Too many workers leave the labour market permanently due to health problems, 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 Denmark, Finland, Ireland and the Netherlands that are reviewed in this volume. 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 health is improving, yet a persistently large number of people of working age leave the workforce and rely on health-related income support? This report explores the possible factors behind this paradox in four countries; 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 challenges which sickness and disability policy makers in Denmark, Finland, Ireland and the Netherlands 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 people with disability and workers with reduced work capacity; financial resources of those people; costs of sickness and disability benefits schemes; and exclusion and inclusion errors of those 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 external challenges need to be taken into account if sickness and disability policy systems are to be reformed successfully.

The extent of policy change over the past 15 years differs widely across the four countries. Ireland is among those OECD countries which have seen the least change, largely because problems in this area have only become apparent relatively recently. The Netherlands used to stand out from other OECD countries because of the ease with which it gave out disability benefits; these days, it stands out as the most radical reformer in the OECD. Finland and Denmark also belong to the group of countries which have undertaken major reforms. The largest difference in policy is found in the extent to which employers are seen as part of the solution. In the Netherlands, employer responsibilities and incentives were increased dramatically in the past decade whereas the Danish flexicurity policy aimed to steer change through better incentives for public authorities, especially municipalities. Finnish reforms have sought a balanced approach, with Irish reform plans looking set to be striving for a strong public role. 

Early action is important to avoid that health conditions develop into more serious problems, eventually leading to a disability benefit claim. Denmark and the Netherlands have introduced guidelines for sickness absence monitoring of workers. Such monitoring is lacking in Finland and Ireland. In addition, countries need to do more to identify and assist people with health problems when they are not regularly employed, or unemployed. The Netherlands is the only country where specific guidelines have been set up recently to address health-related work barriers of this group. At the same time, effective re-integration measures are needed as people with disabilities experience substantial difficulties to exit disability benefits and to find sustainable employment. Denmark has taken big steps in promoting employment in the regular labour market through the use of wage-subsidies, but more can be done to prevent misuse of these “flex-jobs”. On the contrary, a large proportion of people with health problems in the Netherlands remain on sheltered employment. Ireland and Finland lack systematic referral to employment services which limits the chances of activation for people with disabilities. 

Employment rates of people with disability are far below those of people without disability. Partly this is because low recruitment due to a lack of appropriate skills and partly because employers may have an incentive to encourage early exit from the labour market for people with health problems. Employment protection legislation (EPL) meant to protect workers can create additional deterrents for employers to hire. More stringent EPL in Finland and the Netherlands could be contributing to labour market duality and to lower hiring of people with disability. This contrasts with Denmark and Ireland where employers have fewer obligations to retain workers but where the labour market favours easier return to work. Different forms of financial incentives have been put in place as additional incentives to employers in all countries. Wage subsidies have successfully increased employment in Finland but they appear to have created substitution effects in Denmark. In the Netherlands, employers are exempted from carrying the costs of disability benefits and from paying wage during sickness when hiring a person with a longstanding illness. Overall employers are often discouraged by administrative hurdles and more could be done in this area in all poor countries.

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. While these benefits are particularly targeted in Ireland, they provide lower net replacement rates than in the other three countries. The design of these benefits in combination with income taxation can create work disincentives. Average effective taxation is high in all four countries and reaches 70% to 90% with a few exceptions. Different in-work benefit elements are operated to overcome this problem but are either too small in size (Finland), have a take-up problem (Ireland) or are effective only for higher-income groups (Netherlands).

Policy failure can partly result from complex institutional structures, a lack of co-operation across institutions and insufficient financial incentives for, and governing of, public institutions. In this regard, Finland and Ireland are facing particular challenges. Finland is recently promoting stronger inter-agency co-operation and there is also institutional target setting and performance management in place for the public employment service. Both are still lacking in Ireland. Denmark and the Netherlands are much further in the process of institutional change and the strengthening of institutional accountability. The main challenge in Denmark is the enormous cross-regional difference in outcomes, while the Netherlands face a number of new challenges related to the privatisation of large parts of disability policies.