Saira Hussein almost decided to give up hiring an assistant when one candidate said all he wanted from her was to sign a form so he could keep drawing benefits.
The Manchester-based architect had already wasted time on a handful of no-shows during two days of interviews for the £20,000 (£24,200) a year post. “Don’t you want a job?,” she asked. It turned out he didn’t.
Like thousands of people up and down the UK, the applicant had run the numbers on how much more the family would have after benefits were withdrawn and childcare costs added, and decided the job just wasn’t worth it. A household like his would be less than £5,000 better off, the Institute for Fiscal Studies said.
Worker shortages and inactivity are now one of the most urgent issues facing Prime Minister Rishi Sunak’s government. They are holding back the economy, and the incentives for those on the edge of the labour market could either fix the problem or make it worse.
Chancellor of the Exchequer Jeremy Hunt will address the issue on Wednesday in what he’s billed as a “back-to-work” budget. Childcare reforms have been promised and the long-term sick will be able to take a job without fear of losing their benefits in a package of measures that Hunt said on Sunday will “break down barriers and help people find jobs that are right for them.”
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A fix is urgently needed. As things stand, once taxes are added to lost benefits, people returning to work in Britain can face effective tax rates of 69%. Childcare and travel costs whittle down what remains. In some cases, people can end up worse off than when they were unemployed. As incapacity benefits are more generous and free of job-search requirements, it has even paid to be declared long-term sick.
Like many major industrial economies, Britain suffered a “Great Resignation” after coronavirus lockdowns were lifted. What makes the UK stand out is that many never came back.
There are about 250,000 fewer people aged 16 to 64 in work than before Covid. Every other major advanced economy has seen employment push on to new highs. The UK like the US has seen labor force participation fall, in contrast to France and Germany where activity has rebounded strongly.
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Britain’s failure to boost the workforce is crushing economic potential, the Bank of England says.
Inactivity — defined as those of working age who neither have nor want a job — has risen by about 500,000. Of those, roughly 350,000 are “long-term sick.”
What makes the UK drop-out rate more surprising is that it’s happening in a cost-of-living crisis, with more vacancies than ever and pay rising at its fastest pace on record. Yet the jobs that should improve people’s fortunes are left unfilled. “If those people are not working, how are they managing, given high inflation?” Catherine Mann, a BOE ratesetter, said to MPs in November.
Some of it can be explained:
Many of those who work are over 50. They built up savings in the pandemic, saw their property values appreciate 20% and can release their pension pots from age 55. They can retire.
Many are students, who will get jobs.
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Older workers with physical problems need treatment but cannot return until the National Health Service clears its record backlogs.
But the answer to why many other working-age adults are inactive remains elusive. Officials fear something peculiar is happening and attention is shifting to the benefits system.
Hussain, owner of HAD Property Consultants, suspected it was not just one candidate but the no-shows who were playing the system. A Manchester Metropolitan University report in January on employers’ experience of welfare provided evidence. Applicants often fail to turn up, imposing a heavy burden on small businesses, it found.
One social care employer quoted in the report, said, “They only have to – what is it? – prove that they’ve got an invite to an interview.” A retailer lamented, “What I find often is that people just apply for the jobs in order to show … that they applied.”
Claimants apply for jobs they don’t want because those are the rules: look for work or lose benefits. Yet, as Hussain found, the job is often not worth it because of the way work and benefits interact.
Benefits are withdrawn, or “tapered,” at a rate of 55 pence for every £1 earned once annual earnings reach around £4,000. For a second earner in a home or those without children there is no work allowance, making the effective tax rate 55% from the first pound.
As the 20% basic rate tax threshold has been frozen, higher pay means more is taxed. Once the £12,570 allowance is breached, the effective tax rate for those on benefits is 69%, the Institute for Fiscal Studies says. The Office for Budget Responsibility has spoken of “the growing disincentives to work provided by frozen tax thresholds.”
