Back to work

15 Jul 10
With unemployment heading for 3 million and a soaring welfare budget to cut, the coalition is tightening up eligibility conditions for claimants. But we've been here before, warns Dan Finn
By Dan Finn

15 July 2010

With unemployment heading for 3 million and a soaring welfare budget to cut, the coalition is tightening up eligibility conditions for claimants. But we’ve been here before, warns Dan Finn

The coalition government has put welfare reform at the heart of its plans for ­reducing worklessness and public spending. Core elements of the strategy are now clear. The aim is to bring about ‘transformational change’ in the welfare system by implementing stricter work capacity assessments, reinforcing the conditional nature of jobseeker benefits, and paying welfare-to-work providers from the benefit savings they generate by getting people into sustained employment.

In the next phase, Work and Pensions Secretary Iain Duncan Smith wants to increase the pension age and bring in ‘on yer bike’ reforms to make work pay and to encourage mobility, with those living in council houses enabled to escape ‘workless blackspots’.

The new regime will be implemented by a smaller Jobcentre Plus and an expanded ‘welfare-to-work industry’. By mid-2011, a network of prime contractors or consortiums will provide services through the Work Programme, which will integrate all the previous welfare-to-work schemes. It will be supplemented by Get Britain Working measures, including ‘work clubs’, ‘work for yourself’, and other initiatives targeted at unemployed young people. Additionally, a community work experience programme will be mandatory for those unemployed for more than two years.

The welfare-to-work strategy has been shaped by the changes announced in the emergency Budget. Most of the projected £11bn annual savings for 2013/14 come from using the consumer price inflation index for benefit upratings, rather than the higher retail price index, which ­includes housing costs.
Housing Benefit is very much in the line of fire. For example, long-term claimants of Jobseeker’s Allowance stand to lose 10% of their rent payment from April 2013. Chancellor George Osborne has also hinted that further reductions to welfare benefits could ameliorate the severity of the 25% cuts expected in ‘unprotected’ departmental budgets.

In effect, the Budget took a carrot-and-stick approach to worklessness. It aims to make work more attractive through a cumulative reduction in the value and coverage of out-of-work cash benefits combined with some improved incentives to work, such as lower income tax and higher child tax credits for those on the lowest earnings. The Institute for Fiscal Studies concluded that the impact would be ‘mixed’, with improved work incentives for the poorest offset by greater disincentives for those with slightly higher incomes.

Welfare reform minister Lord Freud has been charged with ensuring that work pays and has said that the government continues to look ‘very aggressively’ at the system. Future reforms are likely to include simplification of, and change to, the rules so that claimants are not deterred from working in ‘mini jobs’ and can retain more of any increase in ­earnings. The problem is, as the previous government found, that redesigning benefits, work incentives and tax credits is fraught with hard policy trade-offs. There is a danger, for example, that combining part-time work with benefits might itself become a way of life. As the Budget changes demonstrate, unwinding the tax credit system is likely to create new ­complexities for some and blunt work ­incentives for others.

Another main element of the coalition strategy concerns the intensification of sanctions and extension of work conditionality. The regime for those on JSA was outlined in the Conservative’s 2008 Work for welfare green paper, produced under Chris Grayling, now employment minister. It proposed that anyone initially refusing a suitable job would lose one month’s out-of-work benefits; a second refusal would result in a three-month penalty; and a third refusal would lead to exclusion from benefits for three years.

Those who fail to participate in the Work Programme without good cause will receive full or temporary penalties depending on the circumstances. Sanctions would be mitigated where children are affected but a ‘clear financial penalty’ must remain for ‘wilful non-participation’.  Such a regime is likely to enjoy endorsement from Frank Field, the Department for Work and Pensions’ ­‘poverty czar’, who has advocated a similarly tough approach, especially for young working-class men.

Continued implementation of Labour’s reforms means that, from October, some 120,000 lone parents on Income Support whose youngest child is seven will be moved on to JSA or other benefits. They will be followed between 2011 and 2012 by those whose youngest child is aged over five. The Budget expected this final change to result in an additional 15,000 lone parents entering employment, ­saving £380m by 2015.

The other change concerns the ­reassessment of the estimated 2.4 million people receiving disability benefits to determine who is capable of work and who qualifies for the Employment Support Allowance. The process is to be trialled in Burnley and Aberdeen from October, with national extension from February 2011. Up to 10,000 people a week face reassessment over the following three years. This will overlap with the introduction of medical assessments for those claiming Disability Living Allowance, which will commence in 2013/14.  About half of those claiming out of work ­disability benefits also receive DLA.

The implementation of both these ­assessment processes is likely to be punctuated by controversy and appeals. There have already been many criticisms of the accuracy of the Work Capacity Assessments, undertaken by Atos Healthcare, the sole DWP contractor, and an ­independent review is under way.

Despite problems with the assessment process, the National Audit Office reported that the introduction of the WCA at an earlier stage in the claim process was largely responsible for the small reduction in the incapacity benefit caseload between 2005 and 2009. Findings on the impact of the linked Pathways to Work programme, which comprised mandatory interviews and employment assistance for ESA claimants, were far less positive.

