Housing and Employment

Housing and Employment

1. Introduction

1.It is reasonable to suggest that employment both in terms of remuneration and personal development is an important dimension of well-being. Employment is also essential to, and intimately connected with, the housing sector. This paper teases out these connections and suggests a number of possible policy and evidence work stream ideas that bring housing and employment aspects of well-being together.

2.In this paper, we will:

• Suggest key issues for the Commission to consider
• A background discussion of why this topic is potentially important for the Commission
• A distillation of key facts relating to housing and employment
• A discussion, in more detail, of relevant policies and targets, which link housing and employment along with suggestions for policy initiatives.

2.Background

3.Housing, the labour market and employment are intimately connected across several important strands:

4.First, housing, if broadly defined, is a big employer of blue and white-collar jobs across different stages of housing production and consumption. Housing development & construction, trading, finance and sales, as well as indirect and induced economic activity are important at different spatial scales. Type II multipliers for housing construction (i.e. the direct, indirect and induced effects) are thought to be quite large (c.f. recent research for Scottish Government by CCHPR at Cambridge). While the private sector is activity levels driven and hence pro-cyclical; the opposite is probably true the rental sectors.Housing is of course also important collateral for new businesses, for the self-employed and an important environment for work based at home.

5.Second, the functioning of the housing system, in terms of low transactions costs, an easy access rental market, affordable housing costs and a wider sense of the system working with the grain of the economy (i.e. the broader strong drivers in the economy like international competitiveness pressures, the demand for skilled labour and flexibility, etc.) is essential to the functioning of local labour markets and flourishing economies. In other words, there is a two way relationship: the employment effects of housing activity but also the qualitative impact a good or bad functioning housing system has on the health of the labour market.

6.As a result of these two interacting themes, important policy questions flow. First, to what extent can housing-focused investments, such as for affordable housing, achieve employment and Gross Value Added (GVA) objectives relative to other forms of possible investment? Second, what impacts can housing production and maintenance programmes have on training, apprenticeships (including white collar) and on policies such as delivering the living wage? Third, what role can housingpolicy broadly defined play in supporting the functioning of the wider labour market (e.g. by helping to incentivise work)?

7.What sort of general areas for reform or specific policy innovations or initiatives arise out of this discussion that might be further pursued by the Commission? Candidates include:

• A reconsideration of working age benefits including reform of housing benefit to better make work pay but which also might support the better functioning of the housing system and offer value for money to the taxpayer.
• Promotion of housing-related training and employment opportunities in specific valued sectors such as labour intensive construction, maintenance and refurbishment work, physical neighbourhood regeneration and energy efficiency retrofitting.
• Policies to promote easy access rental housing and wider labour mobility e.g. mutual exchanges.
• Policies that expand the supply of housing in general and new supply in particular in arras of demonstrable housing need.

3. Key Issues

8. The labour market and employment as a key driver of housing opportunitiesand outcomes on both the supply and demand-sides. The housing sector, equally, impacts on the functioning of labour markets.

9. Housing costs, available affordable housing and location relative to employment opportunities evidently affect work incentives[i]. Equally, the interaction of tax and benefit systems, including Housing Benefit, impact on the decision to work and the decision if in work to work more. A long-standing concern has been that those at the margins of working face high effective marginal tax rates (i.e. because of the interaction of coming into taxation and benefits begin withdrawn as incomes rising) and that the net return to working can be very low[ii]. Moreover, Housing Benefit on its own has a taper of benefit withdrawal of 65 pence for each additional pound of gross earnings. One of the motivations behind developing the Universal Credit was to bring together all working age means tested benefits into a single taper of 65 per cent, still significantly punitive, but much lower than the 90% plus that can apply presently in certain circumstances.

10.A second key role that the working age benefit system conveys is that it plays an important role supporting poor people in work. This is particularly true of Housing Benefit but it should be understood that it helps to support part-time and temporary working and, arguably, may support low wage policies by some employers. Again, a focus of current welfare benefit reform is to encourage people into work and from there incentivise them to work more hours per week.

11. There are long-standing arguments that problems in the housing sector can inhibit job creation, job sustainability and the efficient mobility of labour. Traditionally, commentators focused on council housing as such a barrier with much lower turnover rates and much less willingness by tenants to migrate. More recently the spotlight has shifted to the composition of social housing tenants and what it is that makes them more likely to be workless. The causality direction is not clear – it may be that the long term effects of allocations policies focused on highest need acts to concentrate the least competitive in the labour market. Longitudinal evidence following cohorts of council tenants also tells more complex narratives about advantage and disadvantage.

