Regeneration & Renewal,
14 November 2008
The summer saw a raft of new policies designed to get the long-term unemployed into jobs. But will ideas designed for a boom work in a bust? Allister Hayman reports.
It was only a year ago that Gordon Brown told business leaders that unemployment was yesterday's problem. A year on, however, the Prime Minister is entangled again with the old enemy. Last week, Ernst &Young predicted that joblessness would rise to 2.2 million by the end of 2009, up by more than 400,000 on current levels. Accountants Deloitte forecast unemployment to rise to almost three million by the end of 2010.
The irony is that the spectre of mass unemployment has returned just as the Government is embarking on the latest phase of its welfare reform, targeted not at the newly jobless, but at the stubborn cadre of long-term unemployed who have not benefited from the last ten years of growth, as well as those languishing on incapacity benefit.
The so-called Flexible New Deal (FND), which is due to begin in autumn 2009, is a key reform of Brown's Government and is aimed at achieving Labour's stated goal of full employment "in our time". Essentially, the FND embraces the proposals made in a report by Tony Blair's welfare tsar David Freud in 2007. Reportedly resisted by then-chancellor Brown, it called for the private and voluntary sectors to play a greater role in helping the long-term unemployed to find jobs.
Having examined Australian, Scandinavian and US models, Freud recommended the long-term unemployed be referred to private and third sector jobs providers paid by results. Freud argued that, by providing more hands-on, personalised support, innovative providers could slash the number of long-term workless. Firms would be paid with the savings accrued by cutting the benefits bill.
Since becoming work and pensions secretary in January, James Purnell has enthusiastically embraced the Freud report. In February, he outlined how the new system would work. Under the plans, the Department for Work and Pensions (DWP) would commission private and third sector agencies to get the long-term unemployed into jobs. "Prime contractors" - essentially large management firms - would bid for regional or sub-regional contracts from the DWP, and then contract delivery down to smaller, more specialist organisations. But with the first phase of the bidding process for the FND contractors due to finish this month, there are concerns that rising unemployment will mean the new strategy is no longer fit for purpose.
Ian Mulheirn, chief economist at think-tank the Social Market Foundation, says the reforms were designed in a more benign economic climate and will need major change if they are to deliver the Government's objectives. The SMF has forecast a fourfold rise in the number of long-term unemployed - those seeking work for more than 12 months - which will peak in 2012 or 2013 at around 600,000. It is currently at 150,000.
This, Mulheirn says, will create an enormous strain on providers, which may undermine the goal of providing a personalised service to those furthest from the job market. "Providers are going to have problems on the supply side and on the revenue side," he says. "Their caseloads will increase substantially, so they will have less money to spend on each individual client, undermining the specialist service they're meant to provide. At the same time, the difficult job market will see them place fewer clients into jobs, meaning they will get less money. It will be extremely challenging."
The contracts the DWP has devised - which offer an upfront payment of 30 per cent, followed by a 50 per cent payment once clients have been in work for 13 weeks and full payment at 26 weeks of employment - will fail to create a sufficient incentive for providers to help the hardest to reach, he says.
In these difficult job market conditions, says Mulheirn, those people who were supposed to be helped by the programme will simply get sidelined. "The money will be spread more thinly, which means those who are hardest to help - and cost the most to help - will get less support than under the current programmes. In a downturn, providers will focus on those easiest to get into jobs. There's absolutely no incentive to do otherwise." He suggests a system of graduated payments that increase the further providers get through their caseload. Payment for the last person helped into work would be substantially greater than for the first.
The DWP has said that a rise or fall of 40 per cent in prime contractors' caseloads will trigger a renegotiation of the contracts. But this has provided little comfort to the jobs providers. Richard Johnson, managing director at employment services provider Serco, told the Commons Work and Pensions select committee last month that it was vital that contracts being signed now are able to cope with rising unemployment over the next few years. "(We must) put in place services that are robust enough to weather the storm, and the storm will be considerable," he said.
Johnson said that the DWP had unrealistic expectations of performance built into the bidding process, so providers may be tempted to overstate their likely performance in order to win contracts. He said the implied performance baseline set for the FND by the department (R&R, 24 October, p2) suggests that providers should get 70 per cent of people starting on their programme into jobs.
However, over the past ten years, the best performing welfare-to-work programmes have achieved a rate of 50 to 55 per cent. They are currently getting around 35 per cent of clients into work, he said. "To then set up a contract with roughly the same amount of resources and expect it to double that level of performance ... effectively halving the amount of money paid for each one of those outcomes, is, I think, a very dangerous recipe," Johnson said. If contractors overbid, he added, after a large upfront payment based on these overambitious targets, further payments based on their actual performance would be tiny and they could go bust, undermining the entire programme. While Johnson admitted this was the worst-case scenario, he predicted the creation of "a bog-standard service failing to address any of the complex barriers facing the long-term unemployed".
In response, the DWP says it is in the interests of the providers to talk up the costs of the contracts because they are currently going through the bidding process and hope to drive performance expectations down. Last month, the department's adviser, David Freud, told Regeneration & Renewal that, as the contracts were for five to seven years, providers could spread risk over a longer period. While costs may rise initially, when the economy improves, it will be easier to move people into work and the contracts will become "more lucrative", he said.
However, Mulheirn says this doesn't stack up. "What we're seeing is long-term unemployment peaking in 2012 or 2013 with a long tail-off. That is most of the contract period," he says. The only real solution, he says, is for the DWP mandarins to ask the Treasury for more money to top up the programme's budget - a request, he says, that is unlikely to be granted. "Apart from the step change in performance this programme was supposed to deliver, it was also supposed to be cheaper," he says. "To get more money out of the Treasury now would be a big ask." Having bailed out the banks and staved off complete bust, Gordon Brown is now about to find that unemployment is very far from yesterday's problem - and his own job may hinge on his government's ability to cope.
Work in progress: a timeline of the Government's work programmes
March 2007: Freud review proposes greater private and third sector role in back-to-work programmes.
May 2007: Welfare Reform Act 2007 brings into law an employment and support allowance (ESA) to replace incapacity benefit and income support based on incapacity or disability.
December 2007: Ready for Work outlines Flexible New Deal (FND), with jobseekers who are struggling to find work given specialist support.
February 2008: Commissioning strategy for FND to offer contracts to private and third sector providers launched.
June 2008: Work Skills outlines measures to introduce compulsory training for long-term unemployed.
July 2008: No One Written Off outlines plans to compel people who are unemployed for more than two years to work for the benefit.
October 2008: ESA introduced. Work Skills trials begin.
November 2008: Lone parents with youngest child of 12 or over moved onto jobseeker's allowance (JSA).
Autumn 2009: Lone parents with youngest child aged ten or over due to be moved onto JSA. FND set to begin.
October 2010: Lone parents with youngest child of seven or over scheduled to be moved onto JSA.
