The New Deal for Young People:

Implications for the Macroeconomy

National Instituteof Economic andSocial Research

2 Dean Trench StreetSmith SquareLondon SW1P 3HEUnited Kingdom

Tel: +44 (0) 20 7222 7665Fax: +44 (0) 20 7654 1900

Website: http://www.niesr.ac.uk

Copyright 1999 National Institute of Economic and Social Research

No part of this publication may be reproduced or used in any form by any means – graphic, electronicor mechanical including photocopying, recording, taping or information storage or retrieval systems –without prior permission in writing from the National Institute of Economic and Social Research

We are grateful to the Department for Education and Employment, the Employment

Service and HM Treasury for comments on an earlier version of this report. The

views expressed in this report are the authors’ own.

The National Institute of Economic and Social Research

The National Institute is Britain’s longest established independenteconomic research institute with over sixty years experience of applyingacademic excellence to the needs of business and policy makers.

The Institute is independent of all party political interests. It has no corefunding from government and is not affiliated to any single university,although its staff regularly undertake projects in collaboration with leadingacademic institutions.

Its research interests are constantly changing in response to new needs butembrace most of the issues that shape economic performance. Currentprogrammes include work on productivity, education methods, trade andinvestment, European financial integration, labour markets and economicstatistics. All are underpinned by the Institute’s long-standing strength inmacroeconomic modelling and forecasting.

The Institute’s work is influential world wide with subscribers to itspublications in over seventy countries. Its global model is used by somethirty prestigious organisations, including several central banks and financeministries.

Contents

Executive summary 1

1. Introduction to the macro evaluation of the NDYP 3

2. Impact on unemployment 7

2.1 Trends in the labour market 72.2 Impact on youth unemployment and deadweight loss 102.3 Substitution and displacement effects 14

3. Impact on the wider economy 18

3.1 The macroeconomic background 183.2 Key mechanisms 193.3 Impact on output, employment, inflation and the cost to

the exchequer 203.4 Sensitivity of results 26

4. Further work 31

References 33

1

Executive summary

This report summarises results from the macro evaluation of the New Deal for Young

People (NDYP) in the first year after its national roll-out. It incorporates the results

of both the DfEE internal analysis and the evaluation undertaken by the National

Institute of Economic and Social Research (NIESR).

The purpose of the macro evaluation is to assess the overall impact of the NDYP on

youth unemployment and employment, on unemployment of other groups in the

labour market, and on the wider economy.

The programme has had a positive effect on the numbers of young people leaving the

claimant count and is estimated to have reduced youth unemployment in Great Britain

by approximately 30 thousand relative to what it would otherwise have been. This is

equivalent to a reduction in youth long-term unemployment of nearly 40 per cent.

Approximately 50 per cent of individuals leaving unemployment via the NDYP

would have done so in absence of the programme. Approximately 10 thousand

individuals per month leave unemployment as a consequence of the NDYP.

There are no signs that the NDYP simply circulates young people through the

programme and back on to the claimant count, although it is generally too early to

assess this. Individuals are only just starting to complete NDYP options in large

numbers, which may lead to a rise in the numbers rejoining the claimant count.

The employment subsidy could have an adverse impact on other groups in the labour

market if employers substitute young workers with subsidised wages for older

workers. There is little evidence of this so far. By the end of April 1999, only a fifth

of those who had joined an option had taken up subsidised employment, partly

explaining why the adverse effect on other groups appears to be small.

However, the number of long-term unemployed from other age groups leaving the

claimant count is lower than expected. We do not see this as evidence of an adverse

effect from the NDYP since the exit rate from unemployment for this group was

comparatively higher in the NDYP pathfinder areas than in areas where the NDYP

was not yet fully implemented.

2

There is some evidence to suggest that other groups were adversely affected by the

concentration of Employment Service resources on the young during the initial

implementation of NDYP.

The impact of the NDYP on the wider economy depends crucially on the economic

background. The fewer young unemployed there are, the less there is for the

programme to do and so the smaller its impact will appear. The situation in which the

NDYP was introduced was one of relative labour market stability and low

unemployment. As a consequence the impact of the NDYP on the overall economy

is likely to be small, adding about 0.1 per cent to national income (that is around £800

million per annum). However, should macroeconomic conditions deteriorate, then the

NDYP is likely to have a much bigger impact.

The success of the NDYP primarily depends on improving the employability of those

in the programme and in reducing wage pressure. Additional jobs can only be

sustained if wage pressure is reduced.

Our analysis of the budgetary implications of the NDYP indicates that it will be close

to self-financing as the extra activity it generates leads to higher government revenue.

The next stages of the macro evaluation will need to focus on whether young people

are going into sustained employment or whether the NDYP is simply moving people

off the register. It will also need to assess more fully the impact of the NDYP on

wage-setting behaviour.

3

1. Introduction to the macro evaluation of the NDYP

The purpose of the macro evaluation of the New Deal for Young People (NDYP) is to

assess the overall impact of the programme on youth unemployment and employment,

on unemployment of other groups in the labour market, and on the wider economy.

The macro evaluation is part of an extensive evaluation strategy commissioned by the

Employment Service (ES) in collaboration with the Department for Education and

Employment (DfEE) including both qualitative and quantitative research of the

impact of the NDYP at the micro level.1

This report summarises results from the macro evaluation in the first year after the

national roll-out incorporating both the DfEE’s internal analysis and the evaluation

undertaken by the National Institute of Economic and Social Research (NIESR). We

are able to provide an early assessment of the effects of the programme on

unemployment generally and to estimate its impact on the wider economy. At

present, some of these results are quite speculative. A more informed assessment will

only be possible when the programme has been in operation for longer.

The NDYP is designed to reduce youth unemployment by assisting young people,

who have been unemployed for six months, to improve their job search and by

providing work experience and/or training for those who do not find work. Thus if

successful it should increase the employability of young people and, through that,

increase the level of sustainable employment.

The NDYP is claimed to be different to previous active labour market programmes

aimed at young people. Firstly, assistance in job search and training provided through

the NDYP focuses on clients’ individual needs and circumstances. Secondly, the

NDYP gives young people a very clear incentive to improve their employability by

threatening to withdraw their Jobseeker’s Allowance (JSA) if they do not actively

participate in the programme. Young people are guaranteed the equivalent income

contingent on participation in the NDYP.

The NDYP began in a number of pathfinder areas, representing about 11 per cent of

national unemployment, in January 1998, before being launched nationally in April

1998. As well as those who were unemployed for more than six months when the

programme began, people expect to enter the NDYP process at the latest when they

1 See Hall & Reid (1998) for a review of the evaluation strategy.

4

have been unemployed for six months.2 At first they join a ‘Gateway’ period of

intensive job search, where they are given help and advice in finding a suitable job.

