Increasing employment opportunity for all
4.1 The Government's aim is employment opportunity for all the modern definition of full employment. Macroeconomic stability is a prerequisite to achieving this aim, but is not enough to secure job opportunities for all. It needs to be backed up at the microeconomic level to ensure that individuals throughout the country are able to compete effectively for jobs, that there is a secure transition from welfare into work, that employment is financially rewarding and that people are able to secure progression in work. The Government has introduced radical reforms of the tax and benefit system backed up by active labour market policies to achieve these aims.
Achieving high and stable levels of employment across Britain
4.2 The past few years have seen a substantial improvement in Britain's labour market. Over 1 million more people are in work today than in spring 1997, and more people nearly 28 million are in work now than ever before. The employment rate, currently 74.7 per cent, has returned to levels typical of the 1960s and 1970s and substantially above those seen during most of the 1980s and 1990s.
4.3 Alongside record levels of employment, unemployment has fallen sharply. At 5.3 per cent, ILO unemployment is currently at its lowest rate since the 1970s. The claimant count measure currently stands at 1.04 million, down by nearly 630,000 since spring 1997 and the lowest rate since October 1975. The stock of unfilled vacancies at Jobcentres is at record levels: the ratio of jobseekers to vacancies currently stands at just under 3 claimant unemployed people to each Jobcentre vacancy, compared to around 10 jobseekers to each vacancy a decade ago.
4.4 Much of this improvement in the aggregate labour market has come about because of improved macroeconomic stability. Chapter 2 sets out the measures which the Government has taken to deliver economic stability with steady growth and low inflation. The sharp falls in employment experienced in the early 1980s, and again in the early 1990s, were the consequence of the cycle of boom and bust that has characterised the UK economy in the past. Each downturn left more people detached from the labour market, often giving up on finding a job and becoming economically inactive, sometimes permanently.
4.5 Beneath the aggregate picture, where the headline employment and unemployment rates have returned to levels last seen in the 1970s, there is a more complex picture. For some people and groups in society, employment opportunities have expanded significantly over the past 20 years. The employment rate of women has increased from about 60 per cent in 1980 to nearly 70 per cent today, with just over 55 per cent of mothers with children under the age of five in employment today.
4.6 However, for others, employment opportunities were sharply constrained during the 1980s and early 1990s, with increasing worklessness among the over 50s, lone parents and people with disabilities. These changing opportunities led to a polarisation of employment opportunity. For example, in 1996 the proportion of working age households with no-one in work was 14.1 per cent, compared to 4.3 per cent in 1975 when the employment rate was broadly similar a threefold increase, while the proportion of households where all adults were working rose from 56.7 per cent in 1975 to 61.9 per cent in 1996.
4.7 This pattern of polarisation between the 'work-rich' and the 'work-poor' was also repeated geographically with increased employment opportunities in some areas, but sharply reduced opportunities in others.
4.8 The recession of the early 1980s opened up a large difference between the regions of Britain. While the recovery of the late 1980s saw unemployment fall these gaps between regions persisted. Following the recession of the early 1990s the subsequent recovery has seen falling unemployment and rising levels of vacancies in every region of Britain, creating a more balanced and sustainable recovery. Within all regions, however, there remain pockets of high unemployment and inactivity, where employment opportunities are denied to a large proportion of the local population. In addition many of the large cities as well as other areas experience extremes of severe disadvantage and relative affluence. For example:
4.9 While the stable macroeconomic environment is delivering the levels of employment and unemployment of 20 years ago, these are still accompanied by far higher levels of poverty and deprivation than 20 years ago because those who are workless today are far less likely to share a household with people in employment, or to live in a neighbourhood where employment rates are high. Some of these concentrations of worklessness are being tackled the number of children in workless households has fallen by 250,000 since 1997 but significant problems remain.
4.10 These problems cannot be tackled through delivering economic stability alone. Vacancies are close to record levels in all regions. Unless those in disadvantaged groups or areas are able to take up these vacancies, policies to create further labour demand will not tackle these concentrations of worklessness. Instead, jobs will go to those already in work-rich households or areas, reinforcing polarisation within the labour market. So macroeconomic policies need to be complemented by microeconomic policies targeted on workless individuals and disadvantaged areas, to tackle the barriers preventing them from securing the vacancies which are continually being created in a healthy macroeconomic climate.
