The myth of Britain’s missing workers
There is no shortage of labour – there is a shortage of decent jobs.
The discussion over labour shortages, especially in the UK, has been characterised by excessive fatalism. Bewildered commentaries have presented labour shortages as both the big economic problem of our age and the consequence of forces beyond our control. As if they were just the inevitable, irreversible consequence of the pandemic and subsequent lockdowns in 2020 and 2021. There is even talk of a ‘Great Resignation’ or a ‘Great Retirement’. Masses of older people are said to have given up work for good after being inactive during lockdown. As the House of Lords’ Economic Affairs Committee asked forlornly in its report published at the end of last year, ‘Where have all the workers gone?’.
Of course, huge shocks, such as the Covid-19 lockdowns, will always have economic effects. Abruptly opening and shutting down economies was bound to distort production capabilities and global supply chains, as well as labour markets. The experience of lockdowns may even permanently affect the economic behaviour of some of those who lived through them.
Nevertheless, the willingness in the UK to blame so much on Covid deflects attention from substantial, longer-term economic problems. For instance, the dismal state of the contemporary labour market, with too many lousy, low-paid jobs and not enough good ones, predates the pandemic. It is a product of the British economy’s long-term malaise – a malaise that is fixable.
Instead, too many politicians and pundits seem determined to ignore the longer-term problems. They act as if the labour market was relatively healthy before the pandemic struck. For example, a leader in the Financial Times in November pointed to the unusual decline in UK employment compared to pre-pandemic times. It identified Britain as the ‘only developed country where the share of working-age people outside the workforce has risen so significantly and persistently since the onset of Covid-19’ and argued that this ‘has dampened output and added pressure to wages, which keeps prices higher’. Similarly, the Lords Committee also highlighted the post-pandemic ‘rise in inactivity’, which ‘poses serious challenges to the UK economy’. Both the FT and the Lords Committee risk attaching too much significance to lockdown disruptions. In doing so, they ignore economic and labour-market problems that long precede the pandemic.
This approach hides rather more than it illuminates. The particular weaknesses of the British labour market are better viewed as long-term symptoms of Britain’s economic sluggishness compared to rivals. That’s why Britain has returned more slowly to pre-pandemic labour-market patterns – not because we endured more severe lockdown shocks than elsewhere, but because of Britain’s underlying economic lethargy.
The pandemic did of course have an effect on the labour market. Total working-age employment dropped sharply from pre-pandemic levels – by 860,000 in early 2021. The number of economically inactive working-age people – who are neither in work nor actively seeking it – also rose above pre-pandemic levels by 641,000 in mid-2022. Meanwhile, during the first half of 2022, employers reported a half-a-million jump in vacancies from pre-pandemic levels, to a record 1.3million.
These developments prompted the Lords Committee, among others, to blame the labour shortages on ‘an increase in economic inactivity, in particular among 50- to 64-year-olds who do not wish to return to work’. This change, the committee argued, was likely to be permanent, a view supported by Tony Wilson, director at the Institute for Employment Studies and one of Britain’s foremost labour-market experts. He told the committee in October that ‘we are seeing no sign at all of employment recovering or economic inactivity falling’.
But the effects of the pandemic and lockdowns on the labour market are not as permanent as the Lords Committee has suggested. Indeed, even as Wilson was speaking to the Lords last October, labour-market flows were starting to return to normal.
In fact, by the end of last year, total employment levels had already mostly recovered – to only 251,000 below pre-pandemic levels. Vacancies were also falling by the end of 2022, with 166,000 fewer vacancies reported than at its pandemic peak. In the second half of 2022, the working-age inactivity level had also fallen from its earlier peak (by 125,000). Towards the end of 2022, employment levels for over-49s had pretty much returned to pre-pandemic levels. And there were fewer retired people aged under 65 at the end of last year compared to before the pandemic. The ‘Great Retirement’ has become a small unretirement. So, despite the gloomy fatalism, the labour market has in fact been getting back to normal.
This doesn’t mean that everything is hunky dory in the employment world, of course. The pre-pandemic causes of our economic malaise and the problems in the labour market remain. Above all, investment levels remain as low as ever, meaning that there are way too many poor-quality, low-productivity and low-paying jobs on offer – and too few decent jobs for people who want them.
Politicians and commentators have been too willing to blame Covid for the problems in the labour market. This both deflects attention from their real causes and encourages fatalism.
