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Cut benefits too much and create a drugs economy

Politicians on all sides are worried. They are worried because 780,000 unemployed people have been out of work for 12 months or more. They are worried because 580,000 18 to 24-year-olds have no job or training. And they are worried because the dole costs the taxpayer Pounds 10 billion, or 11 per cent of the welfare budget.

No wonder the squeeze is on. Amid the realities of long-term unemployment, a lost generation of young people and welfare reform, the main political parties support cuts in benefit levels and apply tough benefit sanctions.

The Government is following a twin-pack approach. Earlier this month, ministers introduced the greatest change to unemployment benefit since the war - the Jobseeker's Allowance. Under the system, benefit paid on the basis of National Insurance contributions will last for six months rather than 12 months. Furthermore, 18 to 24-year-olds will receive Pounds 10.35 a week less than older claimants.

The measure is intended to increase incentives for young people to take low-paid jobs. But with the JSA tackling the youth unemployment problem, the Government has turned its attention to the long-term unemployed.

At the recent Tory party conference, the Prime Minister announced a major expansion of Project Work, from 6,000 places in three pilot areas to 100, 000 places across the country. Under the scheme, those out of work for more than two years receive 13 weeks' job search, followed by 13 weeks of work experience. If they fail to attend, they lose benefit.

Labour, by contrast, is concentrating on unemployed 18 to 24-year-olds. Thus far, Labour has only promised to review the workings of JSA, saying nothing about offering 18 to 24-year-olds the same level of contributory benefits as older claimants. Moreover, Labour intends to apply benefit sanctions of up to 40 per cent if they refuse to participate in one of the four options to be funded via the windfall tax - namely the full-time education option, the private-sector option, the voluntary-sector option and the environmental task force option.

Over the past decade, calls have been heard from the hard right and modern left for every unemployed person out of work for more than 12 months to do something in return for benefit. However, working for benefit - workfare - is seen as only one option. Proponents of obligatory frameworks are content for the unemployed to undertake a range of activities in return for benefit, including job-search, college-based education and training, as well as work in the voluntary and private sectors. But the main obstacle to introducing an obligatory framework has always been cost. There is no such thing as free workfare, trainfare or college-fare. With the state continuing to pay benefits, the welfare budget would be unchanged whilst spending on employment and training initiatives would increase.

Given the additional costs associated with benefit-based obligatory frameworks, policy-makers have been exploring models which transform benefits into wage subsidies.

Indeed, Labour's private-sector option is based on offering employers a six-month tax rebate worth Pounds 60 per week if firms take on a long-term unemployed 25-year-old. Since they would receive a wage, young people would pay taxes and national insurance, and so the welfare budget could fall.

Clearly, the benefit-subsidy model is dependent on employer interest, and this could be limited in the context of an anti-subsidy culture. Similarly, employers might decide to displace non-subsidised labour, thereby leaving total unemployment unchanged.

And yet the rationale for benefit-subsidy models, and obligatory frameworks in general, is based on the potential indirect impact on the labour market. By improving the employability of the long-term unemployed, so the argument goes, the effective supply of labour will increase. For any level of labour demand, this increase in supply pushes pay settlements down, and encourage employers to employ more workers.

Only experience will tell whether the theory is right. Nevertheless, obligatory frameworks are also championed on the grounds of integrating the underclass into society. Cut benefits too deeply, apply benefit sanctions too savagely, and the young unemployed might leave the welfare system altogether. For them, the black and drugs economy might be too lucrative to turn down.

Mark Corney is the director of MC Consultancy.

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