How to tackle unemployment

A speech by the Rt Hon Chris Grayling MP, Minister for Employment.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Chris Grayling MP

I am delighted to be able to join you today and to deliver Politeia’s Spring Address. My connection to Sheila and her work go further back than either of us care to remember: She was one of my history tutors at Cambridge.

Now we are no longer studying history, we are helping to shape it.

I am here today to address you on the issue of unemployment, and I really want to do two things, firstly set out the scale of the challenge we face and secondly explain the revolutionary approach we have taken to tackling it - an approach that has profoundly changed the way Government provides services.

The figures speak for themselves, there are currently five million people on out of work benefits.

The overall unemployment rate is still showing the impact of recession.

Youth unemployment has been rising since the early part of the last decade - well before the recession started. It’s probably the most challenging part of our labour market legacy.

Over the past year there have been some encouraging signs. Private sector employment has been rising much faster than public sector job losses.

The labour market still shows month to month fluctuations, but it does appear to be more stable now.

The independent Office of Budget Responsibility is in fact forecasting a big increase in employment over the next few years as the economy recovers.

And therein lies our big challenge.

As we take the tough decisions needed to reduce the deficit, rebalancing the economy and driving economic growth, we are seeing confidence return and private sector employment rise.

This is good news and many people will need only minimal support to return to the labour market as more vacancies become available.

But within that five million there are people who have never worked, generations of families who have lived their whole lives on benefits, people with drug and alcohol addictions, ex-offenders; people living on the fringes, failed by a system that is meant to provide support.

Working age welfare spending has increased by 50 per cent in the last decade. Long term benefit dependency is rife, of the 2.6m claiming incapacity benefits, over half have been on benefit for at least 5 years, and a third have been on benefit for 10 years or more.

There are two key problems with the current system.

Firstly the benefits system itself is broken, it is too complex, and for too many people moving from benefits into work simply doesn’t pay.

And secondly, back to work provision has been inadequate for a long time. The New Deals consistently underperformed and failed to break the cycle of long term dependency for many claimants. They ended up shunting people around from dole queue to training room and back again - centrally designed programmes that lacked the individuality of approach that was needed.

The more than two million people on Incapacity Benefit received no support at all to see whether they could do something more than simply spend the rest of their life on benefits. For too long they have been stranded on the margins of our society.

These deeply entrenched problems require radical solutions. And those solutions lie at the heart of the work this Government is doing.

Making sure that work pays.

Delivering specialist back to work support.

Making sure we look again at each individual case to identify the best way of providing support.

To make work pay we are completely overhauling the benefits system, replacing the majority of working age benefits with the Universal Credit. This will create a simpler, fairer benefits system; it will remove the complexities that keep people trapped on welfare, and ensure that we smooth the transition between benefits and work. Above all we need to get rid of the claim that “I’m better off on benefits”.

Crucially, with the introduction of the new Work Programme next month, we are also putting in place effective back to work support for all.

The Work Programme is a revolution in service provision.

It is entirely unlike anything that has gone before.

It will draw upon the best of private, voluntary and third sector expertise to deliver truly tailored support based on individual need. We will not dictate the nature of this support but instead will reward success using payment by results.

We will deliver more by reinvesting the savings we make from getting people off benefits and into work, and drive provider performance through a bonus structure linked to achieving sustainable employment. This is in itself a revolution. Up to now the Treasury has always guarded the barriers between conventional spending on departmental programmes, and the separate pot from which benefits are paid. This is the so-called AME-DEL switch, and it represents a real step forward in delivering support for people on benefits.

This unique payment structure recognises some people will require more help to find and stay in work than others and payments will range from £3,500 for those who need minimal assistance to £14,000 for the hardest to help, reflecting the differing levels of support required.

The contracts are long, up to seven years and include financial incentives for maintaining, as well as securing, employment. Longer contracts mean providers have more certainty and are more willing to invest in provision. Differential payments means they can invest in people.

When I first embarked on delivering this support I felt there was a real opportunity to transform welfare to work services, to create a service that was capable of delivering a personalised package of support for those furthest from the labour market. But it wasn’t clear whether the private sector would in fact be willing to invest.

