David Willetts is President of the Resolution Foundation and a member of the House of Lords
Birth rates. Pension ages. Increasing ill-health. Migration. A host of issues are increasingly seen through the prism of a shortage of the workers we need.
The Lords Economic Affairs Committee recently analysed the issue and showed how Covid had shrunk the number of working people across Western countries. The number of people aged 16-64 in the UK who are economically inactive increased by half a million to 9 million. Employment rates have since bounced back in most countries. but we are one of the few that has not returned to our pre-Covid economic activity rate. There is not one single silver bullet but several different problems at different stages of the life cycle, each of which can be tackled.
Firstly, there are young people (aged 16-24) who are notoriously NEET: not in education, employment or training. This number rose steadily under Labour and reached a shocking peak of over 1.2 million in 2011. Since then it has declined to about 800,000, although there are worrying signs it may now be rising. Our work at Resolution shows that the number of 18-24-year-olds in this category has nearly doubled in the last ten years, rising from 94,000 in 2012 to 185,000 in 2022. Today, almost one-in-four (23 per cent) workless young people are not working because of ill health, up from less than one-in-ten (8 per cent) in 2012. The main factor is increasing ill-health, especially mental illness.
There does seem to be a genuine underlying rise in mental health problems, especially among young people, perhaps due to the endless sense of personal dissatisfaction compared with others generated by social media. And whilst more educated young people seem to be able to combine these conditions with working there is a distressing mix of ill-health and non-work amongst the less skilled. And with many of these types of ill-health the direction of causation goes both ways – people who are out of work for longer tend to develop health conditions, especially of a mental kind.
There is a real risk that government policy could make things worse. They are currently planning to defund BTECs for up to 200,000 young people, expecting them to pour into T levels instead. These are more academic and so far only reaching about 5,000 students. There is a real danger this could lead teenagers to drop out from college and instead go NEET.
One of the main boosts to employment rates has come from the rising number of women – especially mothers – in the jobs market. The Government’s excellent initiatives on access to childcare are helping, but they are focused on highly structured institutional childcare. Lower earning lower-skilled women tend to prefer more informal arrangements such as child-minders, some of which are excluded by very stringent requirements. Moreover, Universal Credit has a complicated and obscure way of helping to fund childcare so if you work longer hours it is hard to see how much extra help you are getting. There is scope to simplify this funding.
Moving up the age range, the next group affected are older workers who get sick and then lose contact with their employer and end up long-term unemployed even if their condition improves. This is a particular problem as they move off statutory sick pay and onto long-term sickness benefit. People who are economically inactive due to long-term sickness or disability are four times as likely to re-enter work after a few months of sickness leave than they are to re-enter work after over two years.
They could keep some right to get their job back or at least to get some kind of employment offer from their employer for longer. This is more regulation which Conservatives are naturally wary of. But a right to return could help keep such people in touch with the jobs market.
Behind this, there is the tricky issue of the level of unemployment benefits. When I was working for Margaret Thatcher on reforming benefits we were trying to create a bigger gap between wages and unemployment benefits – lowering the so-called replacement rate. That policy has been sustained for decades and we now have one of the widest gaps in advanced Western countries. That means the disability payments you get are so much higher than unemployment benefits that there is an enormous incentive to be treated as sick and disabled if at all possible.
It also means that there is enormous pressure on an unemployed person to get some job, any job, rather than to take a bit longer to get one that better matches their skills and aptitudes. Meanwhile, if you are defined as sick the pressure to do anything to get back into work is very low. There is a potential for reform here to soften this gap. Unemployment benefits are now too low and the promotion of work for long-term sick and disabled people too weak.
Finally, there are the older workers who are retiring early. This is the key reason why Covid had a bigger impact on employment in Britain than elsewhere. Ironically it all goes back to the strengths of our system. We don’t have a retirement age: you can collect the state pensions and carry on working, That isn’t the problem. And it is great that we also have more private pension provision.
But at the moment you can access your pension pot with no penalty above the age of 54. That is a lot younger than the state pension/retirement age in France or Germany and means older workers with generous defined benefit pensions can leave the workforce early. The Government is already raising this age to 57 but it will still be ten years younger than the state pension age. Why not move to a model where it is state pension age minus five years instead?
We could also be bolder on the state pension age. We have got ourselves trapped in the assumption that the only thing that matters here is life expectancy and so pension age should be set by a formula of RIP minus X years. But many other factors can be taken into account in setting the pension age such as the costs of the pension and the budgetary pressures presented by the aging of the big cohort of Baby Boomers. So increasing the pension age is a legitimate tool of policy in these circumstances.
In short, there are a range of measures which could be taken to boost employment rates in Britain. Some of them might even be politically acceptable! The real politics is about how our points-based immigration systems works. I hope to return to that in a future column.