Welfare reform and recession: past labour market responses to job losses and the potential impact of Employment Support Allowance

The job losses which occurred as a result of deindustrialisation in the 1980s resulted in a large growth in male economic inactivity, and particularly an increased number claiming Invalidity, subsequently Incapacity Benefit (IB). This created high rates of IB claiming which have never been satisfactorily addressed by subsequent policies. In October 2008, Employment and Support Allowance (ESA) was introduced for new claimants to replace Incapacity Benefit. Between 2009 and 2013 those claiming under the old Incapacity Benefit will also be progressively transferred to the new regime. The changes were designed to both reduce on-flows to the benefit, as well as increase off-flows.

The reforms mean that job losses in the present recession will largely feed directly into unemployment, which is likely to remain relatively high for a prolonged period, particularly in old industrial areas where it is currently growing most rapidly and where employment levels are predicted to recover most slowly. This will make it much more difficult to achieve Government targets of significant reductions in the numbers on sickness benefits, as these groups will find it increasingly difficult to compete for jobs with the newly unemployed. It is therefore argued that more thought needs to go into the balance of policy between supply and demand-side interventions in the labour market.