Employer incentives for hiring young people could be a multi-million pound waste of taxpayers’ cash, experts have warned.
Later this year, the government will roll out two financial bonuses of up to £3,000 for businesses that hire young unemployed people or apprentices.
The incentives are part of a £1 billion package over three years, which includes the ‘jobs guarantee’ subsidised work programme.
But experts said evaluations of past incentive schemes show that while there was a good case for supporting young people in the earlier stages of unemployment, the latest plans risked “deadweight” spending on grants for hires that would have happened anyway.
Work and pensions secretary Pat McFadden announced the measures this week, arguing the government needed to help NEETs who are out of work long-term avoid “lifelong scarring effects” on their health and wealth.
The number of NEET young people (not in education, employment or training) has risen to almost one million since a pre-pandemic low of about 800,000.
New incentives
From June, a ‘youth jobs grant’ of £3,000 will be available to employers who hire anyone aged 18 to 24 who has been on universal credit for six months. Around 60,000 people are forecast to be taken on over three years.
Then in October, the government will also pay an ‘apprenticeship incentive’ of £2,000 to small and medium-sized businesses that hire 16 to 24-year-old apprentices.
A £2,000 employer incentive is also available for every young foundation apprentice start, although figures covering August to October last year reveal there were only 36 starts.
Each new grant can be “stacked”, so an SME hiring a foundation apprentice aged 18 to 24 who has been unemployed at least six months could claim grants totalling £7,000, officials have confirmed.
The incentives come alongside a youth guarantee jobs programme for people in receipt of universal credit for 18 months or more, currently launching in six UK regions and due to expand nationally in October.
McFadden has widened the scheme’s scope from 18 to 21-year-olds up to 24-year-olds, more than doubling the eligible group from 30,000 to 72,000.
Deadweight risk
Business groups welcomed the new incentives, but experts warned the policies were likely to benefit only a “small percentage” of the almost one million NEETs.
Xiaowei Xu, senior research economist at the Institute for Fiscal Studies, said there was a “good case” for supporting young people before their skills and confidence were “eroded” by long spells out of work.
And she explained wage subsidies should boost long-term youth employment levels by encouraging hires that would not have otherwise taken place – a concept economists call “additionality”.
But offering £3,000 to all employers without checking for additionality could result in “substantial dead weight” spending, Xu warned.
And while a £3,000 grant would reduce the cost of hiring a young person by between 27 and 35 per cent over six months, the benefit of the grant to employers would be “negligible” when spread over the long term, she added.
Xu said it “remains to be seen” how much the government policies would increase long-term employment as they will only benefit a “small share” of the nearly one million NEET young people.
The IfS estimated the 60,000 job grants apply to 420,000 NEET young people, including 100,000 looking for work on universal credit for six to 18 months, and 320,000 on the benefit regime for six months or more for health reasons.
An old tool
Cash incentives for businesses that hire young people and apprentices are an established government policy for boosting uptake.
The government already offers long-running incentives for hiring younger apprentices, including £1,000 for a 16 to 18-year-old’s employment-related costs, and relief on employer national insurance contributions for under-25s that is expected to cost the Treasury £570 million this financial year.
From 2012 to 2014, the government offered a ‘youth contract’ wage incentive of £2,275 for employers hiring 18 to 24-year-olds on the government’s ‘work programme’.
Between 2012 and 2017, the government also offered a £1,500 ‘Apprenticeship Grant for Employers’ to businesses that were new to apprenticeships, had fewer than 50 employees, and recruited an apprentice aged 16 to 24.
Evaluations of both programmes estimated that deadweight accounted for about 22 per cent of apprenticeship grants and 76 per cent of youth contract grants.
However, both studies suggested the schemes were successful at encouraging recruitment of young people and that benefits “substantially surpass the costs”.
Stephen Evans, CEO of the Learning and Work Institute, told FE Week that conclusions about whether incentives were successful were “mixed at best”.
And he said the government risked getting “quite a high level” of deadweight if it was not careful about who it targeted with incentive payments.
An ‘apprenticeship incentive payments’ scheme that ran between 2020 and 2021 paid grants of up £3,000 to 162,000 employers.
Only 20 per cent of employers responding to a DfE survey said this caused them to recruit more.
An independent review of spending during the pandemic later found about £4.7 million was lost to fraud and error through such apprentice and trainee hiring incentives.
The Department for Work and Pensions’ director of work-based skills Kate Ridley-Pepper told FE Week the new apprenticeship incentives would be paid to training providers then forwarded to employers in an attempt to avoid fraud.
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