UK's sick pay timebomb that risks a lost generation of workers

The UK is sick. It’s much sicker than other similar countries, and the situation is getting worse, snowballing into a health, social, medical, economic, and potential budgetary crisis.

We are heading to an all-time record for health-related benefits, according to recent forecasts, and the Treasury is worried. The rise in the bill for working-age health-related benefits has surged from £36bn before the pandemic to £48bn in the last financial year, and the official Office for Budget Responsibility (OBR) forecast is that it will reach £63bn per year in the next four years, with all these numbers accounting for inflation.

The big fear is that this could lead to a post-pandemic cohort of younger workers who will permanently drop out of the labour market.

New data shows that benefit claimants are trending younger, and suffering more with mental health problems. This has created a new set of problems for the state.

And then with this, comes a more existential conundrum for Gen Z. What if a large swathe of this generation is permanently semi-detached from the jobs market? Economists call this “hysteresis”, where joblessness begets more of it. And could this same generation also be at the sharp end of the explosion of AI replacing a wide set of entry-level jobs - in call centres, retail, law, the financial and creative industries and much more. Britain’s biggest corporations are racing to implement effective AI solutions to handle everything from customer service to their marketing output.

These transformations are happening more quickly than had been expected, affecting everyone from entry level front-line workers through to highly skilled professionals such as art workers, media planners and legal clerks. It will inevitably become a significant reality - perhaps the defining social and economic change over the course of this Parliament.

On a new block of flats being built on the site of an old glass works next to the Birmingham HS2 terminus in Curzon Street, I meet some construction apprentices during a visit by the Work and Pensions Secretary Liz Kendall.

The apprentices acknowledge the challenge with their age cohort.

Mohammed Khan, 23, and Elizabeth Allingham, 18, are both trainee bricklayers on much sought-after apprenticeships. Mr Khan says of his generation, who came of age in the pandemic: “All they've known is online or social media. Some people just choose not to work, or some people just don't know how to get out there and start looking for jobs, and talk to people”.

Ms Allingham says these issues are an expected consequence of mental health worsening during successive lockdowns. “It did stop quite a few people working, but I think it's slowly getting better. Schemes like this can help motivate people, definitely, especially the part where you can earn while you learn,” she tells me.

Speaking to Liz Kendall in Birmingham I gleaned some insight into how Labour see themselves navigating concerns that are not new, but that pose tricky questions for a left-wing party.

“There is clear evidence we are really struggling with health problems,” Kendall tells me. The solution, she says, is to “think differently” about what the benefit system and Job Centres are designed to do.

But thinking differently will also require some very tough decisions at next week’s Budget and ahead of a related white paper on jobs.

It will also mean extra demands made on employers, and Kendall has a particularly big ask of bosses regarding mental health. Businesses need to “look at flexibility in the workplace” and recognise this new employment reality means there are few potential workers with “no health problems and all the skills we need”. She is concerned not just at getting work for the 2.8 million who are inactive, but for a large group who are at risk of dropping out of the workforce.

It is a picture of fragility of many millions of workers, that for some businesses begs questions about a lack of resilience in a younger generation. “I don't think £30bn extra spending on sickness and disability benefits is because people are feeling ‘a little bit bluesy’,” she tells me, a reference to the words of her predecessor Mel Stride.

So there is a big and consequential question for the country, and for the new government. The pandemic affected the whole world in a broadly similar way, but why has this hit Britain more than any other similar economy? This is one of the big things the government is trying to answer.

As the Institute for Fiscal Studies (IFS) think tank pointed out, claimant numbers of similar benefits in most similar countries with available data (Australia, Austria, Canada, Germany, Ireland, the Netherlands, Sweden and the US) “has in fact slightly fallen over the same period”. France, Norway and Denmark saw modest increases with the latter at 13%, but in the UK, the increase in health-related benefit claimants is an astonishing 30%.

The IFS’s deep dive on the claimant statistics reveals that claimants were younger and their claims increasingly focused on mental health. New awards made to under-40s more than doubled from 4,500 a month before the pandemic to 11,500 last year. Over the same time period, the percentage of all new awards primarily for mental health conditions went from 28% to 37%, an increase from 3,900 claims a month to 12,100 a month.

