Helping the long-term unemployed

The labour market in the UK has shown itself to be remarkably resilient in recent years.  Despite the economy shrinking by more than 7 per cent from its pre-recession peak and still being some way from a full recovery (latest NIESR estimates put the current shortfall at 2.7 per cent), the effect on unemployment has been relatively muted.  In part, this is a reflection of the flexibility of the UK labour market, with levels of employment maintained by workers accepting lower wages or working fewer hours.

However, overall unemployment figures mask important trends.  The headline rate does not distinguish between short-term and long-term unemployment.  These two are very different.  Were the unemployment rate driven primarily by more people having short spells, one might imagine that their brief experience of unemployment would cause little or no harm to their longer-term prospects.  If, on the other hand, there is a core of long-term unemployed then the worry is that their prolonged worklessness may make it more difficult for them to get work, both now and in the future.  There are numerous possible reasons for this – employers may discriminate, morale may decline, skills may become obsolete, and so on.  Whatever the reason, the personal reality for those who remain unemployed for too long is that there is a danger of them losing their ability to find a good job, or perhaps any job.

The chart below shows how the structure of unemployment has changed over the last five years (for 16-64 year olds).  The initial increase in unemployment (up to mid 2009) was accounted for by the growth in short spells, as more individuals joined the unemployment rolls.  Since then, there has been an increase in longer-term unemployment.  The solid line (right hand axis) shows those unemployed for more than a year as a proportion of the total number unemployed.  This has increased by more than 10 percentage points since the first quarter of 2008.  The very long-term unemployed (dashed line)  now account for nearly one in five of all unemployed.

Given the increased numbers of long-term unemployed, policies to help them are of clear interest.  The Employment Retention and Advancement (ERA) demonstration provides unusually strong evidence that the combination of tailored in-work advice and temporary earnings supplements to reward sustained full-time work can help.  The effectiveness of ERA was examined using a randomised control trial, with outcomes observed for the subsequent five years.  The results clearly showed that this combination of support increased earnings by more than 10 per cent.  What’s more, the impacts were pretty consistent over the four financial years for which earnings data were available (see chart).  A detailed analysis showed the benefits to outweigh the costs by a considerable margin (the official report of the evaluation provides full details).

These earnings impacts were mirrored in the employment impacts.  A new NIESR discussion paper asks whether ERA achieved its impressive effects by encouraging more people into work or by helping them to stay in work.  As suggested above, the distinction is important since it is employment retention that is more likely to bring the longer-term benefits – increased employment stability, skill acquisition, earnings growth, career advancement, etc. – and offers hope of breaking the ‘low-pay no-pay’ cycle.

The key findings of the research are summarised in the charts below.  By modelling moves in and out of employment, the overall impacts of ERA on employment can be simulated.  The top chart (labelled “Entry and retention effects”) shows an increase of about 2 percentage points, small in absolute terms but a 10% increase on the employment rate among the control group.  The confidence intervals (represented by dashed lines) indicate that these impacts are statistically significant.  Using the estimated model, the separate effects of employment entry (bottom left chart) and employment retention (bottom right) can also be seen.  From this it is clear that impacts over the first three years or so were driven by more people entering work.  Beyond that point, retention effects became increasingly important.

So, the evaluation of ERA has provided conclusive evidence of its effectiveness at increasing overall employment and these new results suggest that it was also successful in increasing employment retention.  ERA was a demonstration project and there was no commitment to continuing it beyond the demonstration period.  However, in view of the current high levels of long-term unemployment, policymakers should perhaps consider whether there might be a role for this type of support among the provision available to those looking for work.