«(...) Britain had a good record on this score. For two decades until 2019 its inactivity rate (the share of people of working age who are neither working nor looking for a job) was among the lowest of any rich country. Then something went awry. Pandemic lockdowns smothered economic activity everywhere. But whereas other economies bounced back—since 2020 the inactivity rate has fallen, on average, by 0.4 percentage points across the OECD, a club of rich countries—in Britain, uniquely, it continues to climb, and is up by 0.5 points. What’s going on?
The immediate cause is not disputed: more Britons than ever are classified as unwell. Data released this week showed a remarkable 2.6m people, a record, are economically inactive because of long-term sickness—an increase of 476,000 since early 2020. Inactivity helps explain why firms are struggling with labour shortages and, in part, stubbornly high inflation. And there is a hefty bill. The Office for Budget Responsibility, the fiscal watchdog, says more long-term sickness has added £15.7bn ($19.6bn), or 0.6% of GDP, to annual government borrowing because of lost tax receipts and higher welfare spending. (...)
Instead, the primary cause is in the welfare system. The previous Labour government, and Conservative-led ones since 2010, gradually made it harder for claimants to get incapacity benefits. That helped guard against fraud and kept rates of economic inactivity low. But some people with real needs were wrongly denied benefits. In 2019, after several high-profile cases of people being declared fit for work and then dying, the government reversed course and made it much easier to obtain benefits. Over 80% of the claims lodged in the fiscal year 2019-20 were successful, up from just 35% in the decade before.
Meanwhile, perverse incentives have been added. The old system did a fair job of nudging those who were temporarily incapacitated back into work as soon as they were better. The new one has sharply raised the relative rewards of claiming to be permanently incapacitated. Those who are deemed unable ever to return to employment now get twice as much as those expected to go back to work one day. This gives people a strong incentive to exaggerate their ailments, and never look for a job again. (...)»