Most European countries face similar challenges in terms of ageing of their populations and reductions in the ratios of active to retired over the coming decades. Increasing labour force participation is a widely known policy goal. Delaying retirement is also thought of as a potential solution. However, a substantial share of the working age population in the industrialized world suffers from a long standing illness or disability that restricts daily activities and its first consequence is that a substantial fraction of the workers has left the labour market prior to retirement age. This suggests that policy should also focus on reducing disabilities among younger workers and/or on increasing the employment prospects of workers with a disability. Thus, analysing how different dimensions of health impact on the individual’s labour market transitions, as well as understanding how these are modulate by occupational characteristics and financial incentives from the institutional setting, are of prime interest in designing new policies to attain this goal. In this project, we will first deal in depth with the relative role that mental and physical health play in explaining labour status transitions. We will apply competing risk models to European datasets with detailed health information to take into account the transitions across the different possible labour market states. Secondly, we will focus on the role played by occupational characteristics and financial incentives explaining the labour behaviour after a health decrement and will exploit a rich and new data source that links the Dutch Population Survey on Living Conditions with hospital admission records, income tax registers and social security records in the Netherlands for the period 1998 to 2005. The project will be carried out in one of the leading groups for health economics, inside the reputed Erasmus University and offers excellent opportunities for international networking and career development.