This period is intended to last for up to four months, but early evidence suggests that

some have remained on the Gateway for longer than this.3 Many will find

unsubsidised jobs within this period. If by the end of the Gateway they have not

found a job, they will have to choose one of four NDYP options. These are a period of

subsidised employment, a course of full-time education or training, a job in the

Environmental Task Force or a job in the voluntary sector. All options offer NDYP

participants an income equivalent to or above the normal JSA and guarantee a

minimum of one day of training per week. There is no fifth option to continue

claiming JSA.

In simplified terms, the NDYP acts as a buffering mechanism that prevents

unemployment spells from lasting for much more than ten months. Instead of

allowing the possibility of endless unemployment where people can lose their

attachment to the world of work, the young unemployed now know that in less than a

year they will no longer be unemployed. As well as the additional individual support

provided by the personal advisors, this should encourage much more intensive job

search among the young unemployed than would have been the case without the

NDYP.

This could have long lasting effects on the individuals concerned. By avoiding long

spells of unemployment at the early stage of their working life, they will escape the

permanent scarring effect suffered by previous cohorts. This, together with the extra

training they receive through the NDYP, ought to increase their employability

throughout their lifetime and not just in the short term.

From the outset, as part of the government’s Welfare to Work programme, the NDYP

has been seen as a programme which would provide the means for the young

unemployed to find work. Besides encouraging job search by putting an effective

time limit on JSA claims, the NDYP would increase the job opportunities available to

young people through advice and training both during and after the Gateway period

and by providing job subsidies to employers who take on participants in the

programme. This would take place immediately if they found unsubsidised work or if

they started on the employer option. Alternatively, their experience on one of the

2 Individuals identified at risk of becoming long-term unemployed are eligible for earlier entry toNDYP. See DfEE New Deal Statistical First Release series for details of early entry criteria.3 E.g. 11 per cent of those who joined the New Deal in January 1998 in the pathfinder areas were stillon the Gateway eight months later.

5

other options would prepare them for future work. Roughly half of all clients are

expected to proceed directly to work via the gateway or the subsidised employment

option.

The net effect of the NDYP will depend on the extent to which it makes a difference

to the labour market prospects of those who participate in the programme and whether

this is offset by an adverse effect on those who are not able to participate (such as

older JSA claimants). Some of those who go into jobs from the NDYP would have

done so at roughly the same time without the programme. A necessary condition for

the NDYP to be effective is that it helps into work those people who would not

otherwise have gone into work. One of the key components of this part of the

evaluation is to measure the net impact of the NDYP on the youth labour market by

evaluating the extent of unnecessary assistance (known as deadweight).

But there are also questions concerning the extent to which the NDYP actually moves

participants into work rather than another form of unemployment. If the options do

not improve the chances of finding work and participants therefore return to claimant

unemployment, inflows to unemployment will increase and the programme will

simply be churning individuals through the system with only a minimal effect, if any,

on the level of sustainable unemployment. Thus a further key component of this

evaluation will be to examine the impact of the NDYP not just in moving young

people off the unemployment register, but also on where they are going and whether

those moving into employment can sustain that move.

Even if the NDYP succeeds in having a favourable impact on the labour market

experience of young people who have been unemployed for more than six months, it

is possible that this could be at the expense of others. The rest of the economy cannot

be seen in isolation from the youth labour market. The impact on other groups in the

labour market depends on the extent to which they are disadvantaged by efforts to

help the young. There are a number of possible ways in which this could occur.

Employers might substitute NDYP participants for other workers who thereby lose

their jobs or find it more difficult to obtain work (known as substitution). The same

outcome might also occur indirectly if the NDYP gives some firms a competitive

advantage over others (known as displacement). A different type of substitution

could also occur if other unemployed people receive less help in their own job search

because the resources of the ES are diverted to NDYP participants. Thus a key part of

the evaluation will be to pay close attention to the labour market experience of those

not eligible to participate in the programme.

6

It is inevitable that an extensive labour market programme such as the NDYP will

involve elements of deadweight and some adverse effects on other groups. But to be

judged a clear success it will need to raise the overall rate of employment in the

economy relative to what it would otherwise have been. For this to happen it needs to

improve the employability of those who participate in the programme and to put

downward pressure on wages.

The difficulty in assessing the overall impact of the NDYP on the macro-economy is

in establishing what would have happened in absence of the NDYP. It is only then

that it is possible to calculate the difference that the programme has made. The

majority of this Report describes our approach to evaluating the impact of the NDYP

relative to what would otherwise have happened.

Section two draws on the DfEE internal evaluation and Anderton et al (1999a) to

evaluate the effect of the NDYP on the labour market. By generating counterfactual

scenarios for unemployment stocks and flows from information available before the

NDYP was implemented it is possible to identify the impact on unemployment,

substitution and displacement effects, and the deadweight loss associated with the

programme.

Section three draws on Anderton et al (1999b) to illustrate the possible effects of the

NDYP on the wider economy. This is assessed by means of simulations using the

NIESR model of the UK economy. Here, the behaviour of the whole economy is

compared against a benchmark given by the outlook for the economy as it appeared in

July 1998. As yet, this work is illustrative only, since the data necessary to undertake

a fuller empirical analysis is only gradually becoming available.

Section four outlines the next stages in the macro evaluation of the NDYP.

7

2. Impact on unemployment

This section reviews the findings of Anderton et al (1999a) and of the DfEE’s internal

evaluation on the impact of the NDYP on youth unemployment and the

unemployment of other groups. The analysis in Anderton et al (1999a) was based on

a detailed investigation of flows out of unemployment in the designated Pathfinder

areas, where the NDYP began early, and a number of comparison areas, where it

began in April 1998. Rather than simply repeating that analysis here, we instead

apply the same techniques to the national picture (Great Britain).

2.1 Trends in the labour market

At the national roll out in April 1998 the NDYP client group represented 8½ per cent

of the claimant count in Great Britain. This amounted to 114 thousand 18-24 year olds

who had been unemployed for at least 6 months (see chart 2.1 below).

Chart 2.1 Claimant unemployed 18-24 year olds

Source: NOMIS

Over the period of sustained growth since the recession of the early 90s, youth

unemployment and unemployment in general have fallen. Youth unemployment fell

by more than that of other age groups, partially reflecting the sharp decline in the

proportion of the population aged 18-24 over this period, but fell in tandem with

0

200

400

600

800

1000

Apr-87 Apr-89 Apr-91 Apr-93 Apr-95 Apr-97 Apr-99

thou

sand

s, G

B

All aged 18-24

All aged 18-24, 6 months or more

8

overall unemployment from early 1996 onwards. Since mid-1998 however, youth

unemployment has fallen noticeably more quickly compared to that of other age

groups. From April 1998 to April 1999, the share of unemployed 18-24 year olds in

total unemployment dropped by 8½ per cent in Great Britain.