And we worked hard to find the right balance. This has to be a good deal for both taxpayers and providers financially. We need our providers to make a profit, but only if they do well at getting people into work. We don’t want them to be able to make money inappropriately from the taxpayer when they don’t succeed. So we asked some of our leading investment bankers to go through the contracts with a fine toothcomb and identify the weak points, any space ripe for exploitation. And then we closed the gaps.

What we’ve ended up with is a contract structure that runs like this.

For the first three years there will be a small up front payment - about 10% of the total. Thereafter it’s 100% payment by results.

The next payment only comes after someone has been in work for three months if they are from a vulnerable group. Or six months if they are a conventional jobseeker.

Then the rest of the fee is paid in instalments that last up to eighteen months. And if the person drops out of work those payments stop.

It’s meant to be challenging, and more than one provider told me it was.

So we waited to see if we had got that balance right. And if the private and voluntary sectors were really willing to buy into the principle of payment by results.

We now know that the 18 preferred bidders and 300 plus sub-contractors - from a mix of public, private and voluntary - are willing to make that investment - to the tune of £580 million in the first year alone.

This is a powerful indication that payment by results can deliver exciting, innovative programmes that simultaneously provide an effective service and are good value for the tax-payer.

The Work Programme will begin next month, and I believe it will transform the lives of many of our most vulnerable people.

But what we have created with the Work Programme is not just a system of back to work support, but a blueprint for the provision of Government services.

We have built something that can go much further than tackling unemployment, and we are now looking at developing a sophisticated system of social interventions based around the payment by results model, with the Work Programme at its core.

For too long tackling poverty has been reduced to its most basic level - income - and the solutions have been equally simplistic; raise benefit levels and where possible get people into work.

But this approach falls down because it does nothing to tackle the root causes of disadvantage, if anything it perpetuates cycles of poverty as people either remain static, trapped in a benefits system that provides just enough to survive or alternatively rotate around the system through benefits, training and work over and over again, never achieving stability or fulfilling their potential.

To affect real change we must tackle the root causes of poverty, we must break down the barriers that prevent people from achieving their potential, that stop people finding and keeping a job. This is why the Secretary of State is committed to his Social Justice agenda, to transform the lives of the most vulnerable people and to prevent others from slipping down in the first place. Social Justice encourages early intervention, to stop the initial situation snowballing into a complex, long-term social problem. This means recognising the fundamental role of a stable family life in child development; supporting people suffering from addiction to achieve full recovery; delivering practical support to break the cycle of re-offending when people leave prison.

With the Work Programme at the centre we are exploring ways of using the payment by results model to tackle some of these issues.

Let me give you a couple of examples of areas we are exploring.

Intergenerational worklessness is a major problem, there are some 800,000 individuals living in households where no-one has ever worked and almost two million children living in households that are currently workless.

These are troubled families, often with multiple problems, and often already being supported in different ways by a host of local services. Simply providing back to work support to an individual family member is not going to transform the lives of the entire family, we have to do more.

Last December the Prime Minister said helping problem families should be an important task for the Government.

Important work is now under way at local council level, and in the Cabinet Office and the Department for Education about how we can best deliver targeted interventions to those families, and do so, above all, in a joined up way.

We are planning to play a part in that work, by using some of our resources to strengthen the work being done on the ground around the country and to help break down the barriers to work that can be found in many of those families.

So we are planning to build a bolt-on programme to the Work Programme which will provide additional front-line support to our problem families strategy. With a focus on improving their basic employability and easing some of the issues that stop them from working.

We will contract private providers to work with whole families, and with local service provision to tackle some of the acute problems families face. Government will provide £200 million funding from the European Social Fund. The ultimate aim will be to break the intergenerational cycle of worklessness and get families working, but a similar non-prescriptive, payment by results model to the Work Programme will mean providers have the resources and the freedom to really work with families and bring about real life change.

It’s important to stress that a key part of awarding the contracts will be about how potential providers demonstrate that they are interlocking that work with the efforts being made by the public sector both locally and nationally.

For example, the Cabinet Office is also looking at ways to leverage money into this work, using Social Impact Bonds to reinforce that work on the ground, again on a payment by results basis.

Similarly we are taking a new approach to combating problem drug use.