A separate report from the OBR this month showed that more than 1 in 13 of the British working-age population will be in receipt of incapacity benefits, another all-time high, reversing a steady decline in the early 2000s. However it is also the case that this has been largely driven over the past decade and a half by the raising of the state pension age for women in their early 60s. A quarter of a million new claimants are women aged 60-64.

The Employment White Paper being worked on by Kendall will merge the national careers service with job centres. The point of this is to make work and jobs their primary function, rather than acting primarily as the means to prove qualification for benefits. A more personalised service would, for example, offer very different help for women in their 60s to what is offered for Gen Z.

The stresses of Britain’s declining health has already been felt in job centres. At one in Sparkhill, Birmingham, front-of-house team leader Qamar Zaman greets jobseekers and explains how the pattern of claims has changed.

“There’s a lot of mental health, depression and anxiety… It's presented by the claimant himself, who comes in and states ‘look I’ve got a health condition’ and provides a fit note. From there, we assess whether this customer needs to be seen weekly, or we can find a way of seeing him over time, and then he has to wait for a medical. Doctors then have to get involved… we have to find channels to help them."

With the problem deepening, Labour has a target to get the employment rate up to 80% from 75% right now, which means creating about two million more jobs. But how will it do this? Equalising the employment rate of older women with older men would bridge half that gap. And yet at the same time, small businesses might have to pay for higher National Insurance contributions and more generous sick pay, among other stronger workers’ rights brought in by Labour.

Every answer to the tougher question about whether this sort of change requires more stick than carrot is for now parried by Kendall. Yes she wants that £63bn forecast cost of health related benefits to “come down”. But the government is focused on what it sees as the “win-win”. People returning to work will lower the benefit bill, increase tax revenue, raise employment, and help individuals with self esteem and mental health. Her predecessor, Mel Stride, said the same thing.

Take the “Youth Guarantee” to have everyone aged 18-21 earning or learning. Previous versions of this policy, especially those under Labour governments, have been accompanied with considerable subsidies especially to employers. There is no move on that just yet.

And the Department for Work and Pensions has also inherited, from the last government, a change to Work Capability Assessments that could see a multi billion pound cut to benefit eligibility, affecting 450,000 people. They appear to be going ahead with this. “WCA needs to be reformed or replaced, it’s not working,” Kendall says.

Anti-poverty campaigners and many Labour MPs would like the DWP to lift the two-child cap on benefits as a quick win against child poverty. The long-term cost of that would be £3bn a year.

It is in this department that the most controversial cut has been handled. Ms Kendall says the point of means-testing the winter fuel payment is to focus help on the very poorest, including through increased take up of pension credits from around 880,000 people who don’t currently claim it.

The big picture here is that money is tight and increasingly being soaked up into health-related claims. The government’s immediate Budget answer will be that part of the problem is a challenge in the NHS with long waits for appointments for mental health issues and back problems. More health funding could be earmarked to help unlock the inactivity puzzle. There has been a lot of joint work with the Health Secretary Wes Streeting, who recently said that weight-loss jabs for obese people could be a productivity booster and lift people out of unemployment. Pilots of personalised employment support in hospitals and clinics have seen “dramatic results”. Streeting says the Department for Health and Social Care “is now an economic growth department”.

Internal government analysis of new benefit claims by location suggests the rise in health-related claims correlates with the same post industrialised areas that were supposed to be the beneficiaries of levelling-up. Are these claims an expression of existing patterns of economic disconnection in another form?

I pose a question to Kendall about the pattern of worker inactivity that I keep coming back to in my mind. What if this is not a post-pandemic unlucky generation? What if this is the start of a more fundamental shift of what were entry-level jobs away from young people, where the first rungs of the jobs ladder are being broken? Does this government have any sympathy with the Nobel Prize-winning AI experts or Silicon Valley billionaires who think more welfare support, even a universal basic income, is going to be necessary?

“We will have to do things differently. We will use AI to free up the time of our work coaches so that they can focus on the people who most need support,” she says. The answer on solving a series of profound challenges, especially health-related inactivity, is not right now going to be more money going on benefit welfare payments.

The government is in a race to get the inactive back into work, especially the pandemic generation, but without spending much up front. With huge technological transformations in the labour market around the corner, it is a race to avoid a permanent lost generation.

Lead image: Getty Images