The decline in youth unemployment from its peak in 1993 had reduced long term and

short term unemployment in roughly similar measure up until 1997. Thereafter the

share of long term unemployed has dropped significantly, falling by 18.5 per cent in

the year to April 1998 and since the introduction of the NDYP by a further 32.2 per

cent in the year to April 1999.

Both the marked reduction in the share of the NDYP client group in total youth

unemployment and the larger reduction in youth unemployment compared to

unemployment of other age groups coincide with the national introduction of the

NDYP, suggesting some impact of the NDYP. But how much of the apparent

improvement in the youth labour market is actually due to the NDYP and how much

is due to other factors? This is the question the macro evaluation attempts to answer

by generating a counterfactual estimate of what unemployment would have been in

absence of the NDYP. One possible counterfactual is that in the absence of the

NDYP youth unemployment would have fallen at the same rate as that of other age

groups. In fact, if youth unemployment had fallen at that rate then there would have

been at least 35 thousand more unemployed 18-24 year olds in Great Britain by April

1999. This is one estimate of the impact of the NDYP on youth unemployment.

As mentioned in the previous section, the rest of the economy cannot be seen in

isolation of the youth labour market. One also needs to take account of the impact the

NDYP may have on other groups within the labour market. For example, if employers

substitute NDYP participants for other workers or if workers in firms that do not hire

NDYP participants are displaced, the NDYP will have an adverse effect on these

other groups. Therefore, the NDYP may not reduce overall unemployment, even it

reduces youth unemployment.

The employment option offers a good deal to employers and there has been a

significant interest in hiring NDYP participants from the employer’s side.4 The

subsidy of £60 per week represents a substantial contribution towards the pay of

young workers, many of whom receive low rates of pay. For example, 37% of 18-19

year olds and 11% of 20-24 year olds are in the bottom decile of the wage

4 See Snape (1998).

9

distribution.5 This roughly corresponds to the group who benefited from the

introduction of the minimum wage in April 1999. The £60 per week subsidy amounts

to close to half of the wage costs of those earning the minimum wage.

Of the young people who passed the six month unemployment threshold (hence

qualifying for the NDYP) when the NDYP was operating in the pathfinder areas only,

the proportion leaving the claimant count before October 1998 was 18 percentage

points higher in the pathfinder than in the non-pathfinder areas. Of this difference 6

percentage points were due to increased movements into both subsidised and

unsubsidised jobs, suggesting that the NDYP is having a positive effect on moving

young people into work. The rest of the increase in outflows is mainly due to young

people leaving to take up non-job options.

Looking at the destinations of young people leaving NDYP over the year to April

however, the subsidised employment option has not been the most common amongst

NDYP participants. By the end of April 1999, only 20.5 per cent of those who had

joined an NDYP option had taken up subsidised employment. In contrast, 47.1 per

cent had taken up the full-time education and training option. Chart 2.2 shows the

destination of young people leaving the claimant count after a minimum claim of six

months. The proportion of the NDYP target group leaving the claimant count to take

up either subsidised or unsubsidised jobs has fallen since mid 1998 matched by a rise

in the proportion leaving for full-time education and training.

Chart 2.2 Outflows of youth 6 months plus claimants by destination

Source: DfEE internal evaluation

5 Labour Force Survey Spring 1997 (GB)

0%

10%

20%

30%

40%

50%

60%

Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99

Education and training

Employment

10

It is possible that the high proportion going into education and training reflects the

type of people likely to be on the claimant count at a time when unemployment is at a

twenty year low. They are likely to be the ‘least employable’. The relatively small

number of young people going into subsidised jobs means that the potential adverse

effect of the NDYP on other groups is likely to be minimal.

Another factor to keep in mind, when quantifying the effect of the NDYP on other

groups in the labour market, is the size of the youth labour market. At the time the

NDYP was introduced, only 12.4 per cent of the population of working age in

employment were between 18 and 24 years old.6 The magnitude of any potentially

adverse effects of the NDYP on other age groups will be restrained by the

comparatively small size of the youth labour market.

2.2 Impact on youth unemployment and deadweight loss

The impact of the NDYP on the stock of unemployed depends on the impact of the

programme on both the numbers of young people leaving and joining the claimant

count. As well as determining the difference that the programme makes to the stocks

of employment and unemployment at any given moment in time, the effect of the

programme on outflows and inflows will also determine the actual number of people

who will benefit from the programme.

By definition the NDYP will increase the numbers leaving long term unemployment

as there is no fifth option to remain on the register. As mentioned in the previous

section, the early introduction of the NDYP in the pathfinder areas was followed by a

significant increase in the outflow rate of long term unemployed young people

compared to the non-pathfinder areas. The impact on outflows from shorter term

unemployment and on the numbers joining the claimant count is less clear.

In order to quantify the effect of the NDYP on outflows from unemployment we used

statistical analysis to estimate what the relationship between outflows and overall

economic activity had been in the period before the NDYP was introduced. We then

used this relationship to inform us what rate of outflow we should have expected from

unemployment for people of different ages and different spells of unemployment if

the NDYP had not been introduced. This is our counterfactual. Any difference

6 Labour Force Survey Spring 1998 (GB)

11

between the actual outflow rate from unemployment and the counterfactual then

provides an estimate of the effect of the NDYP.

Chart 2.3 Forecast versus actual outflow rates:18-24 year olds (GB)

Notes: solid line represents actual outflow rate; thick dashed line represents forecast mean; thin dashedlines indicate the 95 per cent confidence interval of the forecast; dynamic forecast from 1998Q1-1999Q1

The thick dashed line in Chart 2.3 shows what outflow rates (the number of people

leaving the claimant count relative to the number of claimants) were expected to be

had the NDYP not been implemented. Also shown are actual outflow rates. For the

longer term unemployed, outflows were much higher than they were expected to be

without the NDYP.7 For example, during the first quarter of 1999 between 28.2 and

37.3 per cent of those unemployed for 9-12 months were expected to leave the count.

The actual numbers leaving the count amounted to almost 63 per cent.

In contrast chart 2.3 shows that outflow rates for the shorter term unemployed were

very much as they were expected to be, suggesting that the NDYP has not had an

adverse effect here. Indeed, outflow rates were showing signs of being more than

expected at the beginning of 1999 suggesting a possible beneficial impact of the

NDYP on young people with short unemployment spells. Separate analysis of the

impact of the different stages of the NDYP shows that the proportion of the client

group in the Gateway may have a negative impact on the outflow rate from short-term

unemployment. By contrast, the proportion of the client group on NDYP options

7 The outflow rates shown in this report refer to net outflows (i.e. calculated from the stock ofunemployed) rather than gross outflows as in Anderton et al (1999a).

unemployed 3-6 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

unemployed 9-12 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

12

generally has a positive effect on their outflow rate.8 The first result may indicate that

the short-term unemployed are facing fiercer competition from the long-term

unemployed whose job search skills are improved during the Gateway. It may also

indicate that the initial implementation of NDYP reduced ES support provided to

other unemployed groups, such as the short-term unemployed. The latter result is

open to several interpretations. For example, it may reflect the growing numbers of

early NDYP entrants or it may reflect that claimants are deterred from the register by

the prospect of active participation on one of the NDYP options. Alternatively, if

NDYP options do actually represent additional opportunities for the target group, it

may represent an increase in the number of employment opportunities available to the

short-term unemployed (which would otherwise have been taken up by the target

group).

