Why spend these billions when unemployment is dwindling?

Some economists predict Britain will be back at full employment in a couple of years. If so we need to worry about skill shortages and wage pressure, not schemes for the jobless

The Government's spin doctors have been promising that Gordon Brown's first Budget will mark the most radical shake-up of the welfare state for half-a-century. It will introduce a package designed to get the young and long-term unemployed into jobs along with other, still unspecified, welfare-to-work measures.

Yesterday's figures showing yet another big drop in the number of people claiming unemployment benefit raise the question of whether the Chancellor ought to bother spending pounds 3bn on reducing the under-25s jobless total. With yesterday's figures showing their number making up only a quarter of the total, the lowest share on record, there will soon be few left to help. If the unemployment problem is well on the way to being sorted out because of policies introduced by the previous government, perhaps the money about to be raised by the windfall tax could be better spent.

For example, in new research this week, City economist Kevin Gardiner at Morgan Stanley predicts that on current trends Britain will be back at full employment, on any sensible definition, within a couple of years. The unemployment rate might fall below 5 per cent next year. If he is right, we will soon be worrying about skills shortages and wage pressure, not schemes for the jobless.

Unemployment no longer a problem? This requires a pretty big mental adjustment, and it is not one the Government has made yet. But the headline figures are impressive: the claimant count stood at 1,651,400 last month. Another drop the same size as April's and it will be the lowest since September 1980.

This would be close to what most economists reckon to be the unemployment rate below which inflation would start to accelerate. The UK's "natural" rate of unemployment is thought to be around 5 per cent or 1.4 million, far higher than its level in the late 1960s but lower than in the early 1980s.

Of course, there is no doubt that the claimant count is a flawed measure of unemployment, reduced over the years by many changes of definition. But critics exaggerate the flaws. It is not utterly misleading, having tracked the internationally accepted definition of unemployment in the quarterly Labour Force Survey. The claimant count is about 1 per cent lower than this widely accepted measure.

The downward trend in joblessness since 1992 has two explanations. The obvious one is the cyclical recovery in the economy. One of the merits of the flexible labour market is that employers have hired as quickly during the upturn as they laid off in the downturn. This is not so comforting, as there is nothing to prevent a swift rise in unemployment when the next recession hits.

But the other reason gives more cause for hope. It is the fact that the last government did make a start on reducing both the underlying trend in total unemployment and the "non-accelerating inflation" unemployment rate. The controversial Job Seekers' Allowance formed part of this - and it is noticeable that the new Government shows no interest in abolishing the JSA. Expect it to be quietly renamed and retained.

It has been dramatically effective at shaking out people who are unwilling to carry on claiming benefit under the tough new terms. It's hard to escape the conclusion that many of them were claiming benefit when they had a job. The JSA represents the "hard cop" aspect of what economists would describe as "active labour market policies" or detailed measures to match people to jobs.

The evidence from the US, where some states opted for far tougher benefit regimes as long as five years ago, is that it works. Unemployment has fallen and, more importantly, the proportion of working age adults who are employed has risen.

The "soft cop" aspect - so far - has consisted of improvements to administration and routines at JobCentres. For example, the computer software for benefit claimants has been upgraded and integrated with the system for vacancies. The time spent on initial interviews has doubled, resulting in better matching of people and potential jobs. Although they sound trivial, such changes have had a big impact.

The moral is that the unemployment total falls when people are either bullied or tempted into jobs they would not otherwise accept or bother to find out about. Many people who are out of work either do not know what is available or do not like the look of the available jobs. But it is almost impossible to move from unemployment - especially after any length of time - into a good job. You have to get on to the first rung before you can move up the ladder, and those first-rung jobs are there.

The proposals Gordon Brown will introduce in the Budget, designed for the under-25s, are a slightly kinder and gentler - and more expensive - version of existing active labour market policies. They do not differ in essence from the Conservative measures. As Alan Howarth, the employment minister responsible for the package, put it earlier this week: "There will be no option of staying in bed on full benefits."

Young people without work will have the choice of unemployment removed. In its place will be a choice of a subsidised but low-grade job, voluntary work, a place on an environmental task force or full-time training. The proposals gloss over the fact that the unappealing jobs already exist.

Labour's adviser on unemployment, Professor Richard Layard of the London School of Economics, points out in his recent book, What Labour Can Do, that long-term unemployment is linked to the long-term payment of unemployment benefits. His conclusion is that anybody out of work for more than six months should be guaranteed a job instead of being able to claim. They just won't be great jobs.

It is hard to see why it is worth spending billions of pounds on unnecessary job measures. This is a remnant of the old Labour obsession with full, and full-time male, employment. It is the other welfare-to-work problems that are so much more intractable and so much more expensive because they involve making work more worthwhile.

The most important task is reducing the effective marginal tax rate on people starting low-paid jobs, because they lose so many of their benefit payments so quickly. Introducing tapered withdrawal of benefits will be expensive but is essential to improve work incentives and help relieve poverty.

The Government should also be aiming to make jobs attractive to the people who have been discouraged out of the labour force or cannot look for work. In all the hints about what it might do, one of the simplest possibilities has been overlooked. Lone parents are one important category of people trapped on benefit, unable to take most jobs because the pay does not begin to cover childcare costs. A really radical welfare reform programme would have payment for childcare for single mothers as its centrepiece.

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