In 2003, the Department for Work and Pensions (DWP) commissioned the Institute for Fiscal Studies (IFS) to estimate a model of labour market transitions, in other words, of moves into and out of work (paid employment).

The specific aim of the project was to include disabled men and women in such a model. Including disabled people is important because a large proportion of men and women of working age who are not in work are disabled, and excluding them from a model of work and non-work limits the usefulness of the analysis. The methodology developed in the paper puts a lot of emphasis on most appropriate modelling of financial incentives for disabled and non-disabled people, and accounts for labour market dynamics of single people and couples separately. Compared to standard structural models of labour supply the model makes fewer structural assumptions but at the same time allows for analysis of employment effects of changes to the system of taxes and benefits.

The model uses data from the UK Labour Force Survey (LFS), which operates as a five quarter rolling panel. This allows us to look at whether people in the LFS are in work when they are first surveyed (wave 1), and again a year later (wave 5). In this way we can look at actual dynamics in the labour market (i.e. movement from employment to non-employment, and vice-versa) rather than just looking at a static snapshot of the labour market; this is one of the key advantages of modelling labour supply in this way. The model is still far from a definitive methodology concerning labour market behaviour of disabled people. In fact, some of the findings seem surprising and will require further analysis. It is, however, an important step towards understanding the determinants driving labour market decisions of people with disabilities.