Too many workers leave the labour market permanently in the course of a growing health problem, and too few people with reduced work capacity are working. This is a social as well as economic tragedy that is common to virtually all OECD countries, including Australia, Luxembourg, Spain and the United Kingdom. Health-related problems, or problems labelled as such because of societies’ inability to accommodate individual differences, are increasingly proving an obstacle to raising labour force participation rates and keeping public expenditures under control. Yet throughout the OECD area there is a shared paradox that needs explaining. Why it is that average health status is improving, yet more and more people of working-age leave the workforce and rely on health-related income support? This report explores the possible factors behind this paradox, highlights the role played by institutions and policies, and puts forward a range of recommendations aimed at improving the situation (see Box 0.1 for more details on the scope of the report).

What are the main sickness and disability policy challenges that Australia, Luxembourg, Spain and the United Kingdom will need to address in the future? This chapter highlights the key outcomes and trends in these countries during the past 10-15 years in four areas: labour market integration of workers with disability and reduced work capacity; financial resources of those people; costs of sickness and disability benefit schemes; and exclusion and inclusion errors of benefit schemes. In addition, it addresses two macroeconomic challenges: population ageing and future labour supply shortages, and the impact of changing labour market requirements on workers’ health. These challenges need to be taken into account if sickness and disability policy systems are to be reformed successfully.

All four countries have gone through comprehensive sickness and disability policy reform in the past decade. In the United Kingdom and Spain, employment and benefit policy reform went largely hand-in-hand. In Australia, employment policy change preceded the more recent reform of the benefit system, while Luxembourg went through the reverse sequence, with employment policies only being adjusted and expanded after significant changes in the benefit system. In Australia and Luxembourg, reform has primarily affected people with a partial reduction of their work capacity, who are now expected to remain in or enter the workforce and who are given more help to achieve this. In Australia and the United Kingdom, the array of employment and rehabilitation programmes was extended considerably and new funding mechanisms were introduced. The United Kingdom, in particular, is also instituting new rights and responsibilities for the government and for new disability benefit claimants. Reforms in Spain were largely about decentralisation and concentration of responsibilities to improve service delivery and benefit eligibility management.

Disability benefit recipiency in most cases is a permanent status from which there is little movement back into employment. This is why policies aim, and should aim, to reduce the inflow into such benefits. For this to be effective, it is important to intervene in the early phase of a health condition to avoid that it develops into a more serious problem, eventually leading to a disability benefit claim. This in turn requires comprehensive evidence on the pathways into disability, but such evidence is scarce and partial. It is vital to better identify and assist people with health problems, be it at work, during a sickness absence spell or during unemployment. Spain and Luxembourg are two good-practice examples with regard to sickness absence monitoring. Such early monitoring is lacking in Australia and the United Kingdom, but these two countries are in the process of developing their disability assessment into a strong work capacity assessment tool. In addition, Australia is now better able to discover health-related work barriers of the unemployed, a key issue when so many people are switching from unemployment onto disability. This is also important because the recent tightening of eligibility criteria for people with partially-reduced work capacity, who are now pushed onto unemployment benefits, can only help achieving better outcomes if good services and support systems are in place. The example of Luxembourg shows that such an approach can indeed reduce disability benefit dependency and improve work retention, but also that structural unemployment is likely to increase as well.

One of the main objectives of current disability benefit reforms in all four countries is to increase incentives for persons with disability to take up, or to remain in, work. Disability and other public benefits are an important source of income for people with disability, especially in lower income groups. Nonetheless, the design of these benefits in combination with income taxation can create work disincentives. For instance, in a number of cases (Australia, United Kingdom and above-average income in Spain) disability benefits appear to be more attractive than unemployment benefits, which partly explains the frequent transitions from unemployment into disability. Disability benefits are also being used as a pathway into early retirement, particularly in Luxembourg and Spain. Finally, returning to work may be linked to high effective taxation: such “inactivity trap” exists in the United Kingdom. The other three countries are rather facing “low-wage traps”, as increasing working hours sometimes does not significantly increase incomes of workers with partially-reduced capacity. Recent and on-going benefit reforms reduce slightly the levels of benefit but do not necessarily decrease disincentive features embedded in the system. This is important in view of the low incomes of people with disability, especially in Australia and the United Kingdom, which are partly the result of comparatively low disability benefits in these countries.

Employment rates of people with disability are far below those of persons without disability. Partly this is because severe health impairments prevent people from working. However, there are many other factors including a lack of appropriate skills, discrimination, weak incentives to look for work and accept a job offer, and ineffective re-integration measures. Anti-discrimination legislation (Australia, United Kingdom), employment quotas (Luxembourg, Spain) and other forms of employer responsibilities and supports have proven to be insufficient. Measures to improve the employability of people with reduced work capacity and to help those workers stay in and find employment are needed. Spain and Luxembourg have only just started to acknowledge the need for such change. Australia and the United Kingdom have recently made big steps away from what used to be extremely passive benefit systems, and they are both setting new standards in outcome-based funding of services, individual case management and streamlined service delivery. Yet, overall investments in these areas are still lagging behind and, despite very welcome advances in the United Kingdom, there is a general lack of rigorous evaluation and cost-benefit analysis of employment programmes. To improve the situation, a range of steps have been taken recently in all countries with the aim to raise the involvement and responsibilities of the main actors: workers with disability, their employers and the public authorities supporting them.