WIREDGOV

The government has made getting more people into work a priority with the aim of reaching an employment rate of 80% – up from 75% now. One challenge to achieving this target is the recent increase in people out of the labour market due to ill health – from 4.9% of the working age population in 2019 to 6.4% in 2023 - and the related increase in the share of population claiming health-related benefits- from 7.5% of the working age population in 2019 to 10.0% in 2023.1 More broadly, more people are reporting having a disability of some kind – from 19% of the working age population in 2019 to 24% in 2023. Perhaps with these factors in mind, the Labour manifesto included ambitions to “support more disabled people… into work”, and there have been reports that the upcoming Budget may include reforms along these lines.

Health-related benefits fall into two categories: incapacity benefits and disability benefits. Incapacity benefits provide additional income for people whose health limits their ability to work. The main incapacity benefit in the UK is the health element of universal credit (UC), a means-tested benefit. Disability benefits are intended to help people with disabilities manage the additional costs of a disability. The main working age disability benefit in the UK is personal independence payment (PIP), which is not means-tested.2 Since 2019–20, the number of working-age incapacity and disability benefit claimants has increased by 28% (to 3.2 million) and 39% (also to 3.2 million) respectively. In this comment, I focus on incapacity benefits claimants as eligibility is directly linked to capacity to work, but some of the lessons carry over to disability benefit claimants (not least as 62% of them also claim incapacity benefits).

Helping more people who are claiming incapacity benefits into work could, if successful, both improve living standards for those moving into work, and reduce pressure on public finances. However, there are several reasons this is easier said than done.

First, most incapacity benefit claimants have been out of work for some time. Table 1 shows the employment history for different groups of working age adults.  Only 5% of people receiving incapacity benefits are working3 and 83% have been out of work for more than 2 years. Similarly, almost all people who are economically inactive due to ill health have been out of work for more than 2 years. In comparison, 72% of disabled people who are not receiving health-related benefits are working and 21% have been out of work for more than 2 years.

Table 1. Share of various population groups by employment history, 2023

Source: Author’s calculations using Labour Force Survey, 2023 Q1 to 2023 Q4, 16-64 population.

Note: Population groups overlap, for instance most people inactive due to long-term illness claim a health-related benefit. I count universal credit claimants as incapacity benefit claimants if they state the main reason for claiming is sickness/disability. This is an imprecise measure for universal credit health claimants as people can claim universal credit for multiple reasons.

This matters as the longer someone has been out of work, the less likely they are to return. The impacts of this can be seen in Figure 1, which takes all people with a given characteristic who are out of work in one quarter and looks at their probability of moving into work the following quarter, both before and after the pandemic. It shows that less than 2% of out-of-work incapacity benefit claimants enter work in the following quarter, compared to 10% of all people out-of-work.4 These figures suggest a big policy intervention would be required to move significant numbers of claimants into work.

Figure 1. Share of out-of-work population moving into work in following quarter, 2014-2024

Source: Author’s calculations using Two-Quarter Longitudinal Labour Force Survey, 2014 Q2 to 2024 Q1, 16-64 population. Before pandemic period is average for 2014 Q2 -2020 Q1, during/after pandemic period is average for 2020 Q2-2024 Q1.

Note: Population groups overlap, for instance most people inactive due to long-term illness claim a health-related benefit. I count universal credit claimants as incapacity benefit claimants if they state the main reason for claiming is sickness/disability. This is an imprecise measure for universal credit health claimants as people can claim universal credit for multiple reasons.

A second reason for caution is that government assessments suggest most incapacity benefit claimants have limited capacity for even preparing for work. Following assessment, if an applicant is not deemed “fit for work” (in which case they are denied incapacity benefits), they can be assessed as having “limited capability for work” (LCW), or a “limited capability for work or work-related activities” (LCWRA). 15% of claimants are in the LCW group; they do not have to actively search for work but are judged to be capable of preparing for work – for example, writing a CV or attending a training course. The vast majority of claimants (83%) are in the LCWRA group. These claimants are judged unable to even engage in these work preparation activities.5 The work capability assessment used to assess eligibility has its critics, and the government plans to reform it. Nevertheless, the fact that most claimants are assessed as being a very long way from the labour market indicates the scale of the challenge for any government hoping to move them into work.

A third and final challenge to bringing incapacity benefit claimants into work is that they currently face weak work incentives. If a claimant in the LCWRA group earns over £9,516 a year (equivalent to 16 hours a week at National Living Wage), DWP can require them to undertake another Work Capability Assessment, which may result in them losing their entitlement to the LCWRA element of UC health (£4,994 a year); it is also plausible that claimants might worry that even lower amounts of work could affect their LCWRA entitlements. This is a large disincentive to enter a job paying above this threshold.6

Figure 2 shows how a typical claimant to UC health’s income changes as they work more hours, on the assumption that once they earn more than £9,516, they are reassessed and lose their LCWRA element. It shows that if they moved from being out of work to working 20 hours a week at the National Living Wage (equivalent to £11,930 per year) and had their LCWRA removed as a result, they would actually see their net income (after tax and benefits) fall by £360 per year (2%).7 Their income would only increase by £2,200 a year (14% of out-of-work income) if they moved from not working into working 35 hours on the National Living Wage (earning £20,900 a year). This means their effective tax rate for moving into full-time work is 89%. Effective tax rates this high are likely to discourage work, especially for those with health conditions which make working difficult.

