Cost-benefit analysis methodology

The cost-benefit analysis is conducted from three perspectives: the Government’s, participants’ and society’s.

The cost data incorporate the administrative costs borne by Jobcentre Plus in operating NDDP as well as the costs incurred by Job Brokers. Data on Jobcentre Plus costs were provided by the DWP. As mentioned in Section 1.2.2, data on Job Broker costs were collected from 20 Job Brokers in May and June 2003 and relate to the financial year 1 April 2002 to 31 March 2003 (Greenberg and Davis, 2007). Job Brokers provided cost data on staff costs, overheads, payments to other organisations for services provided to participants and any other relevant costs. The cost analysis also drew upon findings from the Survey of Job Brokers and the Survey of Registrants. Total costs and profits (or losses) for each Job Broker were calculated on a per participant basis. The cost estimates are reported as a range; and have been reported in Section 3.1.7.

The research team suspects that two Job Brokers may have overstated their costs and useable data could not be obtained from another Job Broker. To compensate for the former, cost estimates were adjusted using regression analysis; see Greenberg and Davis (2007) for further details of the procedure used. Accordingly, cost estimates for the programme are reported as both adjusted and unadjusted estimates; with Greenberg and Davis (2007) arguing that the adjusted costs are probably the more accurate. The Job Broker providing unusable data was omitted from the cost analysis (Greenberg and Davis, 2007), that is, the analysis is based on 19 Job Brokers.

The estimation of benefits draws heavily upon the impact analysis, in particular the Early and Maximum Follow-up Cohorts. However, there is no reason to presuppose that the impacts of NDDP would end at 24 (or 36) months. Accordingly, regression analysis is used to predict net impacts.54 _{The cost-benefit analysis is based on} observed variables for the first 24 months (the Early Cohort) and predicted values hereafter. The predicted impacts and estimated impacts for the Early and Maximum Follow-up Cohorts are illustrated in Figure 5.1.

54 _{Greenberg and Davis (2007) consider different possible estimation methods and} for the cost-benefit analysis use a regression with a quadratic time trend variable. The quadratic specification posits that these impacts first grow in absolute magnitude, but at an increasingly slow rate and then begin to shrink, eventually disappearing (thus, the time profile resembles a U-shape curve). However, for estimating the impacts of NDDP on Jobseeker’s Allowance a simple linear specification is used, because this seems to fit the data better than other specifications. Further details of the estimation methodology can be found in Greenberg and Davis (2007).

Figure 5.1 Examples of predicted impacts

Figure 5.1 Continued

Some of the impacts arising from NDDP – for example, increases in earnings, increases in government tax receipts and National Insurance contributions, changes in other benefit payments (such as, Working Tax Credit, Council Tax Benefit and Housing Benefit), and decreases in the costs of administrating benefit programmes – are not directly estimated in the impact analysis and so are inferred from the impacts that are estimated (see Greenberg and Davis, 2007). The impact estimates for benefit receipt are combined with Departmental data on the costs of administrating benefits to calculate administrative savings arising from people moving off incapacity-related benefits and increases in administrative costs due to the small increase in Jobseeker’s Allowance receipt.

Earnings were estimated by computing the total increase in the number of months participants were in employment due to NDDP, discounting this figure by 3.5 per cent per annum (see below) and multiplying by the monthly earnings received by the average participant, £581.13 in 2005 prices. This figure excludes tax payments, National Insurance contributions and tax credits, which, as discussed below, are separately estimated. Thus, Greenberg and Davis (2007) estimate that NDDP increased the average net earnings of longer-term participants by £3,777 and more recent participants by £1,414.

Estimates of the tax payments and National Insurance contributions made by individuals with net monthly earnings of £581.13, the National Insurance contributions made by their employers, the amount of tax credit such persons would receive, and the amount by which their Council Tax Benefit and Housing Benefit would be reduced relative to persons with no earnings were obtained using the Department for Work and Pension’s Pathways to Work model. The monthly values of these amounts are as follows: the individual’s direct tax payments and National Insurance contributions equal £67.33; the employer’s National Insurance contributions equal £31.01; tax credits received by the worker equal £106.72 on average55_{; and the reduction in Council Tax Benefit and Housing Benefit payments} equal £65.

As well as making direct tax payments, individuals are also subject to indirect taxes as a result of the VAT and duties on certain commodities such as alcoholic drinks, tobacco and petrol. Within the income range of NDDP customers, the marginal indirect tax rate is about 28 per cent. Thus, the effect of NDDP on indirect tax payments was computed by multiplying this rate by the programme’s impact on disposable income (i.e. the increases in net earnings, Jobseeker’s Allowance and tax credits resulting from NDDP less reductions in incapacity-related benefits and Council Tax and Housing Benefits).

In line with HM Treasury recommendations (Treasury, 2003), the programme’s benefits are discounted at 3.5 per cent. Discounting is necessary because benefits

55 _{A worker with net monthly earnings of £581.13 would actually be eligible for} £213.45 of tax credits per month. However, the take-up rate for tax credits is roughly 50 per cent.

occur over a number of years, and benefits that are received later are of less value than similar amounts that are received sooner. A discount rate is used to convert the streams of benefits resulting from NDDP to their present values so that benefits that occur at different points of time are comparable and can be compared to costs, which in NDDP are mostly incurred soon after registration. Once benefits in each month are converted to their present values, total programme benefits can be computed by simply summing these present values.

Results for the cost-benefit analysis are presented as net benefits, that is, benefits minus costs. Separate analyses were conducted for more recent and longer-term participants. In addition, separate cost benefit analyses are presented for large Job Brokers (having more than 900 participants) and smaller-sized Job Brokers.

In the cost-benefit analysis all monetary values have been adjusted to 2005 using the Retail Prices Index. This means that the cost-benefit analysis monetary values differ from those reported in the cost analysis and the impact analysis, which are not adjusted for inflation.

The approach adopted assumes that NDDP had no impact on the hours worked per month by those who would have been employed in the absence of the programme, or on the hourly wage rates of those who found employment. This is a conservative assumption; if NDDP has a positive impact on employment it is also likely to have a positive impact on hours worked per month by those who are employed. Moreover, Job Brokers only received job entry and sustained employment outcome payments for participants who worked eight hours or more a week and they received larger payments for participants who worked full-time. Thus, they had a strong incentive to try to increase the working hours of participants. Hence, the actual total net benefits of NDDP are likely to be understated by the estimated values presented here.