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.
Last Friday was an important day for financial markets and for gauging the strength of the world economy. It was announced that the US economy had created 517,000 jobs in January. This rise in non-farm payrolls exceeded market expectations of 185,000, suggesting that the US economy may be healthier than many believed. It raised the possibility that the US may be heading for a soft landing where tighter monetary policy reduces inflation while the jobs market remains strong.
What of the UK jobs market? Could the same happen here, despite all the pessimistic talk? Inflation is 10.5 per cent and is set to decelerate significantly. Meanwhile, the unemployment rate is low at 3.7 per cent and while this is up slightly from 3.5 per cent a few months ago, that was the lowest rate since 1973.
Last week, the Bank of England forecast that UK unemployment would rise to 5.2 per cent by 2025, although only three months ago they were expecting a rise to 6.5 per cent. Their latest forecast may yet prove too pessimistic. The jobs market has proved remarkably resilient.
In fact, in the wake of the pandemic, forecasters expected a large rise in unemployment and permanent scarring. This has not happened, helped by policy measures and by firms hoarding staff, possibly retaining them because of the difficulties of re-recruiting skilled or experienced workers, and perhaps because companies anticipated a post-pandemic recovery in demand.
However, employment has fallen since pre-pandemic, with the numbers in work down 292,000 compared with February 2020. Despite this, the employment numbers are still impressive. Employment is down from 33 million to 32.7 million. This is explained fully by a decline of 777,000 in self-employment to 4.2 million. Meanwhile, the number in payroll jobs has risen by 529,000 to 28.3 million.
As in other countries, the labour data not only gives a great insight into current economic activity ,but also provides an insight into underlying structural problems. Hence much attention is now focused on the numbers of people who are registered as economically inactive – people who are not in employment or are not unemployed since they are not looking for work.
This has added to concerns now – exacerbating worries that the labour market is too tight and that firms may not be able to fill posts with suitable people. One in eight firms are reporting staff shortages. It has fed worries that this shortage will trigger upward pressure on wages, feeding inflation. Furthermore, it adds to worries about future implications as the country has an ageing population.
Latest data shows that the UK population reached 67 million in mid-2021. The state pension age (SPA) is 66 for men and women and, although you can keep working after you reach SPA, one of the current challenges is that the pandemic has led some below the SPA to either leave or not return to the labour force.
There are three important current trends in the population data: the fertility rate is declining, longevity is rising and net migration has increased.
According to the Office for National Statistics (ONS), the “total fertility rate is the lowest since records began in 1938. In 2020, women had 1.6 children on average.” Meanwhile, in 2020 deaths exceeded births for the first time since 1976, but the natural change in the population has been for it to increase as people live longer. In 2020, life expectancy was 79 for men and 82.9 years for women (although those born in 2020 can expect, on average, to live to 87.3 years if men and 90.2 if women).
This creates a challenge. The old age dependency ratio – which shows the number of people over the SPA in relation to each 1,000 people of working age, which is between 16 and the SPA – was 280 in 2020 and will likely rise to 352 by 2041.
As the ONS also points out, “migration to the UK has been the main driven of population growth since the 1990s”. Since our departure from the EU, migration has remained high, but there have been concerns whether we are attracting those with the skills needed. It is important to note that, in the wake of the pandemic, this is a common problem across other countries too. It has, though, shone a spotlight here on the need for more investment in skills and on vocational training, plus raising overall educational attainment.
Problems are most acute in accommodation and food services and in construction. The tighter labour supply has led the British Chamber of Commerce (BCC) to call for measures, “supporting greater business investment in workforce training, adopting flexible working practices, expanding the use of apprenticeships, and a comprehensive reform of the Shortage Occupation List to allow sectors facing urgent demand for skills to get what they need.”
What about the economically inactive? The number of people above the working age of 16 is 53.9 million. Of this, 34.0 are economically active, with 32.8 million in work and 1.2 million unemployed. That leaves 19.9 million who are not in work, and these are pensioners or people aged between 16 to 64 who are economically inactive. It is this latter group that has attracted attention recently.
Vacancies are 1.1 million and, while they have fallen around 75,000 from their peak, they are historically high. Adding the numbers in employment and vacancies together suggests that labour demand is higher than pre-pandemic, but the challenge is that the labour supply has tightened since pre-pandemic. Thus, returning more of the inactive to work would help the economy.
In the UK, the numbers between 16 and 64 who are economically inactive stands at 8.9 million. Contrary to popular perception, it was often higher than this pre-pandemic. Indeed, it reached a peak of 9.5 million between May and July 2011 and has been high since records began in May 1992, when it was 8.4 million.
Currently, 2.4 million people, or just over one in four of the economically inactive, are long-term sick. This is over 300,000 higher than pre-pandemic – though in the three months before the pandemic this figure was already high at 2.1 million. The next highest categories now are students (2.2 million), those looking after home or family which includes carers (1.7 million), those aged 16-64 who are already retired (1.1 million) and the temporarily sick (202,000).
If we compare the last three months with the three months immediately before the pandemic, the increase in those who are economically inactive is 514,000. It is this number that is often cited, leading to calls for policy action. Those on long-term sickness is up by 318,000, and the other big rise is in the number of students, up 173,000. The numbers below the SPA who are retired is up 19,000.
What can be done to get more of this inactive group back to work? The challenge is that, since the levels have been so high throughout this century, it isn’t clear that there are easy solutions.
One focus in recent years has been on ensuring policy is more effective in helping people move from benefits into work. Another critical one has been to improve the provision and effectiveness of childcare. Perhaps too we should focus more on adopting overseas best practice, such as Japan’s Society 5.0 that uses technology as opposed to labour in many areas to help an ageing population. The Chancellor, too, is right to focus on using incentives to encourage those who can work to remain in the labour force and this should figure prominently in the March Budget.