12. Interestingly, since the 1990s, the Warwick economist Andrew Oswald, recently working with David Blanchflower, has argued that excessive home ownership causes unemployment through higher transactions costs and other impediments to mobility such as unaffordable regional housing markets where labour demand is strong. This has spawned a wide empirical literature which essentially seems to say that the macro evidence does not reject the so-called Oswald Hypothesis but that the micro or metropolitan evidence is less convincing. Economists are much more in agreement that a strong easy access (low transaction costs) rental market is the key to labour mobility across regions.

13. These questions are important because sufficient affordable housing of different types and sizes – are important hard assets for urban and regional economic competitiveness. Previous research has suggested that suburban new housing supply can attract business investment to an area[iii]. However, at the same time, within a metropolitan area there may be important skills and spatial mismatches between homes and work and the skills of those in less advantaged areas.Mis-match was originally focused on the labour market disadvantages faced by black households in urban America and corrective policies sought to tackle this through transport subsidy, relocation of employment, better labour search and informationservices and tailored individual active labour market policies. They have also formed a basis for policies promoting mixed communities and the spatial dispersal of affordable housing. Similar questions have arisen in areas of de-industrialisationin Europe and more recently focus has shifted to questions about skills deficits and new migrants.[iv]

14. Housing also plays a key role directly and indirectly in the local labour market. Most obviously as a series of businesses in the private and other sectors, it employs and develops transferable skills. Key housing-related employers include construction firms, public and voluntary sector construction labour organizations, but also white collar housing management and letting/dealing functions, as well as tradesmen and the related housing professions (legal, financial, surveying, etc). More indirectly but as a result of housing construction, trading and moving, all of those occupations that rely on housing transactions and lettings to operate: DIY, white goods, removals firms, decorating, etc. moreover, these housing and related activities generate economic activity through the aggregation of individual consumption decisions. Combined these direct and indirect effects are called Type II Multipliers and give an indication of the considerable wider economic impact housing has on the wider economy.

15. Because housing construction (and maintenance and refurbishment work) islabour-intensive and requires skilled workers, the sector is promoted as a source of apprenticeship training. Many area-based regeneration projects employ local labour clauses and both the industry and the housing sector more broadly encourages and promotes the message of supporting young people into the sector. However, it is also the case that the construction industry is subject to recessions that cut numbers, reduce capacity and starve the sector of places for training. This is a key reason why the public sector and direct labourorganisations, traditionally a little insulated (though less so now) have been a critical source of such placements.

4. Key Facts

16.Recent statistics from the ONS[v] suggest that Scotland has a relatively high employment rate (72.8% in Oct-Dec 2013) compared to the UK and a slightly lower unemployment rate for the same period (just over 7% in Scotland) but a higher JSA claimant count. Economic inactivity rates are at 36.2% lower than Wales (39.7%) and Northern Ireland (39.1%) and marginally above England (36.2%),

17.Drawing on research for the Scottish Government in 2010[vi], we know that in September 2009, about 5.4% (126,900) worked in the Scottish construction sector. Even prior to the depth of the recent recession where a lot of jobs were lost, it is important to note that these numbers are the product of a long term decline in construction employment which was more than 150,000 in 1981. On the other hand it has been argued that these figures significantly underestimate the construction labour force as they do not include self-employment. At the same time, however, the sector is known to rely on temporary and short term contracts and a degree of casualization of labour – in order to maximize numerical flexibility and thereby manage risk but by doing so increase vulnerability to income loss for the workers themselves.

18.One-third of all Scottish apprenticeships are in construction and a further 15-20% are in associated trades (CCHPR, 2010). In 2009 there were approximately 4000 new apprentices according to the Scottish Building Apprenticeship and Training Council.