Eighty per cent of heroin and crack cocaine users in England are claiming out of work benefits, that’s around 270,000 people at an estimated cost, in benefit spend alone, of £1bn a year.

In addition, the social and economic cost of problem drug use is estimated to be around £15bn a year.

And who could put a price on the human cost, the lives lost or wasted as a result of addiction.

It is clear that simply sending a drug user on a training course to help them find work is not enough; we have to provide support to tackle the underlying problem, to deal with the root cause of their unemployment by helping them deal with their drug problem.

We will be making changes to the benefits system to encourage and support out of work drug users if they take up treatment, tailoring benefit conditions around their treatment programme.

But we can go much further. Using the payment by results model we are contracting for eight small-scale pilot schemes exploring how we can create a recovery system that focuses not only on getting people into treatment but getting them into full recovery, off drugs, and reintegrated into their communities.

And we’re looking to beyond this, with the possibility of setting drug treatment work alongside the Work Programme as part of a pathway back into employment.

Employment is an important part of this reintegration and support to find work, provided through the Work Programme, has to be an integral part of the rehabilitation process. So we are exploring how best to further support drug treatment and rehabilitation by reinvesting the savings made as people move off benefits and into work back into drug treatment and recovery services.

I believe the payment by results model could also deliver more for offenders.

The prison population has doubled since 1993 to over 80,000 and nearly half of those released from prison will re-offend in the first 12 months.

The cost of supporting this cycle is huge.

Estimates suggest the cost of re-offending could be as much as £13bn per year, convictions cost an average of £67,000 per offender, and the average cost of a year in custody is £45,000.

We all want to see dangerous criminals behind bars, and offenders face the right punishments, but there is a clear financial incentive to do more to keep people from making a return journey to prison.

And it’s not just the cost to the justice system.

In England and Wales alone, the 80,000 people who left prison in 2008 spent half of the following twelve months on benefits. This equates to a cost to the taxpayer around of £160m.  And of course many return to prison.

Tackling this problem, and getting these people quickly into work could pay huge dividends.

But there is moral imperative too, many prisoners have experienced a lifetime of social exclusion, compared to the general population. We know that prisoners are:

  • 13 times more likely to have been in care as a child
  • 13 times more likely to be unemployed

Many prisoners lack the skills to break out of the cycle of re-offending without support, evidence shows more than half have the reading, writing and numeracy skills of a child of 11, we know between 60 and 70 per cent were using drugs before prison, and 70 per cent suffer from at least two mental health disorders

The current system does not do enough to deal with the complex levels of disadvantage that many offenders experience. That’s why my colleagues in the Ministry of Justice are already working on a series of pilot programmes to use payment by results as the vehicle to fund projects that reduce reoffending. Their work has really exciting potential.

But we are also looking at how we get offenders back to work, using the payment by results approach. And the current system is wholly inadequate. 

Standard practice today is for prisoners to receive £46.50 as they walk out of the gates of the prison and an appointment with a Jobcentre Plus adviser to start their benefit claim - with first payment of benefits weeks down the line. We have a system that essentially spits people out of prison virtually penniless and with poor support - it is no wonder re-offending rates are so high.

Evidence shows that being in employment reduces the risk of re-offending by between a third and a half. Supporting offenders into work must be a key element of rehabilitation.

We should be using the specialist provision already contracted through the Work Programme to deliver improved support for offenders that comes earlier and is more intensive than for more conventional jobseekers. We should be reinvesting the savings we make from getting offenders off the benefits register and into work, putting the money back into support for people leaving prison.

Justice Minister Crispin Blunt and I are working on the details of a package for offenders which we hope to be able to announce very soon. We intend the payment by results approach, to be an integral part of our strategy to keep former offenders from returning to our justice system. Getting them into the Work Programme quickly has the potential to break the cycle.

I began by telling you we are helping to shape history, let me make it clear what I mean: Payment by results has changed the way government provides and pays for services forever.

But the real revolution is a cultural one; people will no longer be abandoned on benefits by a system which views the barriers they face as too complex or too difficult to overcome. We will not shy away from helping the most disadvantaged to break the cycle of dependency; everyone will receive support, because the effective way to tackle unemployment is to set about transforming lives.

This is one revolution I am very proud to be part of.

Published 17 May 2011