A strategy for achieving employment opportunity for all
4.11 The Government's strategy for ensuring employment opportunity for all comprises the following key elements:
WELFARE TO WORK
4.12 There are currently 1.04 million unemployed people claiming Jobseekers' Allowance (JSA), but every year there are around 3 million new claims for JSA. The labour market is dynamic and most of these claims end relatively quickly, with over 50 per cent of people moving off JSA within 13 weeks. There are a further 7.6 million people of working age receiving other out-of-work benefits, including sick and disabled people and lone parents.
4.13 Not all of the economically inactive will be able to work or want to work, because of, for example, caring responsibilities. But many of the economically inactive say that they would like to work. That is why the Government is providing enhanced support combining rights with responsibilities to help people to move from welfare into work through policies including ONE and the New Deal.
4.14 The New Deal is a key element of the Government's wider Welfare to Work strategy aimed at ending the waste of long-term unemployment. It is investing in the long-term employability of participants, giving them a greater chance to take control of their lives and recognising that for most peolple work is the foundation for independence and a sense of self-worth. The New Deal seeks to encourage people to utilise their talents and energy and equip them with the skills to compete for jobs. The key objectives of the New Deal are therefore:
This thereby makes a positive contribution to sustainable levels of employment and to a reduction in social exclusion.
4.15 The New Deal is funded from the proceeds of the one-off Windfall Tax. Independent evaluations of both the New Deal for young people1 and the New Deal for lone parents2 suggest that these programmes are close to paying for themselves. Falling levels of unemployment, in part because of the New Deal's success, have reduced its costs and allowed the Government to extend provision, investing in further reductions in worklessness. The 2000 Spending Review announced that the New Deal will become permanent, funded from a new Employment Opportunities Fund bringing together the remaining Windfall Tax receipts and additional resources.
4.16 The New Deal for young people was launched nationally in April 1998 and the New Deal 25+ was introduced in June 1998. Since November 1998, the Government has also been running innovative pilots of an enhanced New Deal 25+ to test the effectiveness of applying the principles of the New Deal for young people to this wider group. The message the Government has received is clear: the New Deal is proving effective at getting unemployed people back to work.
New Deal for young people
4.17 The Government made a manifesto commitment in 1997 to move 250,000 young people into jobs during this Parliament. It is well on the way to honouring that commitment. Evaluation by the National Institute of Economic and Social Research1 shows that the New Deal for young people is estimated in its first year to have reduced youth unemployment in Britain by around 40 per cent relative to what it would have been in the absence of the policy. Taken against international comparisons for programmes for young people, that is a very favourable result.
4.18 Long-term youth unemployment has fallen by 70 per cent since May 1997. The New Deal for young people helps young unemployed people to secure jobs as the most effective way of enhancing their earnings, increasing their skills and securing their future economic independence.
4.19 As of the end of August 2000, over 532,000 young people had joined the New Deal since the pathfinders were launched in January 1998 and almost 244,500 of these young people had found jobs. In addition, over 156,300 young people had gained work experience and training through the other New Deal options.
4.20 The New Deal for young people is not just about getting people into jobs today. It is also a programme designed to invest in a young person's long-term future. People who are unemployed for more than a year by the time they are 23 spend up to six times longer in unemployment over the following ten years than those who are unemployed for less than six months, and over 14 times longer than those who are not unemployed at all before 23. Securing employment is a fundamental building block of the New Deal. By helping young people into work, the New Deal is not just addressing their needs today but seeking to ensure that their long-term employment prospects are more secure.
4.21 The continuity and form of support offered by the personal adviser is providing a key element of the success of New Deal. Since June 2000, the Gateway stage of New Deal has been enhanced through specialist Gateway to Work provision, intensifying the support available to young people, and providing additional help with "soft skills" such as presentation, punctuality and communications skills. Up to 60 per cent of the young people on the programme believe that the New Deal improves their chances of getting a job.
New Deal for 25+
4.22 Budget 2000 announced that a comprehensive set of measures aimed at helping all unemployed people aged over 25 will be introduced from April 2001. This builds on the existing New Deal for 25+ which has already helped over 50,000 long-term unemployed people move into work. Since June 1998, people aged 25 and over who have been unemployed for two years or more have been eligible for a personal adviser service and, alongside a range of options, a £75 a week wage subsidy. Since April 2000, the New Deal 25+ Gateway has been enhanced with more intensive contact and greater access to support services.
