Labour Market Outlook Q4 - 2024
31st December 2024
In this Labour Market Outlook, we examine how the Government should approach extending Statutory Sick Pay (SSP) to the lowest earners, and in particular what replacement rate - the proportion of their earnings that workers will get while off sick - to set for those workers who will be newly eligible.
There is a clear case for strengthening the UK's SSP system, but the Government faces the challenge of balancing income protection with the risk of absenteeism.
A replacement rate of less than 100 per cent is appropriate to mitigate the latter risk - especially given that ‘waiting days' are also being removed, meaning that workers can access SSP from the first day off sick.
But we argue that the Government should err on the side of protecting incomes: those workers who will be newly eligible for SSP are disproportionately low-income, with almost a third (32 per cent) in poverty compared to one-in-ten (9 per cent) of other employees. For this reason, we propose a replacement rate of 80 per cent for these newly eligible workers, consistent with the recommendations of a previous government consultation, as well as the Coronavirus Job Retention Scheme.
The ‘Lifting the Lid' section looks at the differences between Labour Force Survey estimates in Great Britain and Northern Ireland (where the survey is administered differently), wage growth for graduates relative to the minimum wage, and the extent to which the Government's industrial strategy will target areas most in need of a pay uplift.
Spotlight | Reforming the UK's Statutory Sick Pay system
The Government introduced the Employment Rights Bill in October 2024 as part of its ‘Plan to Make Work Pay’ - arguably the biggest overhaul to employment rights since the introduction of the minimum wage. But the Bill marks only the first step on a long road to reform. There are lots of policy details to be worked out, and the Government is (rightly) consulting on some of the key decisions.
One of the areas being consulted on is the strengthening of the UK’s Statutory Sick Pay (SSP) system. There is a clear case for doing so: the UK’s system currently provides a lower level of minimum protection to sick workers than most other OECD countries. This is because sickness absences shorter than four days are not covered, the lowest earners are excluded and the current SSP rate of £116.75 per week is simply too low. The Government’s planned reforms will address the first two of these (although not the third), and the recent consultation focused specifically on extending SSP eligibility to workers earning less than £123 per week, who currently do not qualify. For these workers, the Government plans to set SSP as a share of earnings but is consulting on what the exact replacement rate should be. In this spotlight, we outline the key considerations and the reasons why we propose that the Government adopts an earnings replacement rate of 80 per cent for newly eligible workers.[1]
Policy makers need to balance income support with a risk of absenteeism
This decision matters because the workers affected will, by and large, be eligible for sick pay coverage for the first time. As well as being excluded from SSP by virtue of the policy design, very few will currently have coverage via their employer: a 2014 survey found that part-time workers (a category which includes all those earning below £123 a week) were less likely than full-time workers to have access to occupational sick pay (42 per cent versus 61 per cent).
The main policy consideration is a ‘moral hazard’ trade-off. Set sick pay too low, and workers who are too unwell to work face an unacceptably large financial hit - and if those workers work through illness to avoid this hit, there are negative health consequences for the individual and wider society. But set sick pay too high, and there is the risk that some workers take false sick days. This is why most countries’ sick pay systems either set mandatory sickness payments at a level below workers’ normal earnings or include ‘waiting days’ (days’ illness where there is no eligibility for sick pay).
The UK’s current system has both features – a three-day ‘waiting period’ as well as a very low rate of earnings replacement for the average worker covered. (Since SSP is a flat rate, however, the earnings replacement is high for those workers just eligible.) But waiting days are set to be removed – and so balancing sickness insurance and absenteeism risks will come down entirely to the choice of earnings replacement rate. This means it is appropriate, in our view, to set an earnings replacement rate below 100 per cent.
As Figure 1 shows, this would be in line with the practice in many other rich countries.[2] A handful of countries (including Luxembourg, Germany, Chile, Austria and Iceland) do provide full earnings replacement from the first day of sickness, but this is fairly unusual, and often accompanied by more stringent requirements to certify illness through the healthcare system. Among countries whose sick pay system does not have any waiting days, the typical earnings replacement rate (in Finland) is 70 per cent.
The cost to employers is also a relevant policy consideration – but one the Government should address separately
On top of this moral hazard problem, there is a second trade-off: both raising sick pay and expanding coverage raise costs for employers. This is both because a greater share of sick days would become eligible for SSP, and because workers would almost certainly take more sick days: cross-country evidence shows that workers take more sick days in countries with more generous sick pay provisions. Of course, more sick days are not universally harmful for businesses, to the extent that they reduce unproductive presenteeism and the spread of illness. But nonetheless, just as concerns exist about the employment effects of the costs imposed on businesses by the minimum wage, higher sick pay costs could also pose risks of job losses.
Our view, however, is that this trade-off should be handled separately from decisions about the replacement rate for low earners. The policy levers are different: the Government could, for example, compensate employers facing high sick pay costs, as it has done in the past.[3] Moreover, the proposed reforms look set to have a relatively low impact on businesses as a share of their wage bills: taken together, extending eligibility and removing waiting days are estimated to increase employers’ sick pay costs from 0.06 per cent of their wage bills to 0.09 per cent.
Given that the policy change would affect people on low incomes, there a stronger case for income protection
So, how should the Government weigh up balancing insurance against work incentives for workers newly eligible for SSP?
The first requirement of a sick pay scheme is that it protects workers’ incomes when sick – and given that the proposed policy change affects those on the lowest earnings, who often have precarious financial situations, there is a strong case for ensuring SSP provides a good level of income protection to the lowest earners. Workers earning below £123 per week (who will be newly eligible for SSP) are disproportionately likely to live in lower-income households: as Figure 2 shows, one-third (32 per cent) of employees earning below this level are living in relative poverty compared to 9 per cent who earn above this threshold. The social security system will help to mitigate the financial impacts for some (albeit with a month’s delay), but nearly a quarter (23 per cent) of employees who will be newly eligible for SSP are living in poverty but do not receive UC or equivalent.[4] Those workers and their families are likely to be among the least able to weather the financial hit of uncompensated time off sick, pointing towards adopting a high earnings replacement rate. Moreover, as the Covid-19 pandemic demonstrated, those in lower-paying jobs are more exposed to health risks at work, so the health benefits of enabling people to stay home when sick might be greatest for this group of workers.
Read the full Resolution Foundation report with graphs HERE
