UNIVERSITY OF KENT

Discuss the extent and causes of unemployment and inactivity in the UK today. To what extent does the Coalition Government s recent welfare-to-work reform The Work Programme provide a credible solution to tackling these challenges?
BY PALOMA MARTNEZ GUTIRREZ 01/12/2011

We are going to discuss unemployment in the UK and the problems that arise in the system. This system is affected by a number of factors and problems we will try to analyze to understand the variations that occur in unemployment. Once the evolution, the theoretical framework and concepts relatives to the work world are explained, will see the measures and reforms that are possible and should be taken by the government. To start we have to determine what unemployment is. The official definition is given by the International Labour Organisation this institution says that unemployed people are: Without a job, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks or out work, have found a job and are waiting to start in the next two weeks The institution that is responsible for measuring unemployment in UK is the Labour Force Survey (LSF). We have to differentiate two kinds of measures about the unemployment. They are provided by the Office of National Statistics (ONS). These sorts of measures are the Labour Survey Force unemployment and the claimant count. The LSF s definition of unemployment covers those who do not have a job but they are actively seeking to work. These people fulfil the definition gave by the International Labour Organisation. The definition of claimant count includes those who claimed unemployment benefits. It is an administrative measure and is taken from the Jobcentre Plus. With the LSF unemployment indicator we can measure the unemployment rate and the unemployment level. Is more useful to use the unemployment rate because it provides us about the economically active population the proportion of them that are unemployed. The unemployment rate is not measured by the claimant count indicator. Therefore it is better to use the unemployment rate because it takes into account the changes that are produced in the level of unemployment and the possible changes that occur in the population size or the movements that happens between activity and inactivity. On the contrary, the claimant count ignores these changes because they vary with the policies of the different governments about the entitlement to unemployment benefits, so that measures to compare changes too. We have to highlight that it is possible to be unemployed and not claim unemployment benefits. This can happen for several reasons. Full-time students, have not contributed to the National Insurance in the two years before, in most cases do not be between 18 years old and the pension age can be a reason for unemployment benefits are rejected. On the other hand, people can receive a Job Seeker Allowance without an account like an unemployed person. For example, people who work 16 hours per week or people who do not put effort into the job search can claim the benefit.

In this figure we can see the evolution of the unemployment rate provided by the Labour Survey Force and the claimant count. We can see that the trend that both measures follow is similar. We can do a better analysis of the labour market if we use both of them. In order to understand the evolution and the causes of the unemployment we have to analyse the trends that the unemployment has followed. We can see through the history and the different policies that were taken the changes that the rate of unemployment has undergone. We do not need to look far into the history to realize that the unemployment behaves in a cycle that follows the changes experienced by the economy. When the economy grows, more jobs are created and unemployment falls. The opposite occurs when the economy suffers a recession. There have been many dramatic changes in the past 20 years in the labour market in UK. Before 1970, the unemployment rate was relatively low. In the conservative years, they failed to carry out the income policies and the trade was more regulated and restricted than before. Under Thatcher mandatory GDP per head significantly decreased, these were unequal years. Unemployment figures experienced a considerable rise, being lower in the first years and increasing with the recession of 1980. However, at the end of this decade, the economy was improving and employment began to grow progressively. The Labour government try to follow social justice and opportunity. They take policies to solve the problems regarding work. These policies are the New Deal, the National Minimum Wage and the Working Families Tax. In this period is intended to safeguard the rights of workers and working conditions. And began to have a more equal distribution among the population. The decline in the unemployment rate was the broad trend until 2004, when the lowest unemployment rate was reached. Finally we have to stand out the 2008 because of the recession the unemployment rates started to rise up again.
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Labour Force survey, Jobcentre Plus Administrative system

For further study, we have to divide the labour market into different subgroups. The labour force depends on the sex, ethnicity, age, parental status, and disabilities among other factors. For example, recessions that occurred during 1980 and 1990 had more impact on the unemployment rate for men, this happens during 2008 too. Respect to the age, the young unemployment is higher than the older age groups. Qualifications of the people also have an impact, having the low-skilled higher unemployment rate. We can talk about more different subgroups and the different rates of unemployment in which they are subjected. To discuss the causes of unemployment we have to relate the variables that influence in the rate of unemployment. First we have to talk about the inflation. We can see a relationship between unemployment and inflation rates. When the inflation rate is low there is a tendency to high rates of unemployment, otherwise happening when inflation rises. We have to get an unemployment rate that is stable with respect to the inflation rate, this will lead to the equilibrium rate of unemployment. If carry out expansionary fiscal and monetary prices, the inflation rate increases, which obtains the lowest unemployment rates. Hence that if the economy is experiencing great growth and the unemployment rate falls too fast, the inflation rate rises. Nevertheless there are factors that can alter this relationship between inflation and unemployment rate. If there is a deficit in trade caused by a high exchange rate, with cheaper imports, it can cause a drop in inflation to maintain low levels of unemployment. Therefore, the factors that affect the rate of inflation affect unemployment.