4.23 A more intensive approach has been tested in some areas, and at earlier durations of unemployment, since November 1998. Building on these pilots and the experience of the New Deal for young people, as announced in Budget 2000, the New Deal 25+ will be extended and intensified from April 2001, on a national basis. For people aged over 25 who have been unemployed for 18 months, there will be a step change in New Deal provision, heralding a stronger emphasis on rights and responsibilities, comprising:
4.24 In order to enforce the rights and responsibilities within this enhanced provision,
4.25 The New Deal Innovation Fund backs good ideas generated at the local level for improving the effectiveness of the New Deal and increasing knowledge about what works in helping people back to work. As announced last year, the Government is providing further funds from the receipts of the Windfall Tax to extend the Innovation Fund. £9.5 million has been allocated to extend the Innovation Fund to March 2003, £5 million of which has been ring-fenced for measures within inner cities to explore the use of intermediaries in helping disadvantaged people into jobs.
4.26 The November 1999 Pre-Budget Report announced a £3 million Innovation Fund within the New Deal for lone parents. This will allow private, voluntary and public sector organisations to bid for funds to improve outcomes for ethnic minorities, long-term benefit claimants and those who face geographical barriers, and to increase the number of lone parents moving into sustainable employment through increased employer engagement.
New Deal for the over 50s
4.27 For most of the 1980s and early 1990s, the employment rate of men aged over 50 fell. Over the same period women over 50 did not experience the same marked increases in labour market participation that younger women have enjoyed. In recent years, the overall employment position of the over 50s has improved. However, the employment rate of those aged between 50 and the state pension age, at 67 per cent in spring 2000, remains well below the employment rates of 80 per cent or more of people aged 25-49.
4.28 The New Deal for the over 50s was launched in nine Pathfinder Areas in October 1999, and was rolled out nationally in April 2000. This New Deal programme provides:
4.29 This support is available to people aged over 50, where they or their partner have been on eligible benefits for more than six months, to help them return to work. The programme is voluntary and available to people who are economically inactive as well as the unemployed. In September 2000, the Government launched a major advertising campaign for the New Deal for the over 50s to ensure that all who can benefit from this initiative are aware of it.
Worklessness in deprived areas
4.30 Every region in Britain has experienced sharply falling unemployment and rising levels of vacancies. However, within regions there remain pockets of high unemployment, typically in individual local authority areas, wards within these areas and even down to particular housing estates. The majority of these areas are in inner cities, but seaside towns and former coal mining areas also feature. Often people from ethnic minorities, lone parents and people with disabilities are disproportionately concentrated within these small areas. They may suffer from poor housing, inadequate transport links and high crime rates, leading to social exclusion.
4.31 However, the problem of Britain's most deprived areas is not necessarily a lack of jobs in many cases, these areas are alongside, and within travelling distance of, labour markets with high levels of vacancies. People need to be equipped to take advantage of these opportunities. The Government's regional and area-based programmes are aimed at regenerating local communities but must also increase the employability of people in disadvantaged areas, so that they can access and fill vacancies that exist near to where they live. Otherwise such jobs will go to people outside the area, further reinforcing the problem.
Action Teams and Employment Zones
4.32 The Government is testing different approaches to tackling localised concentrations of inequality, through Action Teams and Employment Zones. By targeting the most disadvantaged areas a real contribution can be made to tackling some of the problems that have been identified. They can help people to find work and promote equality of opportunity, by:
4.33 Employment Zones offer the opportunity of tailoring programmes specifically to people's needs, with jobseekers and their personal advisers being able to set up Personal Job Accounts to use more flexibly funds that are available for support. In each case, the Government is looking for local solutions to local problems. Each will be unique to the area that it is serving. Action Teams, launched in autumn 2000, are working with the long-term unemployed and inactive people in the most deprived areas, identifying suitable vacancies in neighbouring areas and bringing the two together. Additionally, they are tackling barriers to employment, including funding for transport to enable people to access nearby vacancies.
4.34 The problems of deprived areas are often complex and long-standing. The Government will build on the lessons from Action Teams and Employment Zones in considering what possible further steps might be taken to tackle high levels of localised worklessness.
4.35 Action Teams and Employment Zones are complemented by a number of other area- based initiatives, such as the New Deal for Communities, Education Action Zones and Health Action Zones, all of which seek to address localised problems. In some instances these initiatives run co-terminously, enabling an assessment to be made as to whether these programmes deliver better outcomes than if they do not overlap.