It is as yet too early to assess the full impact of the NDYP on inflows to

unemployment, as individuals who have passed through both the Gateway and options

would have completed their options at the earliest in February 1999. The first to join

the full-time education and training (FTET) option in the pathfinder areas will only

just have passed through the programme in April 1999 if they spent a full 12 months

in education. Furthermore, there will be relatively few of these as most entries to the

FTET option were delayed until the autumn.

Despite this there will be a number of individuals who have passed through the NDYP

by now. Initial analysis of inflows to unemployment does not suggest that the NDYP

is just circulating young people through the programme and back on to the claimant

count. The number of 18-24 year olds joining the claimant count in Great Britain

since the NDYP started is not greater than expected. Chart 2.4 shows the distribution

of new claimants by the length of time since their last claim. Since the introduction of

JSA in October 1996, the distribution has been steady, which would also suggest that

NDYP has, so far, had very little effect on inflows. However, looking at year on year

changes in repeat claims in recent quarters highlights some interesting points,

including some possible early effects of NDYP. The increase in inflows in the year to

April 1999 is partly generated by an increase in inflows of those who were last

claiming JSA less than 6 months ago. This could reflect NDYP, with young people

returning to JSA from an option.9 If this is the case we would expect this to increase

over forthcoming months as more people complete their options and return to JSA.

8 The exact magnitude of these effects is sensitive to details of the econometric specification of theoutflow equations.9 Individuals leaving the NDYP and returning to unemployment within 13 weeks return to the NDYP.

13

We may also see an increase in returns this autumn as people start to finish their

FTET options.

Chart 2.4 Distribution of claimant count inflows:by duration since previous claim (18-24 year olds)

Source: DfEE internal evaluation

So what do these implications for the numbers entering and leaving the claimant

count mean for the stock of unemployed 18-24 year olds? Inflows appear to be

unaffected so far, outflows for the shorter-term unemployed are largely as expected

and outflows from longer-term unemployment have risen. Chart 2.5 shows the stock

implied by actual outflow rates and by outflow rates as we would have expected them

to be in the absence of the NDYP. This shows that by April 1999, GB youth

unemployment would have been around 30 thousand higher if the NDYP had not

been introduced. This is very similar to the estimate that would be derived by

assuming that in the absence of the NDYP youth unemployment would have fallen at

the same rate as that of other age groups.

It is worth emphasising that the estimated reduction in unemployment does not imply

an equivalent increase in employment, but implies an equivalent increase in

employment and inactivity (or ILO unemployment), since outflows represent

outflows to all destinations. This is particularly worth stressing given the relatively

large proportion of those on NDYP options participating in the full-time education

and training option.

0%

10%

20%

30%

40%

50%

60%

Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99

over 1 year or no previous claim

0-3 months

3-6 months

6-12 months

14

Chart 2.5 Unemployment implied by actual and forecast outflow rates

(18-24 year olds)

We can also assess the deadweight loss of the programme so far. Up to the end of

November 1998, a total of 24.1 thousand individuals left the Gateway and the

claimant count in the ten pathfinder areas that we used for detailed empirical analysis.

According to our estimates additional unemployment outflows for 18-24 year olds

due to the NDYP in these areas for this period were roughly 12.3 thousand. This

would suggest that 11.8 thousand individuals who left the claimant count through

NDYP would have done so anyway, equivalent to a deadweight loss in the first eleven

months of approximately 50 per cent, which is broadly in line with estimates from

other active labour market programmes.

These figures might possibly underestimate the actual deadweight loss. The 24.1

thousand leavers from the NDYP do not include those leavers who rejoin the claimant

count within 13 weeks of leaving the NDYP. If, for example, 25 per cent of actual

leavers from the NDYP return to the claimant count within 13 weeks, we would

revise our estimate of the deadweight loss from 50 per cent to approximately 60 per

cent.

2.3 Substitution and displacement effects

We can also assess the impact of the NDYP on other groups. As mentioned above,

one would not expect this impact to be large due to the relatively small size of the

youth labour market compared to the overall labour market. Also, potential

285

295

305

315

325

335

345

1998q2 1998q3 1998q4 1999q1 1999q2

thou

sand

s, G

B

implied by forecast flow rates

implied by actual flow rates

15

substitution from the employers’ side will be abated by the small number (relative to

all in employment) that have taken up the subsidised employment option.

Looking at inflows to unemployment of 25-29 and 30-49 year olds in Great Britain

(not shown here) we do not find any evidence of substitution. If these workers were

being adversely affected one would expect inflows to be higher than expected. If

anything, inflows are lower than expected.

Chart 2.6 Forecast versus actual outflow rates:25-29 year olds

Chart 2.7 Forecast versus actual outflow rates:30-49 year olds

Notes: solid line represents actual outflow rate; thick dashed line represents forecast mean; thin dashedlines indicate the 95 per cent confidence interval of the forecast; dynamic forecast from 1998Q1-1999Q1

unemployed 3-6 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

unemployed more than 12 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

unemployed 3-6 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

unemployed more than 12 months

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1997Q1 1997Q3 1998Q1 1998Q3 1999Q1

16

Actual and expected outflow rates for 25-29 and 30-49 year olds are illustrated in

charts 2.6 and 2.7. Outflow rates are as expected for the shorter term unemployed. For

the longer term unemployed outflow rates are significantly lower than expected,

particularly in the two quarters immediately after the national roll-out of the NDYP.

On first impressions these illustrations provide evidence that the NDYP is having an

adverse impact on longer term unemployed older workers. That the adverse effect is

concentrated in the initial period after the national roll out could suggest that the

initial implementation of NDYP reduced ES resources available to other unemployed

groups. Alternatively, the longer term unemployed may be facing tougher competition

against more ‘employable’ young jobseekers, with employers substituting younger for

older workers.

At this stage it is tempting to conclude that the NDYP is associated with substitution

of NDYP participants for the non-target age groups. However, it is also possible that

these findings reflect other factors unrelated to the NDYP. To check whether this is

the case the pathfinder areas, where the NDYP was piloted three months before the

national launch, are contrasted with a set of control areas. Generally outflows from

long term unemployment in the first half of 1998 appeared to be more adversely

affected in areas where the NDYP was not yet fully implemented than in the

pathfinder areas. This suggests that the NDYP is not having an adverse effect on the

labour market prospects of other groups. Further evidence of this is provided by the

observation that as more young people join the programme, the outflow rate of older

people from long term unemployment appears to return to its expected level.

