In late 1989, the Labor Party returned to government as a junior partner in a grand coalition with the Christian-democrats, following a campaign in which it had taken a firm stance against austerity. In little over a year after the new government came to power, the party nevertheless lent its support to a major overhaul of the public disability and sickness insurance programs. The overhaul was much more radical than anything to which the social insurance system had been subjected thus far, having particularly strong consequences for the country's disabled. Furthermore, it was also deeply unpopular among voters. In October 1991, about one quarter of a million people came out in protest against the government's reform proposals, which made it the largest union protest ever organized. The Labor Party itself was deeply divided over the matter, whereby internal protests eventually led to the resignation of the party's chair, Marjanne Sint, and its Secretary at the Department of Social Affairs and Employment, Elske ter Veld, while party leader Wim Kok only managed to hold on to his position after organizing a special party congress in which he demanded (and eventually received) support from its members. The party eventually lost about one third of its members as a result of the internal crisis that ensued. Moreover, during the subsequent elections of May 1994, it lost almost one quarter of its seats. While this number was unprecedented, it was also much less than what the party had feared at the peak of the crisis. Another consolation was that the CDA lost even more seats, which enabled the Labor Party to hold on to power and form a “purple” coalition with the liberal VVD and liberal-social D66.

Even though its massive electoral loss could clearly be attributed to the unpopularity of social insurance reform, the party continued to support a reformist course during the next eight years in which it was to act as a senior partner to the country's first-ever socialist-liberal government. As long-term unemployment and inactivity due to sickness and disability, respectively, continued to remain high and even increased in absolute numbers, it was under enormous political pressure to do so.