The Coming Storm: Design of Active Labour Market Policy

Professor Paul Gregg, University of Bath, and Professor Emma Tominey, University of York

The concentration of unemployment on certain groups and the huge costs it imposes on individuals who experience longer durations out of work (3+ months) in terms of penalties on wages and unemployment up to 20 years later means that targeted support is necessary, rather than just waiting for an upturn. There are three forms of active labour market policy that have proven effective: job search support, hiring subsidies and high-quality work experience. These policies tend to work best during periods of economic recovery, while those targeting younger people are less effective, especially when less intensive. This emphasises the need for wider support for job creation discussed here. But there is still a role for active labour market policies alongside macro-interventions. Here we discuss which active labour market policies have been proven to be effective.

Job Search Support

The Work Programme was the UK coalition government’s flagship welfare-to-work programme. This started in 2011 and was replaced in 2015 with a programme targeting those with health issues/disability. Young people who had been out of work for three to nine months would be placed with providers and given support with finding employment. The providers received money for placing the individuals into jobs, with an extra reward for sustained jobs.

Providers primarily used one-to-one job search support with relatively little employer engagement and wider interventions such as training. A provider had a job seeker on their books for two years and on average moved 18% into sustained employment and 25% of younger workers (there has not been a comprehensive analysis of the scheme but this is the most useful piece of evidence). The scheme became more successful over time but this largely reflected the strengthening jobs recovery in this period. While placing 1 out of 4 young into sustained employment over 2 years in a strengthening labour market suggests limited success, the scheme was low cost and these types of job support interventions have generally been found to be successful in the past (as in Gateway of New Deal for Young People). The innovative elements include payments for sustained outcomes and that people who returned to unemployment re-engaged with the programme if within the two year window.

Incentives for providers and employers to hire the young

On top of the Work Programme, the Coalition introduced the Youth Contract which offered subsidies worth £2275 for a full-time post, to employers who recruited a young person from the Work Programme and retained them for at least six months. Take-up was very limited and again the effects modest. Work Programme providers did not have the employer links to support this element well. The international evidence on hiring subsidies is much more positive. It shows how well-targeted hiring subsidies raise employment of supported individuals even 5 years after the subsidy ends. However, targeting is central otherwise there are large deadweight costs from paying employers to do what they would have done anyway. Another scenario is that firms may hire a subsidised worker and displace an existing worker. Targeting is usually done by the duration of unemployment or can create early entry for particular high risk-groups (such as those from a disadvantaged background or with disabilities). Hiring subsidies are often used in conjunction with job search support to maximise effectiveness by marketing the participant to employers. This was not well designed in the case with the Youth Contract, as discussed above.

Offer high-quality work experience

Young people can be taken out of unemployment and temporarily placed into work experience to equip them for regular job entry. The UK 2009 Future Jobs Fund (FJF), which offered 6 months paid (minimum wage) work experience to 18-24 year old Jobseeker’s Allowance claimants raised job entry and reduced time on benefits for the young participants. Two years after starting the six-month programme, participants were 11 percentage points more likely than a slightly older and ineligible group, to be in employment (when tracking was stopped). The resulting benefits broadly offset its costs. These sustained employment gains are good considering that the scheme was running at the worst period for unemployment in that recession (2010-12) and as noted earlier, programmes normally perform best in the recovery phase.

The Future Jobs Fund was replaced by the less expensive ‘Work experience’, offering only up to 8 weeks of unpaid work and focused less on high-quality placements,  instead offering very routine roles. The short-run effects were estimated to be positive and 5 weeks after the placement, employment rose by 6 percentage points for the first wave of entrants in 2011. However, these gains were eroded, declining to 4 percentage points at 1 year after participation and became less effective for later cohorts entering the programme. Although cheap, as no wage was paid, the effectiveness was poor.

Combined Programmes

In the UK, the 1998 New Deal for Young People was compulsory for the young unemployed and offered 4 options of employment placement, education/training place, a place on an environmental taskforce or a place on a voluntary sector equivalent. Its innovation over past schemes was to require job search whilst on placement, offering support in finding employment, which started before the option began, and subsidies for employers hiring the young people. The scheme proved successful, increasing employment by around 5% and its marginal benefits were higher than the marginal cost of the programme. However, the environmental taskforce and voluntary sector options were less effective than the other two, whilst the employment option was the most successful. Drawing on this, the Future Jobs Fund also maintained job search support to help participants move into regular employment.

Another more recent combination programme that is still up and running is the Traineeships programme being offered to those young people on benefits, without the necessary qualifications to start an apprenticeship. It offers work experience and training connected to the job and is designed as a pre-apprenticeship, viewing moves into full-time education or an apprenticeship as positive outcomes. The DWP assessment is that it raised employment by 18% after a year and thus is more effective than the Future Jobs Fund or New Deal employment option. However, moves onto Apprenticeships were less positive and the programme should, therefore, be viewed more as a work experience programme with training than apprenticeship access course. It is, however, very small scale, around 20,000 starts a year.  The government has recently committed to provide 30,000 new traineeships, but operated in an extremely tight labour market it might prove hard to grow to a level needed.

In summary, combined programmes offering work experience preferably with training (as with Traineeships), with required job search and on-going job search support and a hiring subsidy for moves into regular work are effective and must be at the heart of efforts to address youth unemployment. But they are expensive and as such they need to be focused on the most at risk of long-term damage from unemployment. Lower cost programmes for the less seriously in need (or at early durations) should not be lower quality work options such as make-work schemes (e.g. Work experience, Environmental Taskforce or similar), but job search supports with hiring subsidies (for those aged 55+ this is a better option than work placement) or just job search supports.

A Guarantee

Creating a Guarantee must integrate these positive elements of active labour market programmes with Apprenticeships and continuing education (Access Courses), to offer a range of positive options rather than low-quality placements. As the schemes will be hard to grow to the scale needed we would need a two-tier entry system based on durations out of work (not on benefits which is often not the same for young people) with early entry for those with high-risk markers (low education, eligible for pupil premium, living in a deprived area, been in-care, disability etc). For those not yet eligible for this more intensive treatment, the natural step is to create a window of job search support (as with the Gateway in New Deal) and the hiring subsidy before entry into the more intensive programme.

At first sight, it seems logical that interventions should focus in specific sectors such as the ‘Green Economy’ or Information Technology/AI. In essence, trying to guess the jobs being created tomorrow. But this will not be the whole solution to the unemployment problem. There are a large range of other sectors where employment will grow in the next few years – health, social care, education, business services, research and even construction. Also, most job openings that will arise over the next 10 years will not be new jobs but replacements to fill the jobs of individuals who are leaving the labour market for child and other caring responsibilities, moving to different jobs, or for retirement. On average, there are at least 10 replacement jobs for each ‘new’ job and extra job creation is obviously limited soon after a recession.  Rather we should focus intervention on positive destinations and funding should as far as possible be outcome related. The first job a person gets after unemployment will not be the last and so it is the skills, education and on-the-job learning that will help individuals, not the sector the offered job is in.