What other factors could be responsible? If these results indicate that outflow rates

from long-term unemployment were generally lower due to factors other than

substitution, then several explanations spring to mind.

With the national implementation of the New Deal for the over 25’s in June 1998,

employers may have postponed hirings of the long-term unemployed until they could

take advantage of the New Deal subsidy for the over 25’s (i.e., an ‘anticipation

effect’). This would be particularly pertinent with the introduction of the national

minimum wage in April 1999. As already mentioned, it may also be the case that the

NDYP initially diverted Employment Service resources from its normal job-broking

activities. Likewise, the long-term unemployed may have reduced their search activity

in the early months of 1998 as they anticipate that they will receive extra assistance in

finding jobs once the New Deal for the over 25’s begins. Similar anticipation effects

17

may apply to the 18-24 year olds in the comparison areas in the early months of 1998

as they waited for the NDYP to begin in earnest in their area.

We may also attribute the general decline in outflows from long-term unemployment

to Jobseeker’s Allowance. The introduction of JSA in October 1996 increased

outflows from unemployment quite considerably for all age and unemployment

duration groups.10 JSA was primarily designed to increase the search intensity of the

unemployed. However, if some workers are genuinely not ‘employable’, one may

expect their increased search effort to make less difference to their chance of leaving

unemployment. Therefore, it might be logical to assume that those remaining

unemployed after the introduction of JSA consist of individuals who are considerably

less able to leave unemployment. Hence, those remaining unemployed after the

introduction of JSA may be more prone to continuing in unemployment. This may

explain the decline in outflow rates for the longer-term unemployed during the period

when NDYP began.

In sum, NDYP does not appear to have had any significant effect on unemployment

of others than the client group so far. However as more people pass through the

NDYP programme, or if the economic background turns less benign, this could

change. Irrespective of the economic background, the impact on other groups will be

mitigated by the size of the youth labour market.

10 See Sweeney & McMahon (1998)

18

3. Impact on the wider economy

This section summarises the analysis of Anderton et al (1999b) which illustrates the

possible effects of the NDYP on the wider economy. The purpose of this exercise is

to set out how we expect the New Deal to develop and what mechanisms are likely to

be important in determining its effectiveness. The original analysis was undertaken

at the end of July 1998. The estimated effects shown reflect what was expected

given information available at that time.

3.1 The macroeconomic background

It is important to stress that the impact of the NDYP will be strongly dependent on

background economic conditions. It can be likened to any control mechanism

designed to prevent extreme outcomes such as a flood barrier. The NDYP is likely to

have a bigger impact when unemployment is high and rising, hence the evaluation of

the scale and effectiveness of the NDYP will depend on the overall state of the labour

market and the background economic conditions. What matters here is the broad

outlook and how this might be affected by the New Deal, rather than the precise

details.

From the perspective of mid-1998, just as the national NDYP roll-out was underway,

it appeared that the economy was slowing down in response to a tightening of

monetary policy and an overvalued exchange rate impacting mainly on the traded

sector. This outlook turned out to be broadly correct as more recent evidence

confirms that the economy stalled in the second half of 1998, with negligible growth.

Claimant unemployment, which stood at 1.36 million in April 1998 (seasonally

adjusted) had been expected by independent forecasters to fall further to 1.35 million

by the end of 1998, before rising to 1.45 million by the end of 1999 (H.M. Treasury,

Forecasts for the UK Economy, July 1998). In fact, it now stands at 1.29 million.

The key point for current purposes is not the exact projection of unemployment, but

the broad magnitude. In mid-1998, UK unemployment and long term unemployment

in particular, was expected to remain lower than it had been for many years. Low

youth unemployment was also expected, even in the absence of the New Deal. The

importance of this is that there are many fewer participants in the programme than

there would have been had the programme been introduced just a few years ago. Its

19

overall impact is therefore likely to be smaller than would have been anticipated two

or three years earlier.

3.2 Key mechanisms

To evaluate the impact of the NDYP it is also necessary to have a clear picture of the

likely mechanisms through which the programme would affect the macroeconomy.

One of the key factors in determining the possible success of the NDYP is its effect

on wage setting and the sustainable level of unemployment. Simply offering wage

subsidies to a particular group when the labour market is already in equilibrium is

likely to distort the market with no overall benefit. There would be an increase in the

demand for those who were subsidised, bidding up their pay. But this would be to the

detriment of other workers, not eligible for subsidies, who would appear less

attractive to employers and whose pay would be bid down.

But the NDYP is not just about subsidies. Instead, its most important element is the

extent to which it raises the job search effectiveness and quality of the young

unemployed by keeping them more closely attached to the world of work. More

intensive job search is equivalent to an increase in their effective supply of labour.

This is liable to put downward pressure on wages, preventing the subsidy being

completely passed on to young workers by higher wages. This in turn should keep the

price of young labour at a level which makes them employable. Of great importance

then is the effect of the NDYP on wage setting.

Historically, there has been a link between the composition of unemployment, as

between long term and short term joblessness, and the level of wages in the UK. The

bargaining power of workers is lower when there is a lot of slack in the labour market.

In addition to this, the bargaining power of workers is also lower when there are more

short term unemployed in the unemployment stock. The rationale for this second

effect is that the short term unemployed are thought to be more active and effective in

looking for work than the long term unemployed. As such, the more long term

unemployed that there are in the stock, the less is the downward pressure on wages for

any given level of total unemployment and the higher the level of sustainable

unemployment.

The important questions for current purposes is what effect the NDYP is likely to

have on the long term unemployment ratio and how much effect this will have on

20

wage setting. This has been assessed from our models of outflows summarised in

section 2. Our central estimate is that the ratio of long term to total unemployment in

the whole economy, around 45 per cent in October 1998, will fall by around one and a

half percentage points as a consequence of the NDYP. This change in the composition

of unemployment is expected to exert downward pressure on wages at any given level

of unemployment.

The NDYP is also likely to have a number of possible effects on productivity. At

least four possible mechanisms are likely to be of some importance:

• By bringing lower productivity individuals into work, the productivity of the

overall workforce in employment is likely to fall. However, this will still leave

overall output higher.

• By reducing the relative cost of labour through subsidies and endogenous

movements in wages, the capital-labour ratio in the economy is likely to fall so

reducing aggregate productivity.

• The NDYP also includes a training element. This applies whether those on the

NDYP options are in employment or not. This should improve the underlying

productivity of the workforce.

• It is also likely that aggregate productivity will be improved if the NDYP is

successful in preventing long spells of unemployment which are thought to lead to

the loss of skills of those affected.