This fatalism is on full display in the Lords Committee’s report. It says that little can be done to address the problems caused by the pandemic and an ageing population. The committee concludes that the decline in activity among older workers is likely to become entrenched. It would be ‘unwise’, the committee warns, ‘to proceed on the basis that a significant proportion of those who have exited the labour force since 2020 will come back, or be persuaded back, by changes in employers’ practices or by policy measures’. Or as Jon Boys, labour-market economist at the Chartered Institute of Personnel and Development, told the Lords in October, those who retired during the pandemic ‘are gone and they are not coming back’.
The evidence suggests otherwise. The impact on the labour force from the lockdowns and their lifting has been hugely disruptive. But it has not permanently diminished the size of the workforce. It has not significantly increased the numbers of inactive working-age people. Even today, as residual lockdown effects persist, the levels of inactivity are not unprecedented – they remain below levels experienced in the decade before 2015.
It isn’t hard to work out what has actually happened over the course of the pandemic and its aftermath. During the lockdowns, many workers’ jobs were protected by the furlough scheme. This kept unemployment relatively low, but activity rates fell, as young people who would previously have been entering the workforce found themselves stuck at home. Many either extended education courses or enrolled in new ones (some of which would have been for two or more years).
Furthermore, cash-strapped companies (the furlough scheme notwithstanding) made about one million redundancies in 2020, which was more than double the annual average. Most of the newly redundant were unable to find replacement jobs during the lockdowns, and so, with little immediate reason to actively seek work, they also entered the population of the economically inactive.
Indeed, during the first year of lockdowns, most of the jobs lost were from relatively lower-paying and less-skilled work. For instance, employment fell the most in food services, food manufacturing, residential care and construction. Tony Wilson has sensibly observed that many of the newly inactive ‘have not always had massively positive experiences of work, and they have left a job and may be struggling or reluctant to come back quickly’.
That sounds about right. Our economy has not been investing and innovating much for years – few are eager to return to low-quality jobs. The issue is not that people are workshy. Rather, many who had been pushed out of unattractive jobs by lockdown opted to look for better alternatives once the economy reopened. This is why labour shortages have hit lower-paid sectors like hospitality and care work the hardest.
Vacancy levels in late 2021 were further increased by the catch-up in voluntary job moves, which many employees had put on hold. The temporary surge in people quitting their jobs after the lockdowns added to the jump in vacancies. In other words, lower labour churn during the lockdowns was followed by higher churn after they were lifted. But high labour-market churn is not the same as a diminished workforce.
Much is made of the still-high level of current vacancies – about 1.1million. This is used as a straightforward indication of labour shortages. But far less is said about the much bigger number of three million people looking for or wanting work. This is composed of over 1.2million unemployed looking for work and over 1.7million currently inactive people looking for work. We can also assume some of the 11million inactive over-64s would want to work if they could find suitable jobs. (Over 1.3million people aged over 64 are currently in work, almost triple the level of the 1990s.)
Thus, the total numbers available to work today are approaching three times the number of vacancies. There is no numerical shortage of labour. There are, however, mismatches – in terms of geography, experience and, to a lesser extent, skills. The big labour-market problem is not that too few people are available to work post-pandemic. It is that there is an inadequate supply of good, suitable jobs for people of different ages – not to mention an absence of effective employer-provided re-training to make them viable.
But this is no occasion for fatalism. There are many policy measures that could significantly improve the jobs market both for employers and potential employees. In fact, the best interventionist solutions are the same as they were before the pandemic. The government could be promoting productivity growth and new industries, with jobs for people of varying levels of experience. It could be helping businesses to move to where people want to work, and helping people to move to where there are vacancies (not least by easing planning controls and boosting home-building). And while people are in between their previous low-grade jobs and the better new ones they are seeking, the government could also provide much more generous financial support than is currently on offer.
As for employers, there is still much they can do to attract staff. Paying more and improving working conditions would boost recruitment and retention, especially in lower-wage sectors like social care, healthcare, agriculture, food production and hospitality.
The numbers of ‘missing’ workers from the economic turmoil of lockdown are neither mysterious nor especially surprising. They are certainly not today’s top socio-economic problem. The unusual features of the current British labour market are primarily the consequence of lockdowns hitting an already anaemic economy. In future, policy discussions on the labour market, or other economic challenges, should address the causes of Britain’s protracted economic slump. That way, we might be able to start solving it. When we only focus on the transient effects of temporary crises, we risk missing the wood for the trees.
Picture by: Getty
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