Out of work and out of money - A study of financial inclusion and Worklessness in Manchester: how to improve support for people with money problems to obtain and sustain employment Executive Summary The Centre for Responsible Credit (CfRC) and Centre for Economic & Social Inclusion (Inclusion) were jointly commissioned in February 2010 by Manchester City Council, acting on behalf of the wider Manchester City Strategy Partnership, to conduct research into the impact of debt and money issues on job seekers’ ability to find and sustain employment. The study comprised a review of the strategic context and prior literature concerning welfare to work, debt advice and financial inclusion provision. Additionally, the study included primary research, involving 45 Jobseekers Allowance claimants in the Greater Manchester area, to determine how money and debt problems: • affect their ability to undertake job search/secure a job and how they influence the employment choices residents make; • impact on their health; how this in turn affected their job seeking behaviour or ability to sustain employment. In shaping the recommendations from the study we were asked to outline the key features of a high quality financial inclusion service for job seekers., We were also asked to provide an overview of the range of nationally funded initiatives that welfare to work providers can tap into in order to provide a financial inclusion service to their clients which is included in Appendix 2 to this report. Strategic Context and Prior Literature Levels of personal indebtedness have increased significantly in the past 10 years, reaching a record high of 154 per cent of aggregated household pre-tax income in the first quarter of 2008. The onset of the credit crisis later that year tipped the economy into recession and, alongside the consequent increase in unemployment, we have witnessed a surge in mortgage repossessions and insolvencies. Unemployment has long been recognised as one of the main triggers of debt problems, with people unable to maintain contractual payments on their credit commitments due to the drop in income that results. Reviewing the literature we find that the relationship between unemployment and debt problems is multi-faceted. The extent of debt problems is in part determined by the degree of credit use prior to the loss of work but living on a low income for lengthy periods can itself give rise to debt problems, and the long term unemployed in particular are likely to face an additional ‘poverty premium’ caused by their exclusion from mainstream and affordable financial services. Government has responded to both the growing problem of over-indebtedness and financial exclusion by: • increasing funding for debt advice services; • providing more help for people at risk of repossession; • securing ‘breathing space’ agreements with the financial services industry and promoting responsible debt recovery; • implementing a long term financial capability programme; • expanding access to more affordable credit; • taking action to address problems of high cost credit and illegal lending; • improving access to banking, savings, and insurance products. Further details of these initiatives are provided in Appendix 1 to this report. The Department of Work and Pensions has given a commitment to improve some of the links between these initiatives and welfare to work services and local partnerships are being encouraged to take a joined up approach. All upper tier authorities in England are subject to a statutory duty to undertake worklessness assessments that can be used to identify barriers to employment (including the extent of debt and financial problems), and Work and Skills Plans are intended to identify ways in which synergies in funding streams and service delivery can be achieved. Local authorities also need to deliver child poverty needs assessments and, together with their partners, develop child poverty strategies, and the Audit Commission has indicated that it will consider how well local strategic partnerships have responded to the economic downturn as part of its Comprehensive Area Assessment. Nevertheless the question remains as to how best to join up services to address financial problems where these pose a barrier to employment. Reviewing the existing literature we identified that money problems impact on job seeking behaviour in four ways, by: • distracting people from job search; • constraining job search activity; • creating disincentives to work, and • reducing the chances of people sustaining their employment. Primary Research Findings We explored these issues further in our focus groups with 43 unemployed people and also undertook a further 2 telephone interviews with recently redundant claimants. Participants in the study were predominantly male (80 per cent), single (71 per cent) and White (93 per cent) and the median age group was 35-44. Just over half of the participants were long term unemployed and had been out of work for over 12 months, and 69 per cent had debt problems, including arrears with household bills as well as credit commitments. Although the sample sizes for different household types was small, we found some evidence to suggest that having a partner who is in employment or having dependent children may increase the likelihood of debt problems and that debt problems were especially likely where both of these factors were present. In some cases participants with partners in employment indicated that they had found it easier to continue to obtain credit following the loss of a job and had been tempted to use this to maintain living standards while they were optimistic of a quick return to work. Therefore, couple households where one partner was still working reported a higher