This affects the level rather than the growth rate of productivity. The actual impact of

the NDYP on average productivity in the economy depends on the extent to which

these effects outweigh the lower productivity of those being drawn into work. It is not

clear a priori which of these effects will dominate. The NDYP may also affect the

growth rate of productivity if the training element affects the ability of individuals to

learn generally and so improves prospects for their future development.

3.3 Impact on output, employment, inflation and the cost to theexchequer

The results described in this section were generated by simulating the NIESR’s model

of the UK economy. The NDYP is assumed to have an ex ante impact on the

economy. The overall effect of the programme depends on the repercussions of these

individual components throughout the economy more generally. The ex ante impact is

to increase the aggregate demand for labour across the main UK industries, as a

21

consequence of the job subsidies, and to increase employment in the NDYP group,

the number of places on job training programmes and economic activity. The initial

impact is also to reduce long term unemployment among the NDYP group, reducing

the ratio of long term to total unemployment and putting downward pressure on

wages, and to raise the quality of the workforce in the whole economy. Expenditure

on job subsidies rises by a similar amount to company tax payments.11 The impact of

the NDYP, based on these preferred assumptions as to how the NDYP will work, are

summarised in tables 3.1 to 3.4.

Table 3.1 The Possible effect of the NDYP on the Youth Labour MarketDifference from base forecast at end of year (thousands)

Employment Short termclaimant

unemployment

Numbers onTrainingschemes

Long termclaimant

unemployment

Totalunemployment

1998 +18 +6 +10 -33 -271999 +18 +7 +10 -33 -262000 +17 +7 +10 -33 -262001 +17 +7 +10 -33 -26

The effect of the NDYP on the youth labour market reflects our assumptions about

how many people are likely to participate in various aspects of the programme. The

NDYP is seen to bring about a reduction in unemployment of a little under 30

thousand each quarter. This is more than accounted for by lower long-term

unemployment. Short-term unemployment is expected to be a little higher as a

consequence of greater competition in the jobs market. Employment is expected to

rise and there is also expected to be a slight increase in inactivity among this age

group as some withdraw from the labour force to pursue the education options.

The effect of the programme is shown here in terms of the difference that it makes to

the stocks of employment and unemployment at any given moment in time. The fact

that youth unemployment is lowered throughout the life of the programme by about

30 thousand does not mean that only 30 thousand people are affected in this way. The

labour market is in a continual state of flux with people flowing between the different

states of employment, unemployment and inactivity. This is particularly true of the

youth labour market where large numbers of young people experience a spell of

unemployment at some stage or other.

Some idea of the actual number of people who would benefit from the programme in

this case can be estimated by noting that the effect on the stock of unemployment

11 See Anderton et al (1999b) for further details of the ex ante impact of the NDYP.

22

shown here is consistent with our analysis of outflows from the Pathfinder areas.

There we found that the NDYP had raised the outflow rate from youth unemployment

by 7 to 19 per cent in the first year, an increase that, if sustained, would imply an

eventual fall in the stock of youth unemployment in the UK of 15 to 55 thousand.

This rise is broadly consistent with a 50 per cent increase in the outflow rate from

long term youth unemployment as a consequence of the NDYP (as in Chart 2.3

above). With an underlying outflow from the Gateway of around 20 thousand per

month, this suggests that about 10 thousand people per month leave unemployment as

a consequence of the NDYP (this then cumulates to about 100 thousand by the end of

1998).12 Clearly, over the course of the entire programme lasting four years, the

number benefitting from it would cumulate to around 500 thousand depending on the

number who pass through the NDYP more than once. If half of these additional

leavers move into jobs as in the simulation, then this amounts to a movement of

around 250 thousand people into jobs as a consequence of the NDYP.

In the main case shown here, the impact of the NDYP on the youth labour market is

almost constant from the end of 1998 until the end of 2001, with little evidence of it

taking time to have its full effect. This is partly a reflection of the relatively stable

labour market position that is assumed to underlie the simulation. As discussed in

sections II and III, with little change in overall unemployment expected from 1998,

the numbers on the NDYP reach their peak in early 1999 and then stabilise at around

that level. Similarly, the effect of the programme in changing the composition of

unemployment also works through quickly.

But this need not mean that the effect of the scheme on the youth labour market and

the wider economy should also be constant from the beginning of 1999. Clearly, it

can take time for the effects of increased labour market activity among the young to

affect wages and hence the demand for labour.

In fact, it is possible to see the NDYP as being made up of two key components with

contrasting short term and long term effects. The first of these arises because the

NDYP increases the effective supply of labour by bringing the long term unemployed

back into the labour market, thereby putting downwards pressure on real wages.

While this has little impact in the short term, in the longer term it generates a fall in

equilibrium unemployment and a rise in employment. By contrast, the additional jobs

12 Our analysis of outflows, suggested that between 7 and 18 thousand had left long termunemployment in the Pathfinder areas in the first 11 months of 1998 as a consequence of the NDYP.Since these areas account for around 10 per cent of UK unemployment, this amounts to an average ofaround 10 thousand per month at the national level.

23

generated by the provision of job subsidies have an immediate effect on employment

and unemployment. But, other things being equal, this will eventually drive real

wages upward until employment and unemployment return to their initial equilibrium.

Therefore this component has a positive short term effect, but no long term effect.

As it turns out, in the main case examined here, the effect of the overall package is for

an immediate increase in employment generated by job subsidies to be sustained by

the long run effect of greater job search. In the next section we show scenarios where

the opposing forces of job subsidies and greater job search lead to different aggregate

effects of NDYP in the short and long run (this is shown in chart 3.2). Depending on

the strength of the wage pressure effect, the New Deal could either be more effective

in the long run than in the short run or its beneficial short run effect could be offset by

rising wage pressure.

The relatively small effect of the NDYP at any moment of time is a consequence of

the low numbers in the client group in the base forecast. The effects on the overall

labour market are shown in table 3.2.

Table 3.2 The Possible effect of the NDYP on the Labour MarketDifference from base forecast at end of year (thousands)

Employment Claimantunemployment

ILOunemployment

Population notemployed rate

(percentagepoints)

1998 +21 -31 -32 -0.41999 +21 -31 -32 -0.42000 +21 -31 -32 -0.42001 +21 -31 -32 -0.4

Note: The population not employed rate falls from around 22 to 21.6 per cent of the working age population, a fall of around 2 per cent.

Overall, the NDYP is expected to lead to an increase in employment in the economy

as a whole. The increase in employment is very similar to that for young people,

suggesting that it is mainly young people that benefit from the extra jobs. The

predicted fall in claimant unemployment is virtually identical to the fall in young

unemployment, suggesting that the NDYP has no serious adverse effect on the

unemployment of other groups. Overall, the proportion of the population of working

age without work is expected to fall slightly. The reduction in unemployment does

not increase inflationary pressure and is instead associated with a marginal reduction

in the sustainable rate of unemployment. This is brought about by the downward

pressure on wages from more effective job search, which reduces inflationary

pressure and allows the economy to operate at a higher level of capacity.

