Labour Market

What is behind the post-Covid rise in economic inactivity?

The Times reports record levels of benefit fraud after Covid, with the Department of Work and Pensions collectively wringing its hands and blaming the public: Britain is becoming more dishonest, apparently. The DWP doesn’t have enough staff to investigate properly, and it won’t use algorithms to flag up dubious claims because this apparently shows up disproportionate numbers of ethnic minority claimants.

It’s a shambles, but deliberate fraud is only part of the problems of the benefit system. There is incompetency on the part of the DWP which leads to considerable levels of both overpayment and underpayment.

However there is also a more fundamental issue that, despite current record-low levels of unemployment, there are growing numbers of economically inactive claimants of working age.

Many of them are apparently suffering from ill health. Having increased steadily as a proportion of the working-age population since the mid-1990s, the total of those said to be unfit to work now stands at over 2.5 million.

This has occurred, remember, at a time when life expectancy has been lengthening, medicine advancing, and physically demanding and dangerous types of manual labour disappearing. You might also think that more flexible patterns of working enabled by online technology and encouraged by the changes following the Covid pandemic – which meant that the home has become the office for many employees – might have encouraged greater labour market participation by those in shaky health. Indeed, that was hailed as one of the advantages of working from home by the cheerleaders for change – but just the opposite has occurred. Since the pandemic began, the number of people who say they are too ill to work has increased by 20 per cent.

Covid itself is said to be a key cause of increased economic inactivity. The ONS recently estimated that 1.4 million people are “adversely affected” by the symptoms of Long Covid, while 409,000 report that their ability to undertake “their day-to-day activities is limited a lot.” In addition, an indirect consequence of the pandemic has been a logjam of people awaiting NHS treatment, with more than 6.7 million people stuck on waiting lists. All this has had a knock-on negative impact on the labour market because so many, denied the medical interventions they need, are unable to get back to work.

A further factor is growing concern about mental health, popularised by the media, politicians and innumerable pressure groups.  Greater understanding of mental health has led to more tolerance and openness, as well as improved therapeutic treatments.

On the other hand, critics maintain that this trend has had a downside, fuelling introspection and a lack of resilience, reflected in the ever greater prevalence of complaints of stress and “burnout.” The difficulty in diagnosing such conditions makes it difficult for those administering the benefit regime, and can be exploited by some who are keener to be on benefits than on work, at least work in the legitimate economy.

The DWP employs experts to carry out Work Capability Assessments. Before the pandemic, they were carrying out between 200,000 and a quarter of a million assessments a quarter, but once Covid struck, the rate fell dramatically, down to just 30,000. As damagingly, many of these assessments had to carried out remotely rather than in person, a method that struggles to give a full picture of fitness. In-person assessments continue to lag pre-Covid levels.

But there are two other factors which indicate that unfitness to work may not be quite what it seems.

First is the fact of big regional variations in the extent of economic inactivity that reveal cultural and social differences across the country. In some areas, such as Wales and the North East, around a quarter of the working-age population is inactive, whereas for the South-East the figure is only 19 per cent. This gap might be explained by greater economic dynamism in the South-East – or perhaps greater acceptance of welfare dependency in Wales and the North East, where the decline of traditional industries may have demoralised many people, changed attitudes to work and perhaps also affected mental health.

The second, more positive, factor is the impressive number of people who could take early retirement on health grounds, but who nevertheless – perhaps from pride or a sense of self-fulfillment – carry on working.  It is estimated that around half of those who suffer from ill-health which harms their ability to work continue to do so against the odds. We need more people to follow their example.

There are no easy solutions to the swelling numbers on working-age benefits and associated costs. Cracking down on eligibility has repeatedly been aborted when confronted by the inevitable wave of protest from pressure groups and the media, who focus on the inevitable hard cases when Capability Assessments go wrong. And trying to cap spending by uprating in line with earnings rather than prices seems unacceptable at the moment, even though it can be argued that other cost of living supplements and the energy price cap have already softened the inflation blow.

But is anybody in government really bothered? ‘Here today, gone tomorrow’ politicians are a major part of the problem.

The last person to make a mark at DWP was Ian Duncan Smith, who was Secretary of State from 2010 to 2016 and introduced Universal Credit which, despite its problems, was at least a considered attempt to rationalise and simplify the benefit system. More recent Secretaries of State have just been footsteps in the sand, washed away by reshuffle after pointless reshuffle.  We have had no fewer than eight of them in the last six years. Since you ask: Stephen Crabb, Damien Green, David Gauke, Esther McVey, Amber Rudd, Therese Coffey, Chloe Smith and now Mel Stride.

No wonder the benefits shambles continues, as shambles continue in so many departments. Sustained reform of benefits, transport, immigration, higher education and other areas is nearly impossible while ministers are constantly shifted round in an endless game of musical chairs in response to the ambitions of politicians who often know no other life, having been hanging around Westminster playing silly games since they were knee-high to a grasshopper. We need a more rational system of governance if we are ever to get anything to work properly.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

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