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Ian Brinkley
Economic Advisor
Ian Brinkley

Welfare Revolution or Evolution?

Authors: Ian Brinkley Ian Brinkley

24 November 2010

The recent White Paper setting out the Coalition’s proposals for a Universal Credit has been described as a fundamental reform of the British welfare system. The proposals certainly have some attractions such as simplification and improvementd in work benefits for some people. But whether their expected labour market impact really justifies some of the hyperbole is more doubtful.

In the White Paper the Department of Work and Pensions says that the proposals will reduce the number of workless households by 300,000 and the number of workless individuals by 500,000. These are impressive figures. However, the latest official statistics show that there were just over 3.9 million workless households with at least one person of working age. This compares with 3.5 million working age households just before the recession. So the reduction in workless households predicted by DWP would not be enough to take us back to pre-recession levels.

This is an unfair comparison, as most of the increase in workless households over the recession was due to unemployment and some of the increase will therefore reverse as unemployment falls in the recovery. Even if we assume that worklessness would have returned to its previous level in the absence of reform (and this is a very big assumption), the additional impact of the reforms would take it down to 3.2 million. This is a significant advance but not earth-shattering.
The transition to Universal Credit starts in 2013 but will not be completed until 2017. The DWP nonetheless thinks the full effect will be realised within two to three years of implementation, so somewhere between 2015 or 2016. This is a big change in a short period.

Under previous governments worklessness also declined. Between 1997 and 2008 the number of workless households fell by just over 180,000. Some of this was due to an improving economy and some to government policies. The DWP offers no overall assessment. However, it contrasts its own estimates of the impact of future reform with independent research into the impact of previous measures. For example, the combined impact of tax credits, New Deal for Lone Parents, and childcare strategy put 80,000 lone parents back to work, according to one study dating back to 2003.

The DWP assumes Universal Credit will have a bigger impact because it is on a bigger scale than previous reform efforts. It is not obvious it is comparing like with like. Moreover, past experience suggests that when properly researched independent evaluations are done after the policies have been introduced the results, while often positive, seldom match the high hopes surrounding their introduction.

The DWP estimates that the biggest impact of the reform will be by moving 250,000 households by moving them in to what the DWP terms 'mini-jobs' of less than 16 hours a week. However, the UK labour market historically has not generated new mini-jobs. Between 1993 and 2008 the number of employees working less than 16 hours fell slightly by 6 per cent, with the share of employee employment in such jobs dropping from 10 per cent to 8 per cent.

The DWP is assuming a big structural change in the composition of the UK labour market towards low- hour work in a relatively short time scale. Moreover, the competition for such jobs from students has been growing and is likely to accelerate as higher fees for universities are introduced. Much of the increase in part time work before the recession was driven by students combining work and study.

The DWP also says that another 100,000 workless households will be moved into what the DWP terms 'full-time jobs' of 16 hours or more. This is an unconventional definition, as most statistical authorities define full time work as at least 30 hours a week. But at least the historical experience suggests the economy is quite capable of generating jobs involving 16 hours or more in large numbers.

So far we have taken the DWP estimates at face value. However, as the DWP itself says, the conventional models and analytical tools it uses internally cannot precisely estimate the impact of Universal Credit: 'we acknowledge that the true impact is highly uncertain' . The DWP says it uses 'plausible' assumptions, although quite what this means is not clear as one would hardly expect the Department to use implausible ones. Moreover, the estimate of a reduction of 100,000 workless households by people moving into the DWP’s elastic concept of a full-time job appears to be based in part on an 'illustrative example of the potential impact of improving these aspects of the benefit system'. This sounds too much like educated guesswork to make us entirely comfortable with the predictions.

It is hard to escape the conclusion that the reform’s impact on worklessness and poverty is being oversold. Let us all hope that the DWP’s brave and challenging assumptions about the impact of these reforms on the UK labour market turn out to be right and prove that assessment wrong. Better still, between now and 2013 when the Credit is to be implemented, the DWP should commission independent research on the reform’s likely impact and commit itself to funding a proper independent assessment in 2016 of what the actual net impact has been. Fundamental reform surely deserves nothing else.