Employment

Lord Freud Excerpts

Thursday 6th June 2019 Lords Chamber

[Lord Freud (Con)]

My Lords, I congratulate my noble friend Lord Leigh on obtaining this debate. I would like to make some observations on the role of the changes to the welfare system in the record levels of employment. I acknowledge that any such impact has taken place in the context of various other levers, such as a flexible labour market and a healthy economy.

In 2007, I wrote a report for the Government on the welfare to work system which endorsed an “aspiration” to achieve an 80% employment rate, compared to the contemporaneous level of 72.7%. The financial crisis of 2008 meant that the 72.7% level proved a high point and the rate collapsed to little more than 70%. From there, employment has clawed its way back to above 76% in 2019—the highest level on record. The various changes in the structure of employment in the UK, such as the increase in the female working age and the greater number of students, mean that this figure is now probably more or less equivalent to the original 80% aspiration.

The welfare system must perform a difficult balancing act between providing an adequate safety net while giving an incentive for people to take economic control of their lives. In particular, it should be designed in a way that does not trap people in inactivity—and the legacy system does have the effect of trapping people in this way. Employment increased in the first decade of this century, but the bulk of the gains derived from people born abroad. It is remarkable how little the number of inactive people living in social housing changed, for instance, through a full economic cycle.

Perhaps the most important piece of work underlying the reform programme was Waddell and Burton’s summary of research published in 2006, entitled Is Work Good for Your Health and Well-being?. I know that it was a major influence on my own report. The positive response to the question meant that the state could pursue work for citizens as an unequivocal goal.

To what extent do the record employment figures we are now seeing reflect the reform programme that was set in train after 2007? The most radical elements were introduced under the coalition Government, but there were major steps under the previous Labour Government, too. Moreover, in parallel with the reform programme, led by the DWP, there was a series of rounds of cuts to benefit payments, led by the Treasury. At this stage, it is much too early to reach a definitive conclusion. There is hard evidence on three of the reforms, and I am indebted to Robert Joyce of the Institute for Fiscal Studies for steering me to them.

The change to lone parent obligations recommended in my original report for the Labour Government boosted the work rate by around 7 percentage points. According to the research, changing the requirement for lone parents to find work when their youngest was five years old rather than 16, has had,

“a much greater impact on moving lone parents into work than other previous programmes and initiatives aimed at this group of claimants”.

The impact of raising the female state pension age was bigger still. This was a reform legislated for in 1995, but accelerated under the coalition. Research by Carl Emmerson of the Institute for Fiscal Studies and Jonathan Cribb of University College London found that the proportion of affected women in work increased by about 10 percentage points.

The reform introduced by George Osborne to cap benefit levels also had a positive effect. The IFS estimated that about 5% of those affected responded by moving into work within a 12-month period, when they would otherwise not have done so. Although that is a fairly sizable effect by the standard of most benefit reforms, its narrow focus meant that it did not have a notable impact on overall employment numbers.

However, there is as yet little definitive work on the employment impact of the two major changes in the years between 2010 and 2016: the cuts programme pushed through by George Osborne and the introduction of universal credit. It is worth pointing out that the cuts programme itself would tend to encourage people into work, as the relative advantage of work and benefits changes.

The latest official estimate for the impact of universal credit, made in 2018, estimated that it would increase employment, when fully rolled out, by about 200,000 people. The early research showed that recipients spent less time out of work than if they were on JSA. There are still only 1.8 million people on universal credit, compared with the 11 million or so when it is fully rolled out. However, it is a well-known phenomenon that people anticipate changes, so that often up to two-thirds of the impact of a new benefit regime can be observed before it is in effect. That phenomenon may well have been amplified by the consistent message that the Government have applied for the past decade or more about the importance and value of work.

There are a number of specific impacts of universal credit quite apart from the financial incentives. There are structural changes, such as the changes to mixed pension and non-pension households. There are two areas of enhanced simplicity. The single taper means that people can straightforwardly forecast their earnings when they work more. At the same time, the combination of tax credits and benefits under one umbrella gets rid of the discontinuities involved in moving between two systems.

We will not obtain a full measure of the impact of these changes for many years. However, as the country faces the new challenges ahead, it may not be a coincidence that the starting point is the highest level of employment on record.