Due to factors such as globalization of industries, it has become more difficult for those with reduced work capacity to maintain a foothold in the labor market. Over the past two decades, there also appears to have been a shift in social norms and attitudes in favor of placing persons who have difficulty finding work into disability welfare, rather than on unemployment benefit.
This was further elevated by increasingly strict work requirements in unemployment insurance and social assistance schemes.
Labor force participation among those 50 and older is low in almost every European country. However, the reasons for that are different. In Sweden and Norway many people between ages 50 and 65 receive disability insurance. In countries such as France, Germany and Spain people tend to get old-age pension. In either case, older people tend to be excluded from the labor market well before they reach 65.
Labor market exclusion will be one of the main topics during the current Swedish presidency of the EU. The Swedish government has undertaken a major reform of the social security system during the last two years. The focus of these reforms has been twofold. First, we seek to promote early intervention shortly after a worker is inflicted with illness or injury that forces employment absence or labor market withdrawal. Second, we want to open up a way back into the labor market for people with disability insurance and long term sickness benefits.
To this end we have imposed fixed time-limits for government determinations of disability claimants’ health status and ability to work. We have also initiated different measures to make rehabilitation strategies more effective, including increased resources allocated by the new government to occupational health care and medical rehabilitation. The main focus has been to speed up the disability claim and determination process and make it more effective.
The other part of the reform, and perhaps the most controversial one, has been the introduction of a targeted negative income tax system targeting people on disability support. When I became minister three years ago, the number of persons on disability support was more than 550,000, about 10 percent of the Swedish workforce. My observation was that the vast majority of persons with partial work capacity who receive disability insurance were unlikely to ever work again. Attempts to reassess their work capacity had failed and active employment programs would have been unmanageable, given our economic resources. So we started to discuss other ways to offer this large group of people a way back into a full role in society.
One inspiration for us was the experiments with negative income tax in the United States during the 1970s. Although Milton Friedman is usually associated with this idea, the original idea of a negative income tax is far older. One seminal figure was Robert Lampman, better known for his involvement in the War on Poverty in the United States. From 1968 to 1979 the largest experiment with negative income tax was undertaken in a number of different US states.
However, the conclusions from the projects were ambiguous. The system seemed to increase labor supply in families with an initially low labor force participation. At the same time, labor supply seemed to decrease in groups whose participation in the labor market already were at the normal level.
Consequently, if a negative income tax is going to be successful as a means to increase labor supply it must be targeted towards groups with low labor force participation rates. Sweden’s more than half a million people on disability benefit was actually the ideal group, because statistics show that less than one percent returned to the labor market. Hence, there was no downside either for the state finances or for people themselves. Since labor supply in this group was already practically zero, a targeted negative income tax could only have positive effects.
This is the background for the large reform that was implemented in January of this year. In essence, we made disability support irrevocable for the 420,000 people that had been granted permanent disability insurance. No matter how much they try to work or study, today or in the future, they will keep their supportive entitlement from the state. They may also earn 42,800 SEK (US$ 5,000) per year and keep all of their disability support. If a person in the program earns more than 42,800 SEK, one SEK of disability support is deducted for every 2 SEK of additional income.
If we look at the number of people affected by this reform, this is by far the largest implementation of a negative income tax scheme so far. The US experiments enrolled about 10,000 people in total, and the self sufficiency project in Canada eight years ago enrolled about 5,000. We know that many people who have been on disability support for a long time are very ill and most will never return to work. But still, if only one percent more returns to work, we will be able to claim a success.
It is still too early to say anything about whether this new model will be successful or not. So far, about 10,000 people in the group have reported to the Social Insurance Board that they will earn money from work. And we should remember that these are tough economic times, and work is hard to find even for people who have full work capacity.
However, we have also seen positive effects of the other part of the Swedish health insurance reforms. The number of persons on sickness benefit has decreased by about 40 percent during the last three years. Also, for the first time since 1970, the number of persons on disability support has started to decrease.
Of course, Sweden is not the only European country undertaking large social reforms. We can all learn from experiences of other European countries, especially in the implementation of different job-matching schemes and the active involvement of employers and trade unions.
By focusing on social exclusion, Sweden wants to emphasize the role of the state and civil society in promoting full employment and social inclusion. The world economy is facing its worst crisis in 50 years with dire consequences for workers and their families. People with reduced work capacity were already in serious trouble before the crisis hit. Despite a booming world economy in recent years and rise in general employment and prosperity, the numbers of such persons in paid work remained static in some countries and fell in others, including Sweden. With unemployment now rising quickly due to the downturn, their ability to hold on to (let alone find) jobs is going to become very difficult unless governments do something about the barriers they face.
The way that societies think about persons with partial work capacity determines what their sickness and disability policies emphasize. It is regrettable that many countries class such persons as incapacitated and without useful labor to offer to their communities. Not surprisingly, their policies exclude them from jobs that could otherwise help protect them from economic hardship.
That is why it is critical not to repeat the mistakes of the past. We should not try to hide unemployment by reclassifying people as sick or disabled. Rather, we must prepare this group for the coming economic upturn. The challenge is to “hold the line” and not just subject such persons to easy solutions, which are not beneficial to them or society. Personally, I am convinced that Sweden will not repeat the mistakes of the past. Moreover, I want to use the Swedish Presidency as an opportunity to convince my fellow Europeans to also “hold the line” and to make every effort in order to achieve full employment and social inclusion.
During the first years of this government’s term I have been striving to make the social security system more focused on the individual and stimulating recovery and return to work. Reclassifying people as sick or disabled is not a long term solution to the problem of social exclusion. Rather, such a policy tends to make their exclusion permanent. A policy of active inclusion must therefore contain two important elements—first, early intervention during the sickness spell, and second, a policy to remove barriers to re-enter the labor market after a period of sickness or unemployment. Only if we combine these two strategies will it be possible to maintain a generous welfare system and a high labor force participation rate simultaneously.
Cristina Husmark Pehrsson
As Minister of Social Security for the Swedish Government, a position held since October 2006, Cristina Husmark Pehrsson’s areas of responsibility include sickness insurance, pensions, administration of social insurance, and Nordic cooperation.
Presidency of the European Union
Starting on July 1, 2009, the Government of Sweden will hold the Presidency of the European Union for a six-month term. Sweden will lead the EU’s work and continue momentum on a number of important issues, including job growth and labor reform, climate change and environmental sustainability, as well as healthy, active and dignified aging.