Economic inactivity - again

 Britain | The missing million

Britain’s worklessness disaster

Can the government get more people working without exposing the vulnerable?

Illustration: Mariaelena Caputi

Mar 13th 2025|Barnsley

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For Sarah, the trouble started with a fracture in her back. She’d worked in a warehouse for years. Now she’s “too old to lug boxes” and her back still aches when it’s cold. Poundland, a budget retailer, rejected her job application. Others didn’t reply. For Mandy, it was losing her job. Without that structure, she felt anxious and depressed. Michael hurt his back in 2022, but is still waiting for surgery. He’s only done part-time Christmas work since.

All three live in Barnsley, in northern England. Ill health pushed them into the ranks of what statisticians drily call the working-age economically inactive: people with no job who have stopped looking. Nearly 3m Britons aged between 16 and 64 are not working because of poor health, up from just over 2m in 2019. That is a misery for them and a mystery to economists. No other rich country has seen a similar rise.

Chart: The Economist

Worklessness is a headache for the government, too. Since 2019 annual spending on health-related benefits for those of working age is up by £19bn ($25bn, 0.7% of GDP) in inflation-adjusted terms (see chart 1). The government has forecast a further £13bn rise by 2029. It is spending more on both incapacity benefits, for people unable to work, and disability benefits like the Personal Independence Payment (PIP), which cover the cost of disability whether the recipient works or not. In England and Wales 4m people, or one in ten of working age, now claim one or both. In 2019, only 2.8m did. And losing so many from the jobs market has compounded wider economic woes, pushing up inflation and pulling down growth.

Chart: The Economist

Have Britons really got so much sicker, so quickly? The evidence is mixed and messy. Official labour-force figures show a particular deterioration in mental health among the young, alongside bone and muscle trouble in the middle-aged (see chart 2). But nearly all sickness is up. And since the pandemic, the data have become ever less reliable, as fewer people respond to surveys.

Chart: The Economist

Over a wider set of measures, the Institute for Fiscal Studies (IFS), a think-tank, found no consistent picture (see chart 3). “Some surveys suggest long-term ill health has grown, while others suggest it has remained unchanged,” says Eduin Latimer of the IFS. “There is much clearer evidence on mental-health conditions. All surveys suggest that more people are reporting mental-health problems now than before the pandemic.”

What, then, is going on? Health-service waiting lists get blamed, but probably unfairly. A study by the Office for Budget Responsibility (OBR), the fiscal watchdog, found that most people on them were working or past retirement age, and that even halving the lists would get only 25,000 of the long-term sick back to work.

A more plausible culprit is the welfare system. Britain is spending a record 4.3% of GDP on benefits for working-age people. But most benefits that are not related to health, such as unemployment support, have been squeezed. (The state pension is a marked exception.) That decline has probably shunted more people into health benefits. Court rulings also forced Theresa May’s government to widen eligibility for people with mental-health problems.

A technological shift has also added to the bill. During the pandemic, phone and video interviews replaced face-to-face assessments for disability and incapacity benefits. TikTok is full of tutorials walking would-be applicants through PIP interviews, listing key things to mention—struggling with cooking, forgetting to take medication—to maximise the likely award.

Chart: The Economist

Once the welfare system has deemed someone ill, the label tends to stick. Sir Steve Houghton, leader of Barnsley council, says post-industrial areas like his have long experience of this. “If they’re in the benefits system for over three years, it’s not easy to get people back out,” he says. “They fear if they come out and work doesn’t work out, going back in will be difficult.” Research by the Resolution Foundation, another think-tank, also found that the newest PIP recipients are less likely than previous cohorts to move off the benefit (see chart 4).

Worklessness frustrated the previous government, too. Rishi Sunak tightened eligibility for incapacity benefits in 2023, but was challenged in court over the length of consultation. The government lost in January (after winning last year’s election, Labour kept fighting the case). Now fiscal necessity has jolted Sir Keir Starmer into action. New OBR forecasts, due on March 26th, are expected to show that the government’s already slim room for manoeuvre has been squeezed to nothing by weak growth and the gilt market. The newly urgent need for rearmament spending has made things tighter still. After the overseas-aid budget, now stripped almost bare, benefits are the next least-popular bit of public expenditure.

