It's not a tautology: the clearest barrier to employment is unemployment

How no job leads to no job.

The essay from Tony Blair in our our Centenary issue ends with seven questions which he says the modern Labour party must answer. Our editor, Jason Cowley, gave a go at answering some, but one in particular bears highlighting. Blair asks:

How do we improve the skillset of those who are unemployed when the shortage of skills is the clearest barrier to employment?

But that question is actually based on a false premise . Shortage of skills is not the clearest barrier to employment – lack of employment is.

It sounds tautological, but persistent research shows that businesses are wary to hire people who are unemployed, instead preferring to poach employees from other companies. The effect also hits hard if you have a sizeable gap in your CV; young people are routinely advised to claim they took a "gap year" to cover up such periods of unemployment, but that only goes so far.

That's bad enough if you quit your job before immediately starting work, but it gets worse still if you've been out of work for a long period of time. New research by Rand Ghayad, reported by Matt O'Brien at the Atlantic, reveals just how much worse:

In a new working paper, he sent out 4800 fictitious resumes to 600 job openings, with 3600 of them for fake unemployed people. Among those 3600, he varied how long they'd been out of work, how often they'd switched jobs, and whether they had any industry experience. Everything else was kept constant. The mocked-up resumes were all male, all had randomly-selected (and racially ambiguous) names, and all had similar education backgrounds. The question was which of them would get callbacks…
As long as you've been out of work for less than six months, you can get called back even if you don't have experience. But after you've been out of work for six months, it doesn't matter what experience you have. Quite literally. There's only a 2.12 percentage point difference in callback rates for the long-term unemployed with or without industry experience. That's compared to a 7.13 and 8.95 percentage point difference for the short-and-medium-term unemployed. This is what screening out the long-term unemployed looks like. In other words, the first thing employers look at is how long you've been out of work, and that's the only thing they look at if it's been six months or longer.

If someone's been out of work for more than six months, upskilling isn't going to help them. They are relegated to the same pile as the unskilled applicants purely by virtue of their unemployment.

The terrible thing is, employers are probably acting rationally here. The attitude that "there must be something wrong with them" will sometimes be right – and if it isn't, well, there's always enough capable applications who aren't long-term unemployed to easily fill any positions.

There may not be any easy solutions, either. Just as upskilling doesn't do much, it's not clear that work experience would either. We don't know what employers are selecting for, but if it is the "there must be something wrong with them" attitude, then being given unpaid experience won't help.

But O'Brien suggests one possible policy:

It's time for the government to start hiring the long-term unemployed. Or, at the least, start giving employers tax incentives to hire the long-term unemployed. The worst possible outcome for all of us is if the long-term unemployed become unemployable. That would permanently reduce our productive capacity.

Whatever happens, people who have been unemployed for a long time need work now, and they need help getting it. It's not a personal failing, it's a social one.

A protestor holds a sign during a demonstration against unemployment benefit cuts on July 11, 2012 in Oakland, California. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation