UK: Smith on Economics - A monument to the chancellor.

UK: Smith on Economics - A monument to the chancellor. - A natural fall in long-term unemployment among the young raises doubts about the New Deal. Will it be Britain's biggest white elephant? asks David Smith.

Last Updated: 31 Aug 2010

A natural fall in long-term unemployment among the young raises doubts about the New Deal. Will it be Britain's biggest white elephant? asks David Smith.

Imagine for a moment that you are Gordon Brown. What would you wish to be the lasting monument to your time as chancellor?

Would it be the independence of the Bank of England? Or would it be that, by putting public spending negotiations in Whitehall on to a three-year basis, you had ended the undignified annual scramble among ministers for more cash?

Both of these might rank high but, for the chancellor and his advisers, another policy would suggest itself - the New Deal for the young and the long-term unemployed. As the grandiosity of the name suggests (a direct steal from the anti-Depression strategy of Franklin D Roosevelt in America in the 1930s), the Government was aiming big.

Under-25s get the lion's share

And big the New Deal is. By raising a one-off £5 billion from the privatised utilities and directing the lion's share of it - £3.2 million - to job-creation subsidies for young people under-25, with smaller amounts for the older, long-term unemployed and for lone parents, the Government was determined to avoid the charge that the New Deal was under-resourced. Indeed, it is the biggest programme of its type ever undertaken by a British government.

Even before its launch on a pilot basis in July last year - the scheme went national this April - critics pointed out one problem. The New Deal had been designed to provide 250,000 jobs or training places for under-25s who had been unemployed for more than six months. When it was assigned, when Labour was in opposition, this was uncontroversial because there were many more than 250,000 in the target group. By the time of its launch, however, falling unemployment had reduced the number of under-25s unemployed for six months or more to around half the 250,000 places intended to be made available.

This, on its own, did not present an insurmountable problem. As long as there are unemployed under-25s, there will be a steady flow of those who become eligible, having been out of work for more than half a year. And the scheme was intended to run for five years, until 2002.

Yet the 'natural' fall in long-term unemployment among young people did suggest that the problem was not quite as intractable as it had appeared to Brown and his advisers when they decided to throw a lot of money at it. As the chart shows, long-term unemployment, like overall unemployment, is highly sensitive to the economic cycle.

There will be those who say we should wait five years to judge the New Deal's success. But some preliminary thoughts, and doubts, are justifiable at this stage. The first is that the standard of long-term unemployed under-25s that remain after a lengthy upturn in the labour market is at best variable, at worst poor. Employers who have been keen to support the programme complain of New Deal recruits who turn up on the first day, but don't appear again. Some do not appear at all. Anecdotal evidence suggests about a third of New Deal recruits drop out in the first few weeks. Many more remain for long periods in the so-called gateway stage, not yet in a job or on a training course.

The second problem is one of mismatch. Many long-term unemployed under-25s could get a job. It is just that they believe they are over-qualified to work in a supermarket or in the catering industry. Attaching a £60-a-week New Deal subsidy to them does not increase their willingness to take up such jobs. A bigger problem of mismatch, however, is regional.

Britain's labour market remains regionally differentiated. However many New Deal recruits there are on Merseyside, they will not address the needs of employers in Newbury or Crawley.

Displacement is inevitable

A third difficulty is displacement. The scheme is being policed to ensure that employers do not take advantage of the subsidy to lay off existing workers and take on cheaper ones. In theory, this is fine. In practice, the New Deal requires displacement. Unless every job represents an addition to the employed workforce of every firm participating, which is unlikely, some displacement is inevitable.

The final problem is the most obvious one - the cold winds of recession blowing through the economy. Job cuts have already been announced at Rover, Siemens and Fujitsu. One effect of this is that there will be many more New Deal recruits, the other that there will be far fewer firms wishing to take them on.

Government's get-out clause

David Blunkett, the education and employment secretary, has already warned that the New Deal could be badly affected by the downturn. This could, of course, provide it with an excuse but the Government should not be allowed to get away so easily. There are more fundamental doubts. Is a temporary subsidy, which will benefit employers who were going to recruit from among the target group anyway, the best way of spending public money?

The evidence suggests not. If you want to encourage employers to take on young people on a permanent basis, the important thing is to reduce the cost of employing them permanently, or ensure that they are more productive when employed. Excluding them from the national minimum wage is a step in the right direction but other action is needed.

Then there is the question of the choice of target group. Young people get on to the New Deal when unemployed for six months or more. Older people have to wait until they have been out of work for more than two years.

Yet they - particularly the over-fifties - suffer greater labour market disadvantages than the young.

Too much political capital, and money, has been invested in the New Deal, as presently designed, for the Government to walk away from it. It is, after all, the biggest such scheme in Britain's history. But it also risks being the biggest white elephant.

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