24

One consequence of this is that prices fall slightly relative to our base forecast in the

short run, this allows the real level of public spending to rise thus increasing real

demand in the economy. This slight fiscal expansion allows employment of the non-

NDYP group to increase a little. Real aggregate demand is also boosted by higher

consumers’ expenditure and higher fixed investment, reflecting expectations of higher

economic activity, and an improvement in net trade as a consequence of a lower real

exchange rate.

The overall effects on the economy are shown in table 3.3.

Table 3.3 The Possible Macroeconomic Effects of the NDYP Difference from base forecast at end year (percentage difference)

GDP ManufacturingOutput

PSNCR*Fiscal year(£ billion)

Exchange rate RPIX**

1998 +0.10 +0.1 -1.4 -0.2 0.01999 +0.10 +0.2 +0.1 -0.2 0.02000 +0.10 +0.2 +0.2 -0.2 0.02001 +0.10 +0.2 +0.2 -0.2 0.0

*public sector net cash requirement** retail price index excluding mortgage payments

The macroeconomic effect of the NDYP is relatively slight due to both the relatively

small share of the labour market in the client group and the cautious assumptions

made here. Output is higher by 0.1 per cent throughout the four year period. The

effect on productivity is roughly zero as the beneficial effect of a better trained

workforce is offset by the detrimental effect of a lower capital-labour ratio. Changes

in the general level of prices, the exchange rate and interest rates are also very small.

With respect to the public finances, the overall improvement in economic activity is

such that public sector receipts improve so reducing the effect on borrowing: the

NDYP is close to being self-financing. This comes about because the slightly higher

level of economic activity generates more tax revenue and less spending on

unemployment. A break down of the effects on the public finances is shown in table

3.4.

Table 3.4 The Possible Effects of the NDYP on the Public FinancesDifference from base forecast in fiscal year (£ million)

Net PropertyIncome

IndirectTaxes

Direct Taxes SocialcontributionsReceived

Socialbenefits paid

New DealSpending

Deficit

1998-99 150 100 1650 100 0 652 -14001999-2000 200 130 100 120 -40 652 652000-01 180 100 50 120 -50 652 1802001-02 160 80 50 110 -60 652 200

25

We have assumed for the purposes of this simulation that all of the expected cost of

the NDYP is spent evenly from the second quarter of 1998. This is a cautious

assumption since the level of unemployment among the client group is low enough

that it may not be necessary to spend all of the available funds on the programme.

In the financial year 1999-2000 and beyond, NDYP spending is assumed to add £652

million to the budget deficit. But the effect on the public finances of the NDYP as a

whole is much smaller than this. Partly, the adverse effect of the NDYP on the public

finances is smaller than it would otherwise have been because of the early collection

of the windfall tax. By raising the finance for the NDYP before it was due to be

spent, the government has effectively built up a stock of interest generating funds. By

investing these (or by not issuing as much debt as it otherwise would have done) the

public sector generates property income for itself. Overall, taking account of other

effects on the debt interest bill, this is estimated to generate extra income of up to

£200 million per annum.

Extra payments of indirect taxes amount to about £100 million per annum, with extra

direct taxes (excluding the windfall tax) contributing about £75 million per annum.

National insurance contributions are expected to rise by a little over £100 million per

annum, while social benefits are expected to fall by around £50 million per annum.

Putting these effects together, we would expect the government deficit to rise by an

average of about £150 million per annum once the windfall tax has been collected.

This is only about a quarter of NDYP spending. Roughly a half of the spending is

covered by extra taxes generated by higher economic activity, while another quarter is

being funded by the proceeds that arise from the windfall tax being levied in advance

of NDYP spending.

Chart 3.1 shows what the effect on the public finances would have been if the NDYP

had been introduced without the windfall tax to pay for it.

26

Chart 3.1 The Budgetary Implications of the NDYP(increase in public sector lending as a consequence of the NDYP,£ million per quarter)

This indicates that the deficit would have increased by about £400 million per annum

in 2001-02 rather than £200 million in the main case. The difference being accounted

for by the enduring benefits of the windfall tax.

3.4 Sensitivity of results

The previous section sketched out one possible scenario describing the quantitative

effect of the NDYP. This scenario is sensitive to the underlying assumptions about

the workings of the NDYP. What would happen if the NDYP works differently than

assumed?

The relatively small macroeconomic effect of the NDYP derives from two sources.

First, from the relatively low number of people eligible to participate in the

programme. Second, from the cautious assumptions used to calculate its possible

effects. Most particularly, the assumption concerning the effect on wage pressure of a

change in the composition of unemployment. As explained earlier, a change in the

composition of unemployment towards short- term unemployment is likely to weaken

wage pressure because people are thought to have a greater attachment to the labour

force when they have been unemployed for only a short time. However, it was also

-150

0

150

300

450

600

1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1

with windfall tax

without windfall tax

27

assumed that the change in the composition of unemployment brought about by the

NDYP would have a much smaller effect than in the past. This is a crucial

assumption.

There are two reasons for this belief. First, around half of those leaving long term

unemployment as a consequence of the NDYP will be moving onto the non-employer

options. This is unlikely to have any effect on wage pressure in the short term,

possibly even increasing it, although it should have an effect by the time they

complete their NDYP options. Second, it is unclear whether long term unemployment

among the young has the same effect on wage pressure as that among the unemployed

in general.

In the scenario described in the previous section, the employment subsidies encourage

employment to some extent, and extra subsidised employment accounts for most of

the increase in jobs. Downward pressure on wages caused by the NDYP is just

sufficient to ensure that there are not offsetting falls in employment elsewhere.

Unemployment falls, but this is partly because of a rise in inactivity and more

employment programmes brought into operation by the NDYP. The deterioration in

the public finances is not substantial such that the programme is virtually self-

financing.

In the alternative case where wages respond more to the changed composition of

unemployment, the level of unemployment that the economy is able to sustain is

lower. This allows the economy to expand further without substantial pressure on

inflation. This encourages fixed capital investment and increases the overall

productive potential of the economy. The public sector finances would be more or less

unaffected by the cost of financing the NDYP as the extra economic activity would

generate sufficient extra revenue to fully support the programme.

In the case where changes in the composition of unemployment have no effect on

wage setting, there is no beneficial effect on output from the NDYP. Other than in the

very short run, output is lower than it would otherwise have been for a number of

years. This reflects the fact that in this case there is no change in the sustainable rate

of unemployment, but there is a small increase in inflationary pressure because the

actual unemployment rate is reduced slightly due to the availability of subsidised jobs

and extra places on training programmes. This puts some slight upwards pressure on

prices thus reducing the volume of public sector consumption as well as reducing

investment somewhat.