Leaks to ITV, a broadcaster, suggest the government is eyeing cuts of around £6bn a year. That will be controversial within Labour. At a meeting of the party’s National Executive Committee in January, Sir Keir was warned that “the disabled community were deeply alarmed”. Measures to raise the bar for disability and incapacity benefits are a necessary stopgap. But Britain’s recent history of welfare changes is littered with the unforeseen consequences of misbegotten schemes, and suffering for society’s poorest as a result. PIP, rolled out in the 2010s, was intended to make disability benefits harder to get, and to save £1.4bn a year. The latest estimates suggest it saves only £100m or so.

So reform is needed too. That means somehow framing eligibility in a way that does not penalise people’s efforts to start working, without hurting those who cannot. At least Labour has electoral time and a huge parliamentary majority on its side.

Barnsley is running a pilot scheme, starting in April, to better tie together the 70-odd training and support programmes for jobless people and collaborate with employers to find them work. The Treasury is watching. If the scheme succeeds—its designers expect four-to-one returns—it could be rolled out nationally.

But the government’s own policies are an obstacle to improvement. Most people don’t fall out of work instantly. Like Sarah, they first look and then, after enough disheartening rejections, stop trying. It would therefore be wise to make it cheaper and less risky for employers to take a punt on someone with a thin CV and poor health.

Sadly, the rest of Labour’s jobs agenda is rowing in the opposite direction. Increases in employers’ national insurance, a payroll tax, and the minimum wage will make hiring the low-paid costlier. The Employment Rights Bill will probably block up the job market more. Progress will be hard without a change of course. ■

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The country that solved a £100bn problem Britain is ‘just wishing away’

A foreign nation may hold the key to fixing a growing UK crisis

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Eir NolsøeSenior Economics Reporter

06 January 2025 7:02am GMT

How to get more people into work and off benefits is a question that has both fascinated and frustrated policymakers for decades.

It is notoriously difficult, especially where poor mental or physical health is involved.

But one country has proved it is possible. The Netherlands has an employment rate that is the envy of other nations, with 82.3pc of working-age people in jobs. It is well ahead of the UK, at 74.9pc.

Sir Keir Starmer pledged to boost the employment rate to 80pc during the election campaign, a promise that would mean getting 2m more people into work.

If Starmer is to succeed, he will have to tackle the surge in people struggling with ill health, who have dropped out of the jobs market at the longest sustained rate since the 1990s.

Getting people off long-term sickness benefits and back to work is also crucial to delivering economic growth, Rachel Reeves has admitted.

It is easy to see why concern is growing: the spiralling cost of supporting people with disabilities and long-term health conditions is on track to surpass £100bn by the end of the decade – nearly twice as much as last year’s defence budget.

A near-record 2.8m people are out of work because of ill health according to the Office for National Statistics (ONS), a rise of close to 700,000 compared to before Covid.

Meanwhile, disability and incapacity benefit claims are up by 39pc and 28pc respectively since 2019-20, at 3.2m each.

This means the UK is on track to become one of the largest spenders on health-related benefits among similar countries, according to the Institute for Fiscal Studies.

Starmer would be wise to take lessons from the Dutch, who have successfully managed to stop a once-ballooning sickness problem in its tracks.

“Around the turn of the century, we had very high sickness rates and also high disability rates,” says Pierre Koning, professor at the Vrije Universiteit of Amsterdam. “We were basically the champion in terms of [sickness] absence then.”

Dramatic turnaround

Today, some 85.5pc of Dutch people are either employed or looking for work, OECD figures show. This marks an astonishing rise from 74.2pc at the start of the millennium.

It stands in stark contrast to the UK’s trajectory. Over the same period the participation rate, as it is known, improved only from 76.8pc to 78.3pc. It is currently a percentage point lower than before Covid, although researchers warn that the ONS’s figures are highly unreliable.