Job Transition Service
4.36 Some of the most difficult employment problems have occurred when there were large-scale redundancies in areas dependent on one industry or one company. The Government will introduce a new service where large-scale redundancies occur, particularly in high unemployment areas or where there is a high dependency on one industry. The service will provide help for people made redundant to move into new jobs, preventing them from becoming detached from the labour market, and also provide extra help for those affected indirectly, such as the long-term unemployed. The service will build on existing provision including Rapid Response Units, and work closely with other government departments and agencies, including the Regional Development Agencies and Learning and Skills Councils, and tap into existing resources where possible.
4.37 The Government's ONE service combines a one-stop shop for benefits and employment advice, a personal adviser service to help people back into work, and work-focused interviews for all new benefit claimants: one place for work and benefits. It aims to forge an entirely new culture which puts work first, and provides a modern, integrated and flexible service for all. ONE is currently running in 12 pilot areas, including four using call centre technology and four led by the private and voluntary sectors. ONE represents a fundamental shift in the way that the Government supports people away from a system that asks simply "what money can we pay you?" to one that says "how can we help you become more independent?" As announced in the 2000 Spending Review, the Government plans a substantial expansion of the ONE service, building on the lessons from the 12 pilots.
4.38 To deliver support for people of working age, during 2001 a brand new, modern agency will be established with a clear focus on work. The new agency will draw together the Employment Service and the parts of the Benefits Agency that support people of working age. It will deliver a single, integrated service to benefit claimants of working age and employers. The agency will continue to develop the partnership approach to working with the private and voluntary sectors which the Government has adopted in implementing its welfare to work policies.
New Deal for lone parents
4.39 Balancing work and family responsibilities is often difficult for parents, particularly when they are the sole carer of a child. But taking long periods out of the labour market while caring for children can put families at greater risk of poverty and can be damaging to long-term earnings potential.
4.40 Lone parent employment rates have risen from 44 per cent in 1997 to just over 50 per cent now, their highest level for over 20 years, and the number of lone parents on Income Support has fallen by over 100,000 since 1997. However, nearly half of lone parent households still have no-one in work, compared to only 7 per cent of couples with children. Children in lone parent households make up almost half of all children in poverty. There is still more scope for increasing employment opportunities for lone parents. The Government announced a new target for lone parent employment in the new Public Service Agreement targets in the 2000 Spending Review, including reducing the number of children in households with no-one in work over the three years to 2004, and reducing the number of children in poverty by at least a quarter by 2004 (see Chapter 5).
4.41 The New Deal for lone parents (NDLP) provides the opportunity for lone parents to receive help from a personal adviser to improve their prospects and living standards by taking up, and increasing, paid work. From the national launch of the programme in October 1998, over 158,000 lone parents have participated and over 60,000 have already moved into employment.
4.42 As announced in the November 1999 Pre-Budget Report, a package of improvements to NDLP has been introduced this year, including specialised resource centres and intensive help for lone parents soon to move onto Jobseekers' Allowance, an innovation fund and pilots of in-work training grants.
4.43 There are a significant number of lone parents, around 150,000, who are not working but who are not currently eligible for NDLP because they are not on Income Support. This includes lone parents who receive enough maintenance or Widowed Mother's Allowance to move them just out of Income Support, but which leaves them and their children in poverty. Starting in autumn 2001, the offer of help and support from the NDLP will be made available to all lone parents who are not working, or who are working less than 16 hours per week.
4.44 The Government recognises that for some lone parents, particularly those with young children, choices are constrained. Since April 2000, in the 12 pilot areas of ONE, all lone parents making a new benefit claim have been required to meet a personal adviser to discuss options for work and training. Building upon the lessons learnt, the Government will be providing information and guidance about opportunities to work, study or care for their children full time, through a specialist lone parent personal adviser. The opportunities on offer to lone parents include:
4.45 These choices will be offered on a voluntary basis. From October 2000 in pathfinder areas and nationally from April 2001, lone parents on Income Support with children over the age of five will be required to meet a personal adviser to discuss the opportunities available to them.
4.46 Chapter 5 sets out in more detail the Government's overall strategy for abolishing child poverty and for ensuring security for lone parents and their children, particularly when their children are young.