www.statistics.gov.uk/tsdlistfiles.asp

We have to include in this relationship the effects that occur in the balance of payments. To reach the equilibrium unemployment rate, apart from having a stable rate of inflation, the deficit of the balance of payments must be zero.

However, unemployment is affected by many factors. Is important to study the relationship between unemployment and benefit system, as this affects the equilibrium which can be achieved by the unemployment rate. Various features of this system should be taken into account. We have to consider what type of benefits are offered by this system, what level they achieve, the duration of the right to obtain it and the restrictions that we can found in the system. The system of unemployment benefits can discourage job search. Several governments have tried to carry out labour market reforms to incentive work. Nevertheless, there are about 12 million people who have age for work who are receiving benefits and Tax Credits. We should note that this lack of incentives to work generates higher levels of poverty and welfare decrease. This system of benefits is causing this disincentive situation, since only induce to work people who meet certain characteristics. This system does not take into account the incomes. With the Tax Credit, those working more than 16 or 30 hours receive an additional income. The removal of these subsidies is progressive, withdrawing the part of the gains outweigh the benefits. However, we can list several groups who have not enough incentives to work for various reasons. For those working less than 16 hours, earnings that exceed the amount of the subsidy are lost because they are used for the repayment of the benefit, so for these people work is not profitable. For the Working Tax Credit is necessary to work a minimum of 16 hours per week, those who do not meet the estimated times do not perceive it, therefore they are not supported even though they have low wages.
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The recent performance of the UK Labour Market

Respect to the Tax Credit is removed through an increase in taxes when the person sees increased his income. The withdrawal of the subsidy is given from the 16 hour working week. Sometimes the recovery rate is up to 90% of the income. Hence, this do not incentive the work too. One of the major concerns arises when people return to work is how quickly they would return to receive the benefit if the situation is not good. Is also important to consider the loss of the Housing Benefit or the time until it starts to collect the Working Tax Credit when people start to work. Sometimes the transition to work it not easy. Above all create a feeling of insecurity and uncertainty. People perceive the rewards of working very low, since the system of withdrawal of subsidies can be viewed as a penalty. Another important factor is we have to examine the role of taxes have respect to unemployment. Taxes are part of the costs for workers paid by companies and are part of the consumer after-tax wage which workers do. Taxes related to employment are payroll taxes, income taxes and consumption taxes. Is important to consider it, because a rise in labour taxes makes workers poorer and the cost of maintaining and hire workers is higher. As a result of this increase is a greater rate of unemployment. A part of unemployment we have to take into account those who neither work nor looking for work. These are the people who form the inactivity rate. Inactive are those who are sick, have a disability, are cared for or maintained by another person, people who are in full-time education or those who retired early. The evolution of the rate of unemployment is not comparable to the evolution of the unemployment rate. There were no significant variations in the rate of unemployment from 1975 to 1998, it remained more or less constant. In these years we must emphasize the striking difference between men and women. However, what we really need to point out is the drastic change that occurs in the inactivity rate over unskilled workers. Since 1980, these workers suffered a relative decline on his salary in comparison with those workers who possessed qualification. This situation caused that the inactivity rate of these workers increased significantly. This increase was most notable for men.

The recent performance of the uk labour market

All this was due to increased relative demand-qualified caused by technological change. One of the reforms that the Coalition government has undertaken to promote the work and improve the workforce is The Work Programme. This is a programme was created in June 2011. This attempts to correct the failures of past reforms, which were often short-term, inflexible and did not reach those most in need. The target of it is a welfare reform which intends to seek the sustained work. People who are unemployment for a long time or are in risk of this situation are supported by this programme.

