Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.
The UK jobs market is frequently cited as a sign of the economy’s successes. Unemployment is, after all, very low. Yet, despite this, the current employment situation has rung all sorts of alarm bells – for different reasons.
Consider the last few weeks. Queues to see GPs. Queues at airports. Longer waits for passports. Many of these issues might be explained by specific factors, but they are indicative of wider concerns, including whether there are enough suitably trained or qualified staff.
It is not uncommon for some of these issues to be reported as if unique to the UK – blamed wrongly, of course, on Brexit.
Just take as an example the job shortages at airports. While a concern, they are not unique to the UK. As reported in the Financial Times, while three per cent of flights were cancelled last Saturday in the UK, the figure was also three per cent in US but four per cent in Germany and 11 per cent in the Netherlands.
Clearly, some industries that were hit hard by the pandemic are finding it hard to return to normal, but this is a global problem. In the case of the UK, poor management appears to be the explanation, with airports sacking staff rather than safeguarding their jobs and cutting pay for those they kept.
So what is happening to the labour force? By the end of March, employment in the UK reached 32.569 million. Unemployment was 1.344 million, or 3.7 per cent of the workforce. These are impressive figures when one considers the pessimistic forecasts made by many economists during the pandemic.
This success largely reflects the effectiveness of the Government’s furlough scheme, as well as the flexibility of the labour market.
A flexible labour market – in which the numbers in work can respond quickly to the ups and downs of the economic cycle – has been a hallmark of UK economic success over the last four decades, since Margaret Thatcher pushed through supply-side reforms.
The labour market also defied expectations in the wake of the 2016 Referendum. Incredibly, the Treasury under George Osborne stated that at least half a million jobs would be lost within only two years of a vote to leave – and that the situation could even be worse.
The opposite happened. In June 2016, the UK’s unemployment rate was 4.9 per cent and the number in work 31.7 million. Two years after the referendum, the unemployment rate had fallen to four per cent and the number in employment had risen to 32.3 million.
The political crisis of 2016-19 created unnecessary uncertainty, and led many firms to put investment plans on hold, and it was then followed by the pandemic. Although the latest GDP figures for April show the economy is 0.9 per cent above its pre-Covid level, the recovery in jobs has not kept pace. UK employment is still 504,000 less than pre-pandemic.
Thus, as welcome as the low rate of unemployment is, there are concerns. Take the worry reflected in parts of the financial markets. Currently, speculators are building up short positions against the pound. They are wary about overall economic policy and dismayed by poor communication from the Bank of England.
But, adding to this, is market concern that the UK’s low rate of unemployment indicates that the economy may already be hitting bottlenecks. Or what might have been called full employment in the past.
This worries financial markets for a number of reasons. It feeds concern that this development will add to inflationary pressures now. Also, it suggests that in future the economy may run into inflation bottlenecks earlier in economic recoveries than before, thus constraining growth.
These worries are exacerbated by the current number of vacancies of 1,295,000; this is a record high and up 499,300 from pre-pandemic.
Again, this situation has wrongly been attributed to Brexit. It seems to be more linked to the pandemic and the high inactivity rate – which measures those not in work, studying in education or not looking for a job. This is at 21.4 per cent and is 1.1 per cent higher than pre-pandemic. Indeed, compared with pre-pandemic, inactivity for 16-24 years has risen 116,950, and for 50-64 years has increased by 281,318 – so there has been a rise of 459,638 overall.
This has also drawn attention both to the large numbers of people over 50 who have taken early retirement and to the sizeable numbers on disability and other such benefits. It reinforces the Government’s focus on helping and supporting people as they go from benefits into work.
Interestingly, even though events of recent years have led to a net return of workers to the EU, the numbers from the EU who have applied for UK residency has been far higher than expected. Data released last week shows that 5.8 million people had applied for the EU settlement scheme, to live and work in the UK, and that 5.4 million had gained a grant of status.
Indeed, the Government post-Brexit has a very liberal immigration policy, to suit the economy’s needs. In the year to March 2022, 277,069 work related visas were issued to people from across the world.
That figure was 129 per cent higher than the previous year and also 50 per cent above the year before the pandemic, up to March 2020. Skilled workers make up the bulk and are 60 per cent above the year to March 2020. Thus, the numbers of immigrants working in the labour force continues to rise. According to the Migration Observatory, foreign born workers constitute 18 per cent of the UK labour force.
But the current vacancy picture suggests that in some sectors a policy answer needs to be found. Seasonal agricultural workers is often cited as one area facing challenges. Yet, in terms of temporary visas, the quota for seasonal workers has increased from 2,500 in 2019 to 30,000, though presumably it may have to rise further, if seen as necessary.
While more targeted visas is one answer, looking across the economy more pay, better training and a more flexible approach to working conditions post-pandemic has to be the route we take to encourage people to return to work.
Currently, average earnings are creeping higher, rising by an annual rate of seven per cent in the first quarter, versus 5.6 per cent the previous quarter. The wage share – the amount of national income that goes to workers – looks set to rise, over time. And this needs to be supported by tax policy.
Interestingly – and perhaps a harbinger of future problems in terms of public sector pay and strike action – while regular pay without bonuses is rising 4.2 per cent it varies between 8.2 per cent in the private sector and 1.6 per cent in the public sector. It is hard to argue that professionals like teachers and doctors should not be paid more, although in the provision of world class services, public sector reform as well as sound financing seems necessary as part of a future approach.
A large portion of the least productive workers are found in low wage service industries, such as the retail sector, accommodation and food services. Previously, able to recruit freely and cheaply from overseas, many firms failed to train or upskill their staff. This, alongside the impact immigration had on suppressing wages in many low skilled sectors, coupled with poor educational qualifications, helps explain the large numbers in low paid, low productive roles.
The current high rate of employment is welcome, but it casts light on the need to make headroads now into a number of areas. Addressing the productivity puzzle requires more people in well paid work, and this has to be part of the pro-business, pro-growth strategy that the economy needs.