Incapacity Benefit: A Health or Labour Market Phenomenon?

The number of people claiming Incapacity Benefit has remained fairly constant in recent years at around 2.7 million (7% of the working age population), although the numbers have trebled since the 1970s when an earlier version of this benefit was available. In January 2006 the UK Government set the ambitious target of reducing the number of claimants by one million, or around 40% of the total, within the next decade. New initiatives will focus on increasing the number of people who remain in work and increasing the number leaving benefits and finding employment. This paper explores these two critical transitions using data from waves 5 to 13 of the British Household Panel Survey. We consider whether the moves onto and off benefit are driven by health status or whether labour market factors are also important. Our results show that while health, and in particular psychological health, is an important determinant of these transitions, other factors such as age, occupation and geographical location are also key explanatory factors. This suggests that a very broad range of policy measures will be required if the government is to meet its target.