The NAO highlighted the problems faced by underperforming private providers who were enticed to ‘bid low and promise high’, with Pathways delivering ‘poor value for money’. These problems were exacerbated by the speed with which the then Labour ministers wanted the programme delivered, the recession, and weaknesses in the procurement process. The NAO said that lessons should be learnt. It recommended that the design and performance assumptions underpinning the Work Programme be subject to stricter scrutiny before implementation.

Detailed rules for the Work Programme have yet to be decided but announcements suggest it will focus on young people, those who have been unemployed for a long time, single ­parents and disability benefit claimants who are moved on to JSA or ESA. Providers will be paid largely on the basis of sustained job outcomes, with differential payments to encourage them to work with the most disadvantaged. They will be able to provide personalised support, with one estimate suggesting they may be catering for up to 2.6 million claimants by 2014 with ­contracts worth in excess of £2bn a year.

The Work Programme is being implemented in two phases. The first involves would-be providers qualifying for entry into a ‘framework agreement’, which will allow them to compete for contracts. The DWP has indicated it will select between three and eight organisations in each of the English regions, Scotland and Wales. The framework will last for four years.

Potential providers must demonstrate they have: a track record of running large and complex contracts; the capacity to work across the region(s) they bid for; and the financial strength to run ­contracts that will paid primarily on results.

Subsequent ‘mini-competitions’ will determine which of the qualifying organisations will be given Work Programme contracts. These will be awarded by January with full national implementation of the programme by summer 2011.

The indicative value of contracts to be let through the framework is likely to be between £0.3bn and £3bn per year. ­Individual contracts will be worth ­between £10m and £50m and will last up to seven years.

These developments seek to transfer risk and contract management from the DWP and will intensify changes in the industry, with a smaller number of prime contractors becoming responsible for investing in and managing their own supply chains. The DWP hopes to attract large public service companies, such as Capita and VT, to enter the market. Grayling and Freud are also working to persuade major financial institutions to bankroll the high start-up costs, which will help secure Treasury agreement to release benefit savings.

The prime contractor Flexible New Deal model had already attracted Serco, G4S and larger international welfare-to-work providers, such as US companies Maximus and ResCare (operating as ­PeopleServe), to the industry. They joined existing British companies, such as  A4e and Reed, and earlier international entrants. These include the Australian ­‘Ingeus’ group and charity Mission Australia, which – with CapGemini – part owns the public-private-voluntary sector provider Working Links. 

These companies had invested heavily in starting up Flexible New Deal in half the country and although these contracts have been terminated, ministers have assured the providers that they are ‘not seeking to rip up everything that is ­already there’.

There are also myriad voluntary and third sector providers, with the largest being the Shaw Trust and Careers ­Development Group. It is contractors in this sector, alongside specialist and ­locally based public sector providers, that have expressed most concern about their future role. Ministers have encouraged the formation of third sector consortiums to bid to be included in the framework. But the future for such groups is likely to be as subcontractors.

Uncertainty remains on other major ­issues, such as the size and role of Jobcentre Plus and the position of its personal advisers; the funding and design of specialist disability programmes; and the role of local authorities and partnerships currently seeking to integrate skills and welfare-to-work services.

The Conservatives have justified their approach to the welfare-to-work industry by reference to international best practice but closer scrutiny raises concerns. While evaluation studies in Australia and the Netherlands report efficiency gains and increased transitions into employment, relatively little is known about the extent to which these gains have been offset by high transaction costs and reductions in service quality. In both countries, ­incentive-based contracts have been associated with ‘parking’ harder-to-help service users, despite greater rewards paid for placing more disadvantaged job seekers into employment.

A distinctive contributory factor to such parking has been price competition – now abandoned in Australia and the Netherlands. The risk of such price competition in the Work Programme is that it is likely to encourage unrealistic cost estimates that will limit provider capacity, stifle innovation and encourage ‘creaming’, where providers focus most effort on those closest to the labour market.
Meanwhile, the government will face a more public challenge when the recent reduction in JSA unemployment is reversed, with one estimate suggesting the JSA total could reach 3 million by 2014.

A number of factors will contribute to the increase, including the winding down of Labour’s employment programmes and the transition of lone parents and those on disability benefits to JSA. Moreover, although employment will revive following the return of economic growth, it will be some time before employers start to recruit again in large numbers and any recovery will be offset by recruitment freezes and redundancies in the public sector.

In this environment, it will be vital for DWP ministers to sustain the capacity of Jobcentre Plus and the welfare-to-work system. They will also have to avoid the sort of mistakes that occurred from the rapid and severe cuts in Jobcentre services and employment programmes between 1979 and 1981. These followed the expenditure cuts of the then newly elected Conservative government and contributed to the entrenched long-term unemployment and growth in economic inactivity that first emerged in the mid-1980s – a grim lesson from history for the coalition.

Dan Finn is professor of social inclusion at the University of Portsmouth and writes extensively on employment programmes

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