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CEP Policy Analysis
Incapacity Benefit Reform: Tackling the Rise in Labour Market Inactivity

March 2006
Paper No' CEPPA005:
Full Paper (pdf)

• There are 2.7 million people of working age in the UK who are claiming Incapacity Benefit, Severe Disability Allowance or Income Support on the grounds of incapacity. Total spending on benefits for disabled people was in excess of £19 billion in 2004. • The inactivity rate for men – the proportion of the working age population of men over 25 who are neither in work nor looking for a job – has risen by a multiple of around four since the mid- 1970s. Among prime-age men (those aged between 25 and 54), the inactivity rate is now 8.6%, a rate five times higher than it was in the mid-1970s. • The level of inactivity among prime-age men is particularly concentrated among those who are both low skilled and suffering from a chronic health problem or disability. Over time, as inactivity has increased, this concentration has become worse. The main factors underlying these changes are the significant weakening of the labour market for low skilled workers and the operation of the invalidity benefit system. • The inactivity rate for prime-age men in the UK is higher than the European (EU15) average. At the same time, labour market participation of older (55-64) men is higher in the UK than in continental Europe.

• There are considerable regional differences: Northern England, Wales and Scotland have higher inactivity rates than the Midlands and Southern England, and the differences are wider today than they were in the mid-1970s. • The government’s strategy to reverse the rise in inactivity and Incapacity Benefit claims includes: the New Deal for Disabled People (NDDP); the Pathways-to-Work pilots; and the recently published Green Paper on welfare reform. • Evidence on the NDDP pilots indicates that take-up of the service has been relatively low and participation has produced modest results. By contrast, evidence on the Pathways-to-Work pilots shows that the programme has been successful in increasing the rate (an increase of 8%) at which new disability claimants return to work. • The Green Paper applies and extends the successful strategy of the Pathways-to-Work programme nationwide. But the inability to deal with existing claimants reduces the potential impact of the proposed reforms.