incidence of credit debts than other household types, although 55 per cent of all participants had credit debts, primarily obtained through credit cards and bank overdrafts. Housing debt was much less common, with just under a quarter of participants reporting mortgage or rent arrears. Long term unemployed people had a higher incidence of utility debt, council tax arrears, and were also more likely to borrow from family and friends and the Social Fund. The only instances of high cost credit debt was also found among this group. We found that the amount of debt also varied significantly according to the time period of unemployment. The mean level of debt for the 69 per cent of participants with debt problems was just over £6,200. However, this was skewed by the inclusion of four ‘heavy’ debtors who owed in excess of £12,500. The largest amount of debt reported was £30,000 and the second largest £26,000 and in three cases participants had either been made insolvent or were going through insolvency procedures at the time of the study. However, the majority of participants had much lower debt levels, with 62 per cent owing less than £3,500 and 87 per cent of long term unemployed debtors owing less than £500 We found that although the level of debts was often quite small, the impact of debt and financial problems associated with living on a low income nevertheless constituted a significant barrier to work for the following reasons: Money problems distracted people from job search • Living on a low income meant that people often had less time available to seek work because it took them much longer to perform other household tasks. In particular, an inability to pay for transport costs and the need to ‘shop around’ for cheap food and other basic items meant that much time and energy was being expended on just getting by. • Financial problems had also affected the health of some participants, including contributing to anxiety, a loss of confidence, and in some cases depression and physical ill health. • In some cases persistent harassment from creditors also distracted people from job search, and it could take considerable time to access debt advice services and comply with regular requests for updates on their financial position. This included instances where people had taken out payment protection insurance against unemployment but were being contacted by both the creditor and insurer for the same information. Money problems also constrained job search activity • Financial planning was more difficult and people often struggled to meet the additional costs associated with job search including phone calls, interview costs, and transport costs to attend training. • A bad credit rating could also limit the employment opportunities on offer. We found that some recruitment processes included credit checks and there was a widespread perception among unemployed people that there was little point in applying for jobs in the financial services sector, or for some security and retail jobs. Debt problems, and how they are sometimes dealt with, can create disincentives to work • We found evidence that some people in debt were anxious about the impact of a return to work on their repayment agreements. This was particularly the case where they had negotiated token payment levels and feared that a return to work would mean a substantial rise in repayment levels. The perception that higher repayments would be required following a return to work led people to rule out very low paid work as an option. • Insolvency procedures, particularly Debt Relief Orders, also appear to create disincentives to work, particularly in the first 12 months after application as only a small level of disposable income significantly reduces the insolvency protection provided to the debtor and means that they will have to pay back a considerably greater proportion of their outstanding debt.. Debt problems may impact on the chances of people sustaining work We found some evidence that debt problems may impact on the chances of people sustaining work which supports the findings of previous studies. • Some participants had found it difficult to make their debt repayments while in work and this had led them to think about giving up their jobs. • For others, debt problems led to them working longer hours with possible health impacts, and dealing with debt problems could also cause people to take time off work. Not all unemployed people experience these problems equally. We found that the impacts differ for the newly unemployed and long term unemployed groups. In particular: • More recently unemployed people face greater distractions from job search because of the need to gain access to advice to help them deal with immediate debt problems that arise when a job is lost, and because they receive regular demands for payment from creditors. This group may also be less able to meet the additional costs connected with job search as much of the support with interview costs and other discretionary financial help is only available to longer term unemployed people. • Longer term unemployed people often incur higher costs for basic services and have exhausted prior savings. They therefore have to spend more time managing their income carefully and have less money for transport costs. Basic household chores take longer leaving them less time available for job search. This group is also more likely to experience health problems and may have more difficulty in the transition back to work because they have problems obtaining bank accounts and lack any affordable credit options to cover additional work related expenditure during this period. ID: 45640 Author(s): Gibbons, Damon Publication date: 01/05/10

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