Figure 2. Change in annual net income (after tax and benefit) relative to not-working for example Universal Credit claimant

Source: Author’s calculations using TAXBEN, the IFS’s tax and benefits model. 
Note: I assume that someone working above 16 hours at the National Living Wage is immediately reassessed and loses their entitlement to the LCWRA element to demonstrate the cliff-edge. DWP has some discretion over when they reassess people following them working over 16 hours and in some cases, people may be reassessed and keep their LCWRA element. There is little evidence around how DWP uses this discretion.   

Work incentives are stronger for moving into a job that pays below the threshold for reassessment (£9,516 a year.) However, claimants may not know the exact rules and still perceive moving into work paying below the threshold as a risk to their benefit entitlement. They also may struggle to find employers who offer jobs paying below the threshold.  

So, what does this mean for government policy?

First, the government should weigh the costs to claimants and government against the potential benefits of any measures. For instance, increasing job search requirements for incapacity benefit claimants will likely encourage some claimants to work, but it comes at an administrative cost to government and makes life more difficult for claimants who are not able to work. Similarly, additional programmes to help incapacity benefit claimants find work that suits them come at a cost, and so there is a question as to whether they will increase employment enough to be worth it. Recent evaluations of employment support programmes find modest positive employment effects for some programmes in certain contexts.8

Second, if the government wants to encourage incapacity benefit claimants into work, it could consider ways to improve their financial incentives to work. The previous government announced (but did not implement) a plan to break the link between being out of work and getting the UC-health element, which would (for some) strengthen work incentives.9 Similarly, the Labour Party’s Back to Work plan suggests they might weaken the disincentive to work by allowing claimants to try work out temporarily before a new assessment is triggered. Neither of these sorts of plans are without cost – indeed, they would mean that increases in employment would create less fiscal savings than currently – but they could get more people into work for whom the incentives to do so are currently very weak.

Finally, if the goal is simply to increase employment (rather than reduce the health-related benefit bill), the government need not limit its attention to those currently claiming these benefits. We estimate that 2 in 5 of people reporting a disability are claiming health-related benefits.10 This leaves another 3 in 5 of people with a disability who do not currently claim a health-related benefit. As Table 1 shows, this group is far more likely to be in work or to have recently left work than health-related benefit claimants. It may be that there are more people in this group who are at the margins of employment and so responsive to interventions to help them into work or stop them falling out of work.

One can entirely understand why the government is looking at how they can help people with disabilities work, but there are unlikely to be quick or easy solutions. If the government wants to design effective interventions in this area, doing more research to understand why there has been such a dramatic recent rise in health-related benefit claims is vital. 

Endnotes

1. 1 This figure relates to England and Wales as it is only in that part of the country that statistics on the number of people claiming either incapacity or disability benefits are available. Other figures in this paragraph use data from the Labour Force Survey and are for the 16-64 population in the UK overall. 
2. 2 The Scottish Government has recently replaced Personal Independence Payment with Adult Disability Payment in Scotland, following the devolution of disability benefits to Scotland in 2022.
3. 3 Although incapacity benefits are aimed at those with health conditions that limit their capability to work, claimants are under some circumstances allowed to do some paid work.
4. 4 Administrative data suggests a higher rate of flows into employment for UC health claimants of 3% (see Figure 3.14 in OBR Welfare Trends Report (2024). I report the Labour Force Survey based estimates here as the estimates also include ESA claimants and I have comparable estimates for other groups. 
5. 5 Author’s calculations using DWP Statxplore, February 2024 data. Includes both ESA and UC health claimants. ESA claimants in the support group are counted as equivalent to UC health LCWRA claimants and in the WRA group are counted as equivalent to UC health LCW claimants. Excludes people with a live fit-note pre-assessment. Figures do not sum to 100% as claimant group is unknown for some claimants. 
6. 6 If the claimant receives Employment Support Allowance rather than UC-health, they will not receive any benefit income in weeks where their earnings exceed the same limit. In contrast, there is no direct link between employment and eligibility for disability benefits. Someone just on disability benefits would in principle lose no income if their earnings increase. However, disability benefits assessments are based on the functional abilities of the claimants and some claimants may fear that moving into work would make it harder to demonstrate they struggle with certain tasks. These beliefs would further weaken work incentives for health-related benefit claimants. 
7. 7 This claimant is a single, private renter without children paying £125 a week, the median of local housing allowance rates for a one-bed property. They do not receive Personal Independence Payments. 
8. 8 See paragraphs 3.27 to 3.31 in OBR Welfare Trends Report (2024)
9. 9 See discussion in Ray-Chaudhuri and Waters (2023).
10. 10 Author’s calculations using DWP Statxplore and Labour Force Survey, see Latimer and Waters (2024).