The UK is an international outlier when it comes to economic inactivity, a new government-commissioned report has found, as employers find it cheaper to replace workers than retain them.
The discovery phase of the new Keep Britain Working Review, led by Sir Charles Mayfield, found that “the costs borne by employers for sickness absence are lower relative to some other European countries and may be worth paying versus the greater time and investment needed to pursue retention.”
The UK was the only country with an advanced economy where economic inactivity was increasing, Mayfield said.
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The study’s central thrust was that confused financial incentives for employers and employees were one reason economic inactivity had worsened in the UK compared with other countries, and that employers were finding it cheaper to replace workers who fell sick than to invest in their retention.
Mayfied, who was chairman of the John Lewis Partnership from 2007 to 2020 also noted that the low rate of statutory sick pay in the UK – £116.75 a week for up to 28 weeks — was among the lowest replacement rates of average earnings of any country in the OECD.
This helped lead to situations “where the financial incentive to invest in retention is weaker than recruiting a replacement”.
The report argued that action to stop people from leaving work when they first fell sick would make much more difference than reforms to the welfare system aimed at long-term benefits claimants.
The Netherlands, where there were stronger incentives for employers to invest in workforce health and retention, was presented as something of a model by Mayfield. Dutch employers had to pay at least 70% of workers’ salaries for up to two years of sickness absence, and provide occupational health support as part of a back-to-work plan. This contributed to a drop of eight percentage points in economic inactivity between 2010 and 2023 in the country, the review noted.
Denmark was also studied in depth. It had succeeded in balancing labour market flexibility with strong social protections and active labour market policies, Mayfield stated, and now ranked first in 15 European countries for employment rates among people with health limitations (75% vs 56%).
Although the report noted that international comparisons were difficult, given different legal systems, cultures and economic measures, it found little correlation between countries’ spending on incapacity benefits (as a share of GDP) and economic inactivity rates. “Some countries had achieved significant reductions in economic inactivity or maintain low absolute rates, despite varied spending levels,” the research stated.
No single approach worked universally, Mayfield emphasised. But there were five key principles that were identified as underpinning an “effective labour market ecosystem”:
- Employer incentives for prevention and retention – encourage businesses to
invest in workforce health and retention, such as in the Netherlands. - Early intervention and structured return-to-work support: Improve workforce
participation with proactive occupational health policies, such as in Denmark. - Balance flexibility with security: ensure worker support during sickness while
maintaining a dynamic labour market, akin to Denmark’s flexicurity model. - Strong alignment between government and employer roles – coordination of
employer-led and public-sector initiatives to enhance workforce resilience. - Removal of structural barriers to reemployment: ensure access to training,
childcare support, and reintegration programs to prevent long-term economic
inactivity.
Mayfield said: “Our initial report published today confirms the scale of rising economic inactivity and what’s driving it. It underlines the urgency that we tackle this challenge by improving prevention and retention of those in work and by creating better pathways back into work for those who are economically inactive.
“It’s a problem that can and must be addressed by government and employers together. Even at this initial stage of the review, we have found inspiring examples of employers making a difference that’s literally life-changing for some people. We need more of these on a greater scale and, in the next stages of the review, we will be engaging with many organisations to establish how that can be achieved.”
Ben Willmott, head of public policy for the CIPD, said the report showed that more ambition was needed from the government to tackle health-related inactivity. He said: “The Youth Guarantee is a positive step but not sufficient to tackle the collapse in apprenticeship provision for young people in recent years and the lack of effective employment support to underpin pathways into work. Our research shows there is strong employer backing for a broader Apprenticeship Guarantee which would provide a guaranteed apprenticeship place for young people aged 16-24. Better training and employment opportunities for young people will also support efforts to improve their mental health and wellbeing.
“The government must provide strong backing to the Keep Britain Working review and be prepared to invest, for example, to improve the provision of occupational health support to SMEs to keep people healthy and in work. Improving health at work and retention are also likely to require an increased focus by the Health and Safety Executive on tackling work-related stress, which is linked to mental health conditions like anxiety and depression, as well as increased risk of heart disease. The economic benefit of focusing on prevention and tackling sickness absence to reduce ill-health related economic inactivity is huge.”
“It’s also important that the government continues to consult with employers as details on some of the key measures in the Employment Rights Bill are finalised, to ensure they don’t have the effect of deterring employers from hiring candidates with health conditions or more development needs.”
Patrick Thomson, head of research, analysis and policy at Phoenix Insights, said the UK “should be pulling every lever to help people who want to be in fulfilling work as quickly as possible”.
He added: “The review highlights that the best way to boost employment opportunities for people with health conditions is to support them to stay in work. Every step away from active employment leads to more barriers for people returning.”
CEO of Simplyhealth, Paul Schreier, agreed that preventing people from dropping out of work is just as important as trying to get people back into the workforce.
“We mustn’t lose sight of the value that comes from providing working people with preventative, easy to access healthcare support through their workplace – particularly when the NHS is in crisis. With one in five of the working population reporting that they have a work limiting health condition, this support must be available regardless of pre-existing conditions too.
“With challenging economic headwinds and a shared priority of achieving growth, it’s vital that businesses do not face a greater financial burden to look after the health of their staff. Instead, the government must make it easier to invest in workplace health support.”
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