Mobilising Britain’s Missing Workforce
Unemployment, incapacity benefit, and the regions

By Steve Fothergill and John Grieve Smith

EXECUTIVE SUMMARY

• The very high numbers of people on incapacity benefits in the older industrial areas of the North, Scotland and Wales reflect “hidden unemployment” on a grand scale. Many of these people would be able and willing to work if more jobs were available.

• Comparisons of the numbers on such benefits with the levels in the areas close to full employment, and allowing for underlying differences in ill health, suggest that over 1 million people have been diverted from unemployment to incapacity benefits. In addition there are many unemployed people who have been diverted off benefits altogether. It would take at least 1.5 million more jobs in the “North” to bring the proportion of adults of working age in jobs up to the level in the more prosperous parts of the “South”.

• Mobilising this “missing workforce” would benefit not only those concerned, and the areas in which they live, but also the economy as a whole. A more even spread of jobs across the country would avoid the need for higher interest rates to curb inflation in parts of the South while other areas are still far from full employment. The Treasury would benefit from lower expenditure on benefits and higher tax revenue. The looming pensions crisis would be eased by the higher ratio of workers to pensioners.

• A key objective for Labour’s third term must be to mobilise this workforce. The government’s present reliance on labour “supply side” measures, such as the proposed reform to Incapacity Benefit, is unlikely by itself to solve the problem. The government is right to offer training and support for incapacity claimants to return to work, and to make sure that it is financially worthwhile for them to do so. However, unless there are also more jobs for these people, and in the right places, the reforms are likely to have little impact.

• The key is a regional economic policy that will deliver more jobs in the areas where incapacity claimants are concentrated. In particular, this requires continued improvement in infrastructure and effective incentives for the private sector to invest and create new jobs. The government should be more willing to recognise that policy must discriminate in favour of areas of low employment. It is no good simply leaving all the Regional Development Agencies to get on with the job.

• New EU regional policies, designed to cope with enlargement, will make the task more difficult. The impending loss of EU regional funds, which are presently vital in financing infrastructure and business support in less prosperous areas, needs to be made good by additional UK government spending. The tighter EU rules on UK regional incentives to companies, due to kick in at the start of 2007, need to be offset by more intensive use of the remaining opportunities to assist firms in the regions. In particular, the grant regime needs to send a clear signal to firms that if they invest in certain parts of the country, where employment rates remain low, their investment will receive financial support. In practice, the extra public expenditure will be offset by lower spending on benefits and higher tax revenue.

• In addition, the government needs to look at innovative ways in which it can now promote a more equitable distribution of jobs around the country. The public sector itself is a major employer, and its location decisions should to be adjusted to reflect the need for jobs in different parts of the country.

• Cutting the numbers on incapacity benefits and promoting regional development are not two separate, unrelated policy objectives. There can be no solution to one without the other. The government is intent on reforming incapacity benefits. It needs to match this intent with a radical re-think and strengthening of its regional policies.

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