The biggest lesson the Dutch can teach Britons is that it is far easier to help people stay employed in the first place than to get them off benefits later on, says Christopher Prinz.

He is an expert on labour markets at the OECD in Paris, an intergovernmental organisation representing mostly rich countries.

“We know from data from a couple of different countries that after six months of sickness absence, it’s more likely that people drop out of the labour force altogether than return to work. Any policy that misses these first six months will not succeed,” says Prinz.

“Typically people who have been on long-term sickness, if you check their labour market trajectory you will find they have been in and out of work and have unstable, broken careers.

“By not acting early it means you completely missed the fact that these people had problems for years.”

The Netherlands experienced a remarkable fall in the number of people claiming sickness benefits through its insurance system during the Noughties.

The share of people who started receiving disability payments in any given year was reduced by two-thirds between 2001 and 2012.

Meanwhile, spending on disability programmes halved from 4.2pc of GDP in 1990 to 2.1pc in 2007, lower than in similar countries such as Sweden and Norway.

‘Extreme’ measures

Two policies were essential to bringing down these costs and helping more people stay in work, says Koning.

The first, introduced in 2003, was making it mandatory for workers and employers to make a plan together for returning to work after a period of sickness.

The plan can include anything from agreeing to a gradual return to work, starting for example with 10 hours a week, to more radical measures.

“In more extreme cases it can be thinking about another position within the firm or another firm,” Koning says. “If they won’t come up with such a plan and adhere to it, then the worker after the sickness period is not eligible to apply for disability benefits. This has had quite a strong impact on absence.”

This places big obligations on both the employee and the employer to prove they have tried everything in their power to get the person back to work. It also means people who have some capacity to work will think getting signed off sick “is not worth it” because of the onerous process, he says.

The second policy that made a significant difference was giving employers a big financial incentive to help people stay in work.

“Employers must continue wage payments of sick workers for up to two years, which is quite extreme,” Koning says. “After these two years, you apply for benefits.

“So the employer has, together with obligations, a huge incentive to prevent somebody from becoming long-term absent because this worker stays on the payroll for a long stretch of time.

“This has been quite effective and is one of the two major ingredients of why we managed to reduce sickness.”

Many employers, especially smaller ones, use private insurance to cover such costs and the associated administrative burden. In some cases companies appear more likely to use temporary contracts for workers with obvious health conditions, he adds.

Overall, though, hiring has stayed strong despite the greater responsibility.

A very British problem

The Netherlands’ strategy stands in stark contrast to the British approach.

“In the UK, the approach is more like ‘we first let you get on to these benefits, and once you are receiving these benefits we think about how we can best help you back’,” says Prinz at the OECD.

“Employers also have very limited obligations, so they wouldn’t help you much either. They can watch things [unfold] and wait until you are on benefits as well.”

With mental health issues in particular, “being away from work for too long is actually very counterproductive”, Prinz adds.

Ben Baumberg Geiger, a professor at King’s College London, says cuts to the benefit system since the 2010s have encouraged people to claim for ill health, rather than unemployment.

The Dutch model demonstrates how the UK could do better, he believes. “It’s the difference between taking it seriously as opposed to what we’ve mostly done in the UK, which is just saying ‘we’ve got a problem’ and then trot out something that is not a solution. It just wishes away the issue,” Baumberg Geiger says.

Another factor in the Netherlands’ success is that it has largely devolved support for people who are unemployed, says Ed Davies at the Centre for Social Justice.

“They get people back into work about three times the rate we do over the last 10 years. The major difference is that they devolve money right down to a very local level. Our equivalent here would be mayoralties or local authorities.

“The idea is that you can then commission services that are much closer to people and understand what they need.

“The Government would have to be willing to divest a lot of money locally without having necessarily the levers to get the outcome that it wants. It does mean putting a lot of trust in local actors.”

However, Koning warns the Dutch model is not perfect.

It tends to work far better for people who are already employed, making the rise of gig workers a challenge. Koning also cautions that the Netherlands’ high employment rate hides the fact that the Dutch work fewer hours than in many other countries.

Yet these are problems Starmer and Reeves would likely happily trade for their own.