Slow progress: improving progression in the UK labour market

a research paper by Paul Garaud and Matthew Oakley (Policy Exchange) published by Policy Exchange

Executive summary

The challenge of progression

Since coming to power, the Coalition government has embarked on a radical programme of welfare reform. Its flagship Work Programme scheme is now in place and providing support to the long-term unemployed and disadvantaged to help them to enter and stay in work. In a few weeks, Universal Credit, the benefit that will replace a series of income-replacement benefits and tax credits, will begin its staged roll out. These are positive steps and the extent to which they represent a step change in our approach to welfare policy should not be underestimated.

In particular, helping claimants of in-work benefits to sustain their jobs for longer and increase their earnings (to “progress”) are now key goals of government welfare policy. This approach will significantly increase the number of people able to take on support and also subject to more intensive conditions in return for benefit. In particular, once rolled out, current claimants of tax credits who are working relatively few hours are likely to be subject to increased requirements. If successful in increasing earnings, this approach would increase living standards of families and reduce the benefit bill. However, there are significant challenges to achieving this goal.

Existing evidence tells us that staying in work and increasing earnings can be extremely difficult for individuals with relatively low levels of qualifications and for employees in low-income jobs. At the most basic level, the median length of continuous employment for those employed in the bottom decile of the earnings distribution is just over two years. For those in the top decile the equivalent figure is around eight years. Some 14% of employees in the bottom decile of the earnings distribution are in temporary employment. Only 2% of those in the top decile of the earnings distribution are in this position.

The recession clearly has an impact on the ability of some employees to increase their earnings. One respondent to our call for evidence summarised:

“How can you just ‘magic up’ extra hours if you only work part-time? Most companies can’t just give you more hours.”

However, a lack of progression is not just a result of the recession. Even during past periods of relatively strong growth we could see that the labour market in the UK was changing: jobs have become more flexible and potentially more insecure; the “job for life” is no-longer a standard form of employment; and due to technological changes, many of the jobs which were relied upon for employees to progress over their working lives no longer exist. Reports over the last decade have continually highlighted that a low-pay, no-pay cycle exists in the UK and that policy interventions are not helping to tackle it.

In particular, while around 70% of JSA claimants move off benefit within six months of initiating a JSA claim, success in terms of finding claimants sustainable work is far less convincing. As documented in our earlier report, Welfare 2.0:

• Only 68% of those leaving JSA actually enter employment;
• Around a third (30%) of those leaving JSA are claiming benefits again within eight months; and
• Of those who started work nearly one in ten (8%) were employed for fewer than 16 hours a week.

Overall, this means that just 36% of claimants will find a job within six months of receiving JSA and still be in work seven or eight months later. Other research from DWP shows the depth of movements between fragile employment and benefits. After following a group of 22–24 year olds and 32–34 year olds, it found that over one in ten of those in these groups making a new claim for JSA in 2010/11 had spent at least half of the previous four years on benefit.

Combined with a lack of evidence around policy interventions that are effective in helping people to increase their earnings, these challenges mean that the government is faced with a difficult task in designing an effective and efficient system of support and requirements. This lack of evidence makes it essential that the government is fully committed to piloting and fully evaluating potential policy interventions to help people to increase their earnings. For this reason it is encouraging that the government has issued a call for ideas in this area and looks set to implement a number of pilots.

A breakdown of in-work claimants

This commitment to piloting is even more important because our analysis suggests that a large variety of individuals and families may come under a new programme of support and requirements for in-work benefits claimants.

Overall, analysis in this report suggests that around 1.3 million people will be subject to some form of in-work requirements and support. Of these, Chapter 1 demonstrates that:

• Around two thirds of the group do not have dependent children. However, alongside these families without dependent children, there are also a significant minority of the group who are lone-parents with dependent children aged between 5 and 17;
• Almost two thirds of the group are female;
• The group has a broad mixture of individuals of different ages. However, just over half are over 45 years old;
• Nearly 45% of the group has relatively low qualifications or no formal qualifications at all;
• Many of the group are currently in stable employment, with over half having been with their current employer for over two years. However, working hours are relatively low for the majority of the group (typically between 15 and 24 hours a week); and
• A large majority of the group are not currently looking for additional employment.

Such a diversity of individuals and families in this group will present DWP with challenges in terms of targeting effective personalised support in order to help claimants to increase their earnings. A particular challenge will be the fact that our research suggests that a large majority of the group do not seem to be motivated to increase their earnings. This point is also supported by recent reports from DWP. For instance, one report suggests that among part-time workers on Working Tax Credit, only around one fifth were seeking additional hours. The DWP report also looks at reasons for not wanting more work. It shows that, of part-time recipients of working age benefits or tax credits, 43% agreed that ‘I don’t need more hours because I get by okay on what I currently earn’.

Evidence on the diversity of this group also echoes the concerns of a number of respondents to our call for evidence. In particular, because of caring responsibilities, ill health or a disability some families and individuals might have limited scope for increasing their earnings. As we outlined in Personalised Welfare, it is essential to approach these issues in a way that does not simply consider benefit type and length of claim, but instead to effectively target personalised support.

Combined with existing evidence of the chances of progression and the impact of policy, this leaves the government facing significant challenges:

• A large proportion of individuals in low-paid or low-hours work do not regard progression as a priority.
• Current policy interventions (e.g. JCP) can be counter-productive to the goal of progression.
• Temporary jobs, part-time work, and mini-jobs do not, on average, appear to help individuals progress.
• Training does not, on average, appear to lead to progression, though implementation and differential impact across groups may cloud results.
• Financial incentives for employment retention may work for some groups.
• Employment retention appears to be encouraged by job-seeking while in work.

All of these factors present government with a significant challenge in helping individuals and families to increase their earnings. The groups that it wants to support and encourage to increase their earnings are the same groups that currently seem to find it hardest to achieve significant earnings progression and who may not want to progress anyway. This means that if it is to design policy interventions to support and encourage Universal Credit claimants to progress in work and move towards self sufficiency, new policy solutions and a significant level of testing will be needed. If implemented effectively and comprehensively evaluated, the policy pilots that DWP are likely to announce will provide a valuable evidence base to inform future policy decisions.

Making progress

Based on the limited existing evidence and our own analysis, this report outlines areas where we believe that the government should focus its pilots. However, we are also clear that these pilots alone will not be enough. It is essential that freedom is given to Jobcentres and power devolved through the City Deals process in order to leverage a far greater range of piloting and policy innovation. By doing so, we will begin to get a better picture of policy interventions that are effective in supporting and encouraging in-work claimants to increase their earnings.

We also outline reforms that are essential to roll out now, before piloting begins. These include fundamental changes in the way in which Jobcentre performance is measured and in how Work Programme providers are rewarded for helping the claimants placed with them. Alongside these measures it will also be essential to put in place a baseline conditionality regime right from day one of Universal Credit being rolled out. Without this, the moment of change will be missed and an important opportunity to influence the attitudes and behaviour of benefit claimants lost.

Together our proposals outline the basis for a strong system of support and conditionality for in-work claimants. Once pilots have been evaluated and lessons learned, this system can be built up in order to put in place a comprehensive programme of personalised and targeted support and requirements for claimants in order to improve earnings, boost living standards and help more families move towards independence.

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