New Deal for partners of the unemployed
4.47 For couples where one partner is unemployed, the chances of the other partner being in work are much lower. This is especially the case for women: where the male partner is unemployed, only 40 per cent of female partners are employed. In contrast, where the male is employed, 75 per cent of female partners are employed. The large increases in female employment over the past 20 years have come in households where the partner is already in work. The New Deal for partners of unemployed people was launched in three pathfinder areas in February 1999 and was rolled out nationally in April 1999. It provides a personal adviser service aimed at helping partners of unemployed people to move into work. Partners aged between 18 and 24 are eligible to receive help through the New Deal for young people and from April 2001 will become joint JSA claimants subject to the same rights and responsibilities as the main claimant.
New Deal for disabled people
4.48 People with disabilities have a particularly low level of participation in the labour market and low employment rates. Whereas 79 per cent of the whole working age population is economically active, only 52 per cent of those with a work-limiting or Disability Discrimination Act-defined disability are, and even fewer just 11 per cent of those of working age on Disability Living Allowance are in work or looking for work. The goal of the New Deal for disabled people is to increase the labour force participation rate of this highly disadvantaged group.
4.49 Many people with disabilities say they wish to work. The Government has responded by:
4.50 Recognising the need for innovative approaches in this area, the New Deal for disabled people tests a variety of measures and delivery mechanisms. There are:
By the end of September 2000, over 5,000 people with disabilities over 30 per cent of participants had found work through the New Deal.
4.51 In the 2000 Spending Review, the Government set aside additional resources for the extension of services for people with disabilities across the country under the New Deal for disabled people; and for retention and rehabilitation pilots.
4.52 The Pre-Budget Report announces further details of these policies. Both initiatives will continue to place great emphasis on testing experimental approaches in order to develop the most effective service possible to help people with disabilities into work. Continuing the focus on sound evidence-based policy-making, the NDDP will be evaluated using random assignment, learning what works best, to guide future policy-making:
Funding Welfare to Work
4.53 The Welfare to Work programme is currently funded from receipts of the one-off Windfall Tax on the excess profits of the privatised utilities. This Windfall Tax raised a total of £5.2 billion. To make the New Deal a permanent deal, the 2000 Spending Review announced the creation of a new Employment Opportunities Fund to continue and expand New Deal programmes once Windfall Tax receipts become exhausted. This Employment Opportunities Fund, worth £875 million in 2001-02, increasing to £1.4 billion in 2003-04, is part of the Government's long term investment strategy and will ensure successful employment initiatives will continue to be funded in the future.
Table 4.1a: Allocation of the Windfall Tax receipts 1997-98 to 2000-01
1 Rounded to the nearest £10 million (except where expenditure is less than £5 million). Constituent elements may not sum to totals because of rounding. Outturns for 199798 and 199899, projected outturns for 199900 and allocations for 200001.
2 Includes £10 million for skills development fund.
3 Includes £10 million in 199900, an element of the November 1998 announcements on Welfare Reform.
4 Capital spending on renewal of school infrastructure, to help raise standards.
5 Start-up and development costs. Other costs of the UfI are funded from within departmental expenditure limits.
6 Funding for repeat interviews. Other funding comes from the Invest to Save budget.
Table 4.1b: The Employment Opportunities Fund
EASING THE TRANSITION TO WORK
4.54 For many people, especially those who have been out of work for long periods, the transition back into work can be a difficult period. Although they would be better off in work, the associated risks, especially managing until the first pay cheque and covering any additional expenditure such as buying clothes for work, can make many people prefer to stay on certain, but lower, benefit levels rather than make the move into work. Some groups also require additional support to overcome specific barriers to work for example families with children can be constrained by the cost and availability of childcare. The Government has therefore introduced a number of reforms to improve and simplify the schemes available to help ease the move into work. The new measures aim to provide people with additional financial support during the transition period in as straightforward and automatic a way as possible. This will give people security as well as encouraging them to take up employment.
4.55 As announced in Budget 2000, from spring 2001 a Job Grant of £100 will be available for people who move from welfare into work. This builds on the two-week Income Support run-on for lone parents, introduced in October 1999, which they will continue to receive. The Job Grant will replace the discretionary and narrowly targeted Jobfinder's Grant and Jobmatch, providing a single transitional payment, available much more widely and without the complex eligibility criteria of the previous schemes.
