Why so many drop out of the New Deal

THE GOVERNMENT'S Annual Report referred to the launch of the New Deal as one of its success stories. They have certainly been lucky so far in the timing.

The New Deal was launched into a labour market as buoyant as anything we have seen since the 1973 oil crisis. In some parts of the country - for those old enough to remember - it feels like the 1960s. Desperate employers are taking on anyone who applies for a job. Those who have jobs they do not like feel confident enough to resign, as they know they can easily get a new one.

Captains of industry and small firms alike have been enthused and come forward to offer placements for the unemployed 18 to 24 year olds who are the New Deal target group. Their enthusiasm has partly been fuelled by the subsidies available. But some of their motivation seems to stem from a willingness to look to new sources of recruitment as old ones dry up.

We are told that 20,000 employers have signed New Deal agreements, which means several times that number of places are available. Similarly, colleges have geared up to provide courses for the young people who wish to take up the option of a full-time training course prior to entering work.

The trouble for the New Deal is that across much of the country there are placements available with enthusiastic employers, and there are college courses which have hired tutors, but there are very few young people coming forward. Moreover, from places as different as Leeds and east London, there are reports that those who do come forward have job expectations that the New Deal is unlikely to be able to fulfil. Not all want to be brain surgeons, but few want to work in supermarkets or train as chefs.

More problematic, perhaps, is the fact that the young people eligible for the programme are increasingly concentrated in a few unemployment blackspots where placements are hard to come by. In those areas the young people's expectations may be realistic about the job they are willing to take, but it may still be difficult to fulfil them.

A fortnight ago the Government announced that 92,500 young people had entered the programme, with 11,000 having moved into work and a further 2,000 starting training courses. This leaves nearly 80,000 who have either dropped out or who remain in the gateway stage. Anecdotal evidence suggests that around a third or more are dropping out within the first few weeks.

Drop-out essentially means that those concerned have alternative means of survival, as refusal of a New Deal offer disqualifies them from receiving benefits. This implies either that they are getting unsubsidised jobs relatively easily, or that the black economy is alive and well.

For many of the target group the New Deal may be unnecessarily elaborate as they are doing well in the open labour market. However, there is a significant minority with health, housing and other social problems, for whom it may still represent too much of a challenge.

Moreover, there are groups in the population who need more help, particularly those over 40, and who are either unemployed or who have become disillusioned in their search for work and dropped out of the labour market altogether. Although those who have been unemployed for two years or more are eligible for a variant of the New Deal, it is a waste under current circumstances to make them wait that long. Their skills are likely to decay and their self-confidence erode. There is sufficient evidence of employer prejudice against older workers for it to make sense for them to be eligible for help at a much earlier stage.

Many employers are willing to take a risk with young people. Far fewer are prepared to give a similar chance to the over-40s. They are thought to be slow, set in their ways, and unable to adapt to new technology. The evidence to support such attitudes is thin, and there is a good deal pointing the other way. A six-month subsidy allows them an induction period to adapt and get up to speed. It gives them a chance to compete with younger people.

Similar considerations apply to lone parents, where the version of the New Deal on offer has not been going well. Only a very small proportion of those invited to visit the job centre to see what help is available have accepted the invitation. This is partly because the programme takes a very short-term view. It targets those whose youngest child is at primary school, but only offers help in finding a job.

Research evidence suggests that lone parents who have some educational qualifications are more likely to be working than those who do not. As a result, lone parents dependent on income support are likely to have few or no educational or vocational qualifications. This in turn means that their potential earnings are relatively low.

However, this does not mean that they do not want to work at some time in the future. The one thing that would equip them to meet that ambition would be the opportunity to improve their qualifications and equip them for the modern labour market. Better qualifications would also help them to keep a job once they have got one, and to make subsequent career progress. Reducing benefit dependency among lone parents is a long-term ambition. Helping people to help themselves is central to the Governments philosophy. Yet the New Deal for lone parents does not offer them the opportunity to spend part of their children's early years in primary school investing in themselves. They can be helped to get a job in a supermarket now, but they cannot be helped to take a course in word processing and office skills that would enable them to get a better job in a year or so's time.

The New Deal is a classic example of public expenditure addressing the wrong problem. The young people who do not seem to need much help are getting too much, and the other groups who are not working, the one million lone parents dependent on income support and the unemployed over 40s, are not getting enough.

Why does the Government not reallocate the resources? One reason is that help for young people was a manifesto pledge, and unfortunately this means it takes priority over more effective use of the money. Another is probably a fear that it is too good to last. Events over the next two to three months will reveal whether the economy is in line for a slowdown in the rate of growth - in which case unemployment may rise, but not dramatically - or for a full-blown recession, in which case the Government will need to have a large programme in place to cope with the rapid increase in the numbers eligible for the New Deal. Only time will tell.

Pamela Meadows is a senior research fellow at the National Institute of Economic and Social Research