Had Hussain’s candidate, whose wife is already working, taken the job, his £20,000 salary would have meant just £8,000 more income for the household. About half of that would go on care for children under three years old, and £2,000 for three to four year olds, according to Women’s Budget Group estimates. That’s before travel costs.
“People on modest wages can get very little financial reward from increasing hours of paid work,” said Rob Joyce, deputy director of the Institute for Fiscal Studies. “It’s easy to see how incentives can tip the balance for some people, especially parents.”
Work incentives improved under benefit reforms since 2008 but employment tended to be in £8,000-a-year, dead-end jobs with no career progression, the IFS said. Incentives have now been blunted, due to frozen tax thresholds and partly because welfare has proved more generous relative to earnings.
Benefits rose just 3.1% last year, compared with 5.9% for wages, threatening financial catastrophe for many as inflation jumped into double figures. But low-income households got an additional £1,200 support.
In April, most benefits rise by 10.1% for 8 million households - compared with a 4% pay rise forecast by the BOE - and receive a further £900 cost of living payment. At that point, a household on £20,000 of benefits would be £3,000 better off. Take a job that pushed them £1 over the means-tested limit, and they lose it all.
For those on benefits, it is better to be classed as long-term sick. Standard income support is £77 a week and subject to work search conditions. On health and disability benefit, payments can double and are free of conditionality.
Benefit reforms “intended to encourage those with disabilities back into employment in fact led to a significant increase in the number declaring themselves unable to work,” said Karl Williams, senior researcher at the Centre for Policy Studies in his report, Where are the Workers?
According to official labor statistics, the UK is in the midst of two health crises: a physical one among the old and a mental one among the young. It is a unique Covid aftershock.
Werner Eichhorst, labor market coordinator in Europe for IZA, Germany’s institute of labor economics, and Eliza Forsythe, professor on labor relations at the University of Illinois, told UK lawmakers in October there was no evidence of lasting health problems in their territories.
Yet, in Britain, health-related benefit claims have rocketed 72% compared with pre-pandemic levels. Those aged 16 to 44 with mental health disorders account for 30% of the increase. Older workers with physical ailments make up 35%. The OBR says worsening health will add £8 billion to annual welfare costs within five years.
As presently structured, the benefits regime can deter the ill from returning to work. Should someone on more generous health benefits take a job, they lose the extra support and will not return to the regime if they lose their job. As a result, the return to work rate is very low.
Williams said the system has “created perverse incentives for people to remove themselves from the workforce.” Hunt hopes to end this benefits trap by scrapping the work capability assessment.
Rising illness among older workers has been linked to NHS backlogs – with 5 million people awaiting treatment. What’s driving mental health claims is less clear.
ONS analysis shows that 71,500 more 18 to 29 year olds are inactive than would have been expected three years ago, largely due to “mental illness and nervous disorders.” The fastest growth in long-term illness is among 16 to 24 year olds with those same issues, a million whom are not in education or employment, a level rarely seen that risks long-term damage to their job prospects.
BOE Chief Economist Huw Pill has speculated that “public attitudes towards mental health” may be contributing. His predecessor, Royal Society of the Arts Chief Executive Andy Haldane, said Covid has “flipped” pre-existing poor health “into being much worse.” The rise of social media is widely believed to be a contributing factor.
Yet the rise in benefit claims awarded on mental health grounds has coincided with a big increase in benefit fraud. Almost £8.5 billion was paid out in fraud or error in 2021-22, double pre-pandemic levels, government figures show.
Nixie Edwards, who runs HAB Property’s estate agency in Burnley, has seen interview candidates declare illness to play the benefits system. During the pandemic, she hired an assistant on minimum wage for 20 hours a week. The young woman did a week’s work before spending a month self-isolating then quarantining with Covid, drawing state sick pay.
“At the end of the month, she went to the hospital to get a sick note for stress,” Edwards said. “Later, the Jobcentre told us they knew she was going to try and live off these sick payments.”
Hunt will tackle the UK’s unique participation problem in his budget on March 15. But his biggest challenge will be getting the incentives right.