Income Support for Mortgage Interest run-on
4.56 Housing costs are a particular concern to many people moving back into work. Although Housing Benefit can be paid in work, the time taken to process claims can lead to rent arrears building up. Housing Benefit can already be paid, at out-of-work rates, for the first four weeks in work under the Housing Benefit Extended Payment scheme for recipients of Income Support and Jobseekers' Allowance. As announced in Budget 2000, the rules of this scheme will be simplified from April 2001 to ensure that payments are as near automatic as possible.
4.57 The Government is also providing help with housing costs for homeowners going back to work. Homeowners who have been out of work and on Income Support or Jobseekers' Allowance for nine months or more receive help in paying the interest on their mortgage through Income Support Mortgage Interest (ISMI). As announced in Budget 2000, from spring 2001 the Government will extend the ISMI scheme to provide a four week ISMI run-on for those entering work. The existing linking rules will also be improved so that everyone getting ISMI will be able to requalify for it directly if they return to benefits within one year of taking a job.
4.58 The Government is also making it easier for those in the benefit system to try out work by increasing the amount of earnings disregarded in Income Support and Jobseekers' Allowance by £5 to £20 a week for those groups facing restricted work choices, such as lone parents, carers or people with disabilities. As announced in Budget 2000, from April 2001 these groups will be able to keep £20 a week of any earnings without losing their benefit. This will boost their incomes and help them progress in work and move off benefits.
4.59 Budget 2000 also announced that from April 2002 the Government will introduce measures to streamline the process for re-claiming benefit for people on Jobseekers' Allowance and Income Support returning to benefit after taking up full-time work for periods of up to 12 weeks. The Government will also consider the case for introducing a similar arrangement in Housing Benefit. This should encourage benefit claimants to report starting work which may be temporary or insecure and help ensure that they are not deterred by the normal claims procedure. Together, these measures will help to reduce the barriers to trying legitimate work (see Box 4.3).
National Childcare Strategy
4.60 High-quality, affordable and accessible childcare will be a key factor in achieving the Government's objective to reduce the number of children living in workless households. The Government aims to support those already in work and promote the move into work for those on benefits. Evidence shows that childcare is a major barrier to parental employment, particularly for lone parents.
Childcare tax credit
4.61 The Government's strategy is to make childcare affordable for low-income parents by subsidising their childcare costs. The Working Families' Tax Credit and Disabled Person's Tax Credit include a generous childcare tax credit element. Funding childcare in this manner ensures that the choice of childcare provider is where it belongs with the parents.
Support for childcare providers
4.62 To date, the National Childcare Strategy has created new childcare places that have helped 427,000 children across England. In the 2000 Spending Review, the Government announced a major expansion of childcare, focused specifically on providing childcare facilities in disadvantaged areas for parents moving into work. This expansion will be funded by a threefold increase in annual expenditure on childcare from £66 million this year to over £200 million by 2003-04, and £155 million extra for childcare from the New Opportunities Fund between 2001 and 2004. The Government is offering:
The new money from the 2000 Spending Review and New Opportunities Fund will ensure that the Government will have created places for 1.6 million children by 2004. Taking into account turnover, that means a net increase in places for 1 million children in England alone.
The informal economy
4.63 The review of the hidden economy, conducted by Lord Grabiner QC, and which reported to the Chancellor in March 2000, looked at the problems of unregistered businesses and self-employed people and employees in the hidden economy, and made a number of recommendations.
4.64 Lord Grabiner's report suggests that people can become trapped in the hidden economy because they are not aware of the legitimate opportunities that are available. The Government has already introduced a number of new incentives to encourage people to leave the informal economy and take up legitimate work. In June 2000, a confidential telephone line was launched to advise people in the hidden economy about how to put their affairs in order and how the tax and benefit rules apply to them. The Government also announced the introduction of a series of measures in Budget 2000 to help simplify the transition off benefits and into work, including the £100 Job Grant and increases in earnings disregards.
4.65 In addition, the Government will:
4.66 Lord Grabiner also recommended new measures to take action against those who persist in the hidden economy, especially employers who commit multiple tax offences and collude in benefit fraud. The Government:
MAKING WORK PAY
4.67 Evidence suggests that people who are out of work are reluctant to move into work if the financial gains are small. The situation where the difference between in-work and out-of-work incomes is too small to provide an incentive for someone to move into work is known as the "unemployment trap".
