Government’s end of term report on employment and welfare reform: “Good, but could do better”

By Gerwyn Davies, CIPD Labour Market Adviser, @Davies_Gerwyn

If one were to award a grade for each subject, the coalition government would rightly expect a high grade for its record on employment and welfare reform.  An increase of more than 1.8 million people in employment, coupled with a fall in the unemployment rate from 7.9% to 5.6% since May 2010, is an impressive record by anybody’s standards.  However, it is also true that the jobs recovery has not benefitted everybody. 

Firstly, the number of people in part-time employment that would like to work more hours – the underemployed – remains well above pre-recession levels (Figure 1). This disproportionately affects low-paid occupations such as cleaners, labourers or food preparation assistants, who form a relatively large share of the 8 million workers in part-time employment in the UK.

Figure 1: Proportion of Part-Timers Who Would Prefer to be Full Time (%)

Source: Labour Force Survey (ONS)

Second, the labour market outcomes of some groups, especially the harder-to-help groups, have not shown the same level of progress during the past 5 years.  This is reflected by the fact that the proportion of people who are economically inactive, who far outnumber the number of unemployed, has fallen more modestly during the past five years.  Additionally, the government’s flagship Work Programme, which is designed to help long-term unemployed people find and keep jobs, was labelled only ‘as successful as previous welfare-to-work programmes’ by the National Audit Office last year.

All of this reinforces the point that the ability of the unemployed to find work, and of low-paid employees to work more hours, ultimately depends on the ability and willingness of employers to offer more hours to staff.  The CIPD has a modest solution to improving employer demand: we believe that raising the threshold for employers’ National Insurance Contributions (NICs) to £220 per week or above (from the current level of £153 per week) would encourage more employers to consider increasing the hours of some of their existing staff.

The seed of this policy proposal comes from the CIPD’s Making Work Pay (2014) report, which indicated that the current threshold can act as a financial disincentive to employers.  In others words, some employers are allocating work to ensure that they don’t breach the NICs threshold in order to reduce their labour costs. We acknowledge that ‘moving the goalposts’ in this way is not a permanent solution as such – therefore in the longer term, we recommend exploring the costs and benefits of alternative options.  However, we do believe that its ‘holding’ introduction could not come a better time for the lowest-paid workers.  This Parliament has seen the raising of the personal income tax allowance from £6,475 to £10,600,  which has seen three quarters of a million people being lifted out of paying income tax altogether.  This is undoubtedly good news, although it also suggests that the taxation system has reached its limit in terms of increasing the earnings potential of our very lowest-paid workers.  Increasing hours, thus, appears to be the quicker route to improving the living standards of this particular group.

In addition, to complement both measures [raising the personal taxation allowance and employer NICs], the CIPD also calls on the next government to review the work allowance threshold and second-earner incentives under Universal Credit.  This tweak would ensure that more employees and new entrants to the labour market keep more of their earnings.  This may also be timely and complementary to the suite of manifesto policies that are designed to move and keep both parents into work, which includes a vastly more generous state-funded childcare package.  

All in all, the future outlook appears positive: employment growth projections are strong, the number of vacancies has never been higher and the main political parties are broadly behind the current government’s flagship welfare reform policies.  The opportunity to translate this success and consensus into better outcomes for more jobseekers and part-time workers who want more hours has never been greater.  Let’s hope, therefore, that the new government takes it, starting with a closer look at the threshold for employers’ National Insurance Contributions.

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