The government try to do that the firms have more incentives to contract people. We can achieve this through low market regulation and taxation. The government claims the creation of new jobs. This is achieved through flexibility and dynamism. There is freedom for the service providers to innovate and the government ensures long-term incentives to get it. This program gives the payments once results are displayed. Therefore we can highlight three main features about this program. The first one is the clear incentives to deliver result. The organizations that help persons who have more difficulties to find a job have a higher reward. The payments depends on the results, the delivery partners have incentives to keep participants in work as they more will be paid. We have to show the freedom for service providers. If the government doesn t put a lot of restrictions or prescriptions about the way in which providers have to do it, they can innovate, doing a better manages of their resources and they probably could do a better function. This demonstrated that the local providers, generally they know better the main needs of the people into sustained work. They are better to help this people, and it is doing in the best way if they haven t got a lot of restrictions. Therefore the providers have a lot of freedom to design the different measures to support the individuals, in the better way to fit to the local market. This leads to the creation of different partnerships with local authorities, colleges or health service. The organizations that carrying out the program can be of public, private or voluntary sector. They have a long-term commitment. Generally the contracts are made for five year period. This kind of contract gives to the providers incentives. With this period, they have time to innovate and to invest in different fields inside the organization. This doing to that the different provides can do partnerships with specialist supply chains of local providers and with other organizations, like with the local government. If we consider the improvement in the structure and in the resources, we can say that this is a good way to try to achieve success.
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The labour market under new labour

As we have said the providers are paid for results. We have to explain the payment system. The participants can be paid for two years. We can talk about three different payments that each participant receives. The fist one is called start fee . This is giving in the first years of the contracts. This paid finish in the third year. There is also the so-called job outcome payment . To claim this payment is necessary that the participant has been working for three or six months. The last kind of payment is a sustained payment . This is paid every four weeks. The duration of it varies depending on the ease of the participants for find a job. They can claim this for one year, one year and a half or two years. This payment pretends to incentive the longer duration of the participant in the sustained work.

This program tries to focus on the individual characteristics of participants. To be a participant the persons have to be receiving a benefit work-related. Within these benefits can enumerate several kinds, like Jobseeker s Allowance or Employment and Support Allowance. Depending on the reason why the person doesn t work and the difficulty to find a work the help are a higher amount. Amounts ranging from around 3,800 pounds to 13,700 pounds. The higher amount is providing to persons who are receiving benefits for several years, this may be due to a limited capability for work. This do that the providers have more incentives to contract the most disadvantaged people. Therefore we can see that the payment depends on the individuals. Currently, Prime providers are applying 40 Work Programme contracts, spread over 18 regions of the UK.

Department for Work and Pensions (2003). The Work Programme.

In addition to the payments made. There are other kinds of incentives for the participants and for the taxpayers. While the contracts are in force, the market share is shifted to the best-performing providers. The participants of the program are randomly assigned to each provider. At the final of the second year of the contracts, the provider who has a higher help to the sustained-work is rewarded with a shift in market share of five per cent between low-performing and high-performing. The providers who are following the program have to ensure a minimum performance level. This level is fixed in ten per cent higher than if they don t participate in the program, if they don t meet this requirement they can lose the contracts. If the providers improve both the system and increase their services in a thirty per cent respect the non-intervention level, they will receive an extra 1,000 payment throughout the additional sustained work that they create. All this measures provide good value for money of the tax payer. If the providers contract more people who have more risk for keeping unemployed, the benefits that the government pay for them are reduced. Therefore the program is a good measure to promote the work. The government encourages suppliers to hire people who have more difficult to integrate in the workplace. We can say that the Work Program is efficient, since payments are made once the expected results for the program are achieved. Hence, this program aims to make people able to get out of the recession, with the objective of economic recovery and the break with the benefit dependency.

Department for Work and Pensions (2003). The Work Programme.

However, although this measure is a good step to reach the lowest levels of unemployment, there are many other areas related to the workplace to which they need a reform. Should be set a series of objectives related to labour welfare must be priorities for reform. Between these objectives should be important to create a less complex system, where people feel certain and secure and can clearly see the rewards for working. The Government have to continue promoting measures through more household work and the number of hours that they are worked. The system must be seen as a fair system for both beneficiaries and taxpayers. It cannot afford any possibility of fraud and should be finished with errors and delays in payments. Of course, the subsidy system must be affordable. Many of these objectives are gradually being achieved, through measures such as the Work Programme or the Universal Credit, which allow a simply system for support unemployed.