4.68 Those already in work can be discouraged from working longer hours or taking a better job because, as their earnings increase, their benefits are reduced and they must pay more income tax and national insurance contributions. Where this happens, it is often referred to as the "poverty trap".
4.69 Policies aimed at helping individuals better compete in the labour market, such as the New Deal, therefore need to be supported by policies that reward work. In the past, it was often the case that the financial incentives were insufficient to encourage people to take work, or to take a better paid job:
4.70 The Government is therefore committed to tackling the unemployment and poverty traps by making sure that work pays more than welfare and by providing incentives to move up the earnings ladder.
National Minimum Wage
4.71 The National Minimum Wage ensures fair minimum standards of pay and underpins the Government's tax and benefit reforms. It was introduced in April 1999 and the rates were recently increased to:
4.72 Trainees (workers aged 22 and over in the first six months of employment and receiving training leading to a recognised qualification) are also entitled to a minimum wage of £3.20 an hour.
4.73 The Low Pay Commission's Second Report, which assessed the initial impact of the National Minimum Wage, found that the National Minimum Wage has been a success and has not had any harmful effects on employment or the economy. The Low Pay Commission has been asked by the Government to continue to monitor the impact of the National Minimum Wage and consider the case for a further increase, and to report its findings by July 2001.
4.74 Women's earnings continue to lag behind those of men, 30 years after the Equal Pay Act. The Government recognises that there are major problems in the equal pay tribunal procedures. It can take years for women to gain redress for pay discrimination; delays and complexity deter many more women from bringing claims. The Government is committed to tackling these problems and ensuring equity for women. The Department for Education and Employment and the Department of Trade and Industry will shortly bring forward for consultation proposals for overhauling the system, with the specific aim of speeding up and simplifying tribunal procedures.
Making work pay for all
4.75 The Government has embarked upon a series of reforms to help make work pay at all levels of the labour market, including for those on low incomes. The basic rate of income tax was reduced to 22p from April 2000 the lowest level for 70 years. The introduction of the 10p starting rate of income tax in April 1999 halved the marginal tax rate for 1.8 million people in low paid work.
4.76 In addition to reducing income tax, the Government's reforms to employees' national insurance contributions (NICs) have helped to ensure that jobs at the lower end of the earnings distribution now pay better. Following a report into work incentives by Martin Taylor3, published at the time of the 1998 Budget, the NICs entry fee was abolished, removing the situation where employees could face a drop in net pay as a result of a one penny increase in gross earnings. In addition, as previously announced from April 2001 the threshold above which employees pay NICs will be increased to align it with the income tax personal allowance.
4.77 The Government has also simplified NICs payments for employers, introducing a single employer rate and aligning the point at which employers begin to pay NICs with the personal tax allowance. Additionally, there will be a reduction in employer NICs of 0.3 percentage points from April 2001 and a further reduction of 0.1 percentage points from April 2002, thereby ensuring that all revenue from the climate change levy and the aggregates levy is recycled back to business (see Chapter 6 for details of the climate change levy and the aggregates levy).
Additional targeted support
4.78 Martin Taylor's report highlighted the particular work incentive problems faced by families with children. To address these problems, the Working Families' Tax Credit (WFTC) was introduced in October 1999. Already, more than 1.1 million families are receiving the WFTC, around 300,000 more than received Family Credit at its peak. Families are, on average receiving around £30 a week more compared to Family Credit.
4.79 The WFTC includes a generous childcare tax credit component, which helps many families for whom the cost of childcare is a barrier to work. The credit is worth 70 per cent of eligible childcare costs up to £100 a week for a family with one child and £150 for a family with two or more children. Over 100,000 families are benefiting from the childcare tax credit, more than twice the number that received the Family Credit disregard at its peak. In addition, as a tax credit rather than a disregard, it is of particular help to those on the lowest incomes.
4.80 Recent increases in the Working Families' Tax Credit for children, combined with the increase in the National Minimum Wage to £3.70 an hour, now guarantee a minimum income of £208 a week, rising to £214 a week from April 2001 for a family with children eligible for WFTC and with someone working 35 hours or more a week.