19.Turning to benefits, the overall annual cost of Housing Benefit (HB) in Scotland is thought to be currently around £1.7 billion. HB is paid to low income households on a means-test and is both a non-working and a working household benefit – indeed many working low income households rely on such benefits because of low wage levels. In the 2011-12 Survey of English Housing 15% of social tenants receiving HB were working and the corresponding figure for private tenants was 33%.Overall, some 6$% of social tenants and 27.3% of private tenants eligible to pay rent were receiving HB.In May 2012, 484,000 tenants were in receipt of housing Benefit (more than three quarters of whom were social tenants) and the average HB payment per week was £67.95 (considerably higher at £89.97 in the private rented sector).[vii] At April 2013, just over 80,000 working age social tenants were affected by the under-occupation charge (the ‘bedroom tax’), most of them with one spare bedroom and the majority with a household member with a long term illness or disability. Most cases should now be able to be mitigated by the level of Discretionary Housing Payments available to local authorities (but it is too early to say how efficient this has been in practice and on a consistent basis). Policy reforms as a result of the Work Programme and reforms to the assessment of Employment Support Allowance and Personal Independence Payments and their linked use of benefit sanctions are likely to impact on work incentives and do so more directly than changes thus far to Housing Benefit in Scotland (the situation is very different in high cost London and the Home Counties).

20.Evidence from an extensive economics literature suggests that workers are sensitive to changing tax and benefit rates in making labour supply decisions but that women are more sensitive to changing net earnings than men and that lone parents on several scores have the most elastic supply response. Research suggests that that tax cuts/working benefit increases can increase individual labour supply at the margin. This has obvious implications for the way in which the tapers of benefit withdrawal operate in the case of Housing Benefit.

21.Finally, economic multipliers are relatively well-understood as are their impacts relating to housing and construction. Multipliers are of two forms: Type I and Type II. Type I capture the direct and indirect output, employment or income associated with both the direct activity and also down its supply chain. Type II multipliers add the induced effects of those earning from these type impacts then spending on other sectors’ goods and services.

21.Based on the 2004 input-output tables for Scotland and reported in CCHPR (2010), the construction sector has a type 2 output multiplier of 1.88 and equivalent employment and income multipliers of 1.93 and 1.91, respectively. These are large absolute (and relative to other sectors) multipliers. While we cannot disaggregate to housing activities alone, we do know that categories like owning and dealing in real estate and letting property have even larger multipliers (though they are comparatively small sectors compared to construction). More recent research confirms the stability of these sorts of estimates in both Northern Ireland and for the UK as a whole.

5. Policy:Labour market, Social Security and Housing policy Issues

22.Recognising that Scottish housing construction is an important sector to the economy with significant employment, training and value-added contributions, how can we best confirm that these benefits are properly accounted for when making planning and resource allocations decisions at all levels of government? Similarly, within specific housing spending choices (e.g. construction v refurbishment), there needs to be due consideration taken of the relative economic returns as well as the sustainability and housing/community value of different projects. We also need to have a more robust sense of the possible leakages from housing construction activities and whether policy might try to support more local business development to counteract leakage through for example the import of housing supplies. This is especially relevant to seeking to build on local labour contracts and maximising the local economic benefit to area regeneration projects.

23.The combination of subsidised social housing and Housing Benefit increases direct affordability but may do so at the cost of raising marginal rates of tax and weakening work incentives. A main reason for the Universal Credit policy is to simplify and reduce such marginal tax rates. Similarly, reforms to HB for private renting (known as the Local HousingAllowance and to under-occupation are supposed to incentivise behaviour. Opposition to the reforms allied to the constitutional debate have led to a debate regarding devolving Housing Benefit as part of wider devolution-plus proposals (e.g. the recent report by the IPPR). The advantages and disadvantages of these questions for Scotland do need to be properly ventilated, as does the effectiveness or otherwise of the conditionality and sanctions regimes relating to working, disability and related benefits. In particular, thinking through work incentives is not just about the choice of working or not working but also how much work to do and this takes us into broader demand-side questions about gender, wages, the minimum wage, in-work benefits and the like. Housing is only one dimension of these issues, however, it is an important one.

24.However, thinking about welfare reform should not neglect the remaining considerable problems that exist with the Housing Benefit system, issues not resolved by either the status quo or the DWP proposals. The UK has over time developed a system of social security wherein low income households receive relatively modest cash benefits because they have all or most of their housing costs met by Housing Benefit. The design of the system aims to protect low income after housing cost incomes and this means that the poorest can have all of their housing costs met, that all eligible recipients can have rent increases fully insulated by increasing HB. Additionally, direct payments to landlords have removed responsibility for rent payment, or at least a regular connection to paying for rent and the quality of services received. Moreover, different tenures have varying eligibility for Housing Benefit. Only the direct payments issue is being addressed – and this is itself in practice problematic.