28

In order to make more clearly the point that job subsidies are not the key factor in the

NDYP, chart 3.2 shows how employment would be expected to develop if the other

parts of the New Deal were implemented without subsidies. The response is shown

for two different assumptions concerning the sensitivity of wage setting to changes in

the composition of unemployment.

Chart 3.2 The Sensitivity of The New Deal Effects to the Subsidy Assumption

The Response of employment (thousands)

The chart shows that the response of employment to the NDYP depends very much on

how sensitive is wage setting to changes in the composition of unemployment. In the

more sensitive case employment increases by about 50 to 60 thousand, irrespective of

whether the subsidy actually effects the demand for labour. Other than in the short

run, the employment response is very similar whether displacement is 50 per cent or

100 per cent (i.e. whether the job subsidy creates additional jobs or not).

Similarly, in the case where wage setting is less sensitive to the composition of

unemployment (as in the previous section), employment expands by around 20 to 30

thousand irrespective of the effect of the subsidy.

In the short run, which means for up to three years, the subsidy does have a beneficial

effect on employment, but ultimately it is the effect on wage setting that matters. This

0

15

30

45

60

1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

50% displacement, high wage sensitivity

100% displacement, high wage sensitivity

100% displacement, low wage sensitivity

50% displacement, low wage sensitivity

29

indicates that the important component of the NDYP is its effect in stimulating and

improving job search, rather than in generating extra job offers through the provision

of employment subsidies. It is the extra and more effective job search which ensures

that the benefits of subsidies are not dissipated through higher wages.

The prospective effects of the NDYP are also sensitive to the assumptions made about

a training effect on productivity. Changes in productivity do not affect the sustainable

rate of unemployment since they lead to an increase in both the desired real wage and

the real wage that firms can afford to pay. Thus, the effect of the NDYP on

employment and unemployment is broadly independent of its effect on productivity.

The overall effect on productivity does depend on whether training has a positive

effect. In the scenario described in the previous section productivity rises by about ½

per cent. If the quality of the labour force is unaffected by the training component of

the NDYP, productivity falls by ½ per cent. The difference reflects the assumed

effect of training on technical progress. This indicates that in the absence of a

positive effect from training, the NDYP would lead to lower productivity as a

consequence of substitution of labour for capital.

Given that these two cases do not differ significantly in their effect on employment, it

is clear that output must rise by more where there is a positive effect of training. The

effect on the public sector deficit is surprisingly little different in the two cases despite

the greater response of output when there is a positive training effect. This arises

partly because nominal income is very similar in both cases: prices fall by more when

the output increase is largest. With nominal government spending assumed to be the

same in both cases, and with little change in nominal income, there is very little

difference in budget deficit.

As well as the uncertainty surrounding the assumptions about the effect of the NDYP

on wage-pressure and productivity, there are other risks associated with the way in

which the NDYP is likely to work. As described above, the NDYP is being

introduced at a time when long term unemployment among the target group is low

and expected to get smaller. This may be seen as a good thing in the sense that help

can be directed to those young people who really need it. But it also means that there

is ample scope within the programme should the demands on it increase.

Should the demand on the programme increase, the NDYP is likely to have a bigger

impact than would be the case in its absence. The policy would then be reaching

different groups to the one it is now mostly likely to be helping. At present, the

30

NDYP looks set to be helping the hard-to-employ. Should an economic downturn

arise, it will be helping those who might through a period without employment

become the hard-to-employ. One of the benefits of the programme is likely to be its

ability to act as a safety-net to catch people who might otherwise drop out of the

effective labour force. Like other safety-nets, its value will not be appreciated until it

is needed.

31

4. Further work

Two important questions remain unanswered in the summary of results in the

previous sections.

First the question of whether young people leaving unemployment through the NDYP

are going into sustainable jobs or whether the fall in the claimant count is merely

cosmetic. To answer this we will need to analyse trends in youth employment, ILO

unemployment and inactivity. Chart 4.1 shows total claimant unemployed and total

ILO unemployment of 18-24 year olds. There has been a notable divergence between

the two measures of unemployment since 1996, with the claimant count decreasing

relative to the ILO measure. The continued divergence could reflect factors such as

the economic cycle, more students looking for work or NDYP, or some combination

of these. If the continued divergence is due to the NDYP, this might indicate that

NDYP is having a cosmetic effect, pushing young people off JSA but not leading to

an increase in sustainable employment. It might also, and more positively, indicate

increased job-seeking in accord with the intended effects of NDYP.

Chart 4.1 Claimant versus ILO unemployed 18-24 year olds

Source: DfEE internal evaluation

The second question left unanswered is the effect of the NDYP on wage-setting

behaviour. As was emphasised in section 3, the impact of the NDYP on wage-setting

behaviour is expected to be central to its impact on the labour market and the wider

economy.

250

350

450

550

650

750

850

spr-92 spr-93 spr-94 spr-95 spr-96 spr-97 spr-98

thou

sand

s, G

B

ILO unemployment

Claimant count

32

Both questions will be central to the further understanding of the impact of the NDYP

on the macroeconomy. The next stage in our research will include analysis of both of

these questions.

We intend to update our analysis of trends in unemployment stocks and flows at the

national and local level. Given the focus of the Welfare-to-Work programme on

shifting the unemployed back into work, our analysis will examine in more detail than

hitherto the effect of the NDYP on the destinations of outflows from unemployment

as the data becomes available. Other strands of the macro evaluation looking at the

effect of NDYP on individual outcomes will complement this.

An important part of our future work will be to transform the macroeconomic analysis

of the NDYP from a description of what might happen to a quantified account of what

has happened. This will involve extending the model to take full account of the extent

to which companies substitute young workers for old workers as well as building in

our estimates of the effects of the NDYP on wage setting and productivity. This will

then enable us to provide estimates of the effect of the NDYP on the economy

generally, including evidence contributing to an informed judgement as to whether it

has provided value for money for the British taxpayer.

33

References

Anderton, B., R. Riley and G. Young (1999a). The New Deal for Young People: EarlyFindings from the Pathfinder Areas, Report for the Department for Education andEmployment

Anderton, B., R. Riley and G. Young (1999b). An Illustration of the PossibleMacroeconomic Effects of the New Deal for Young Unemployed People, Report forthe Department for Education and Employment

Hall, J. and Reid, K. (1998), ‘New Deal for the young unemployed: monitoring andevaluation’, Labour Market Trends, November 1998, 549-553.

Snape, D. (1998), New Deal for Young Unemployed People: A Good Deal forEmployers?, Research and Development Report, Employment Service & SCPR

Sweeney, K. and D. McMahon (1998). ‘The effect of Jobseeker’s Allowance on theclaimant count’, Labour Market Trends, 106(4), pp. 195-202