4.81 The Disabled Person's Tax Credit (DPTC), launched alongside the WFTC, helps to provide support for workers with disabilities. In August 2000, over 25,000 disabled workers were benefiting from DPTC 37 per cent more than were receiving Disability Working Allowance in July 1999 by an average of £72 per week. DPTC is open to people who work for 16 hours or more a week, have an illness or disability which puts them at a disadvantage in getting a job, and who are either receiving one of a range of incapacity or disability benefits at the time of their application or have been receiving certain benefits within the previous six months. From October 2000, a new fast-track to DPTC was introduced to help people who have been sick for 20 weeks or more, but can do some work, to remain in their job.
The effect of the Government's package to make work pay
Tackling the unemployment trap
4.82 The reforms outlined above are helping to ensure that work pays more than welfare, thereby addressing the unemployment trap. The gain to work has increased while security for those out-of-work has been maintained and enhanced.
4.83 The Government's making work pay package highlights clearly the rewards of work over welfare, and by April 2001 guarantees:
Weekly Minimum Income Guarantee
4.84 There is some evidence that unemployed people may be reluctant to take a job if they will be less than £40 a week better off in work. As a result of measures announced in previous Budgets over the current Parliament, the weekly wage before tax needed to be £40 a week better off in work has fallen from nearly £260 to £160, for a couple with two children under 11. This amount is very close to the average wage this group would command when moving into work. This is illustrated in Chart 4.2.
Tackling the poverty trap
4.85 The Government's reforms to the tax and benefit system have also helped to counter the poverty trap. Low-income families, who often face the highest marginal deduction rates and therefore the greatest poverty trap, now keep more of each additional pound that they earn. This means they have more incentive to take a better paid job or increase the hours they work. As a result of tax and benefit reforms, the number of families facing marginal deduction rates4of more than 70 per cent will fall to around a third of the 1997 level a reduction of nearly half a million during this Parliament.
Increasing labour supply
4.86 One of the key aims of the Government's tax and benefit reforms is to boost labour supply by increasing the number of workless people who are seeking work.
4.87 The Government has also estimated the impact of the whole package of measures to make work pay, including the reductions in income tax and NICs. On cautious assumptions, the initial package of reforms5 is estimated to increase labour supply by 160,000 people. If this result was translated into jobs, it would mean:
4.88 Further details of these estimates are contained in "The Modernisation of Britain's Tax and Benefit System, Number Six, Tackling Poverty and Making Work Pay Tax Credits for the 21st Century", HM Treasury, March 2000.
SECURING PROGRESSION IN WORK
4.89 Moving from welfare into work is the first step in moving out of poverty. But the Government also wants to enable people to progress up the earnings ladder once in employment. The Government has introduced policies to promote lifelong learning to ensure that everyone in work is equipped with the training and skills necessary to progress in work.
New Deal providing skills
4.90 Both the New Deal for young people and the New Deal 50 plus offer a £750 in-work training grant. This access to training through the New Deal programmes helps people develop their skills, thereby providing opportunities for people to climb the earnings ladder.
Life long learning
4.91 In order to gain the vocational skills businesses require for higher paid work, many people first need to upgrade their basic skills. Only by building a new culture of lifelong learning can this be achieved. The new Learning and Skills Council will work in partnership with employers, Regional Development Agencies and the Small Business Service to deliver the right skills to progress in work.
4.92 The Government has also invested £25 million to make opportunities available for up to 50,000 more people to get the ICT skills they need to increase their employability, and if they need it, to improve their basic literacy and numeracy. This measure complements the ICT learning centres announced in Budget 99. Nineteen pilot projects are testing innovative ways of enabling people to overcome barriers to their acquisition of basic ICT skills.
4.93 Lifelong learning is not just about basic skills. There will also be increased means through individual learning accounts, and increased opportunities through the learndirect centres, for individuals to take responsibility for their own futures, and to continue to increase their knowledge and skills, thereby improving their employability. Currently over 700 learndirect centres are operating nationally, offering over 400 courses including ICT, Basic Skills, Multimedia and Retail & Distribution. Over 85 per cent of these courses are available on-line. More details are provided in Chapter 3.
1New Deal for young people: first year analysis of implications for the macroeconomy, National Institute of Economic and Social Research, December 1999.
3The Modernisation of Britain's Tax and Benefit System number two "Work Incentives: A report by Martin Taylor." HM Treasury, March 1998.
4 The marginal deduction rate measures how much of every extra pound that someone earns is lost as they pay more tax and have their benefits reduced.
5 All tax and benefit reforms excluding those measures announced in Budget 2000 and the childcare tax credit.