipt, often deter people from taking advantage of it. The Guarantee Group are those aged between 18-25 and unemployed for between six months and a year. The Aim Group are those aged 18-50 and unemployed for more than two years. Source for figures ET leavers survey Oct

(3) 1989-Sept 1990 reported by Unemployment Unit (1991).

(4) All these schemes have been the victims of a steady decline in the real value of benefits of participation. The remainder are in educational establishments.

(5) Target groups are called the Guarantee Group of claimants aged 18-25 and unemployed for between six months and

(6) year and the Aim Group of claimants over 18 who have been unemployed for two years. See Unemployment Unit Working Brief, August 1991, page 3-4, for evidence of the formulation of this position. See Loy (1990) for details of this approach.