Welcome to Labour Market Voices; our series of blogs and discussions with leading policy commentators.
In this first edition, James Neave, Head of Data Science at Adzuna, and Tony Wilson, Research Director, Institute for Employment Studies (IES), discuss the state of the UK labour market and how we compare to other developed economies. Part 2 will look at how our public employment services need to be reformed in order to improve the functioning of our labour market.
James Neave:
Leading up to the Covid-19 pandemic, the UK’s labour market appeared to have been in pretty good shape – we entered the pandemic with employment at its highest-ever rate and unemployment close to its lowest in fifty years. Was everything as good as it seemed on the surface?
Tony Wilson:
Well, yes and no. Whilst the record high level of employment you mention was certainly positive, it actually masked a range of issues we were facing: :
- Certain groups still faced significant disadvantages in the labour market, including disabled people (who were 2.5x more likely to be out of work than non-disabled people), those with limited qualifications, ethnic minority groups, lone parents and older people;
- Disadvantaged areas were at risk of falling further behind. These mostly ex-industrial and coastal areas with lower employment and vacancy levels, but also disadvantaged across a range of other indicators, saw virtually no employment growth over the last five years, and existing employment in these areas was more heavily concentrated in industries at risk of decline;
- Low investment in people (the number of people accessing training at work was falling, and much of said training merely constituted induction or health and safety) and capital was also contributing to weak productivity growth and a widening gap between the UK’s productivity rate and the productivity rates of other major economies;
- One in six workers were in low pay, with as many as 25% of those in low pay having been stuck there for up to a decade and a further half had cycled in and out of low pay.
- These issues contributed to record levels of poverty among working households, with nine million people in relative income poverty, including rising numbers for families where all adults worked, likely reflecting the effects of large cuts to social security for working families.
James:
So actually, the record employment figures belied the true health of the labour market, particularly the circumstances of certain groups? And then the pandemic hit – did this then bring these challenges to the forefront?
Tony:
Absolutely. Whilst we avoided the widely predicted unemployment crisis in the aftermath of the pandemic, we are instead now facing three linked crises that we had not prepared for and are struggling to meet.
1) Worklessness has increased significantly
There are still 600,000 more people out of work than before the pandemic began. This is explained by higher ‘economic inactivity’ (people not looking and/or not available to work), driven by more older people leaving work and more people out of work with long-term health conditions.
Although many want to work and would come back for the right job with the right support, for instance with adequate flexibility so that individuals can maintain employment alongside the demands of their personal circumstances, be that managing a health condition or looking after children for instance.
What is concerning as well is that the growth in economic inactivity is being driven by those out of work the longest, with 200,000 more people that have been economically inactive for over five years.
2) We are facing serious labour and skills shortages
The shrinking labour force is contributing to acute labour and skills shortages – with more than a million unfilled vacancies, and fewer unemployed people than there are jobs available.
This is holding back growth and may be adding to pay pressures in the private sector (where nominal pay growth is above 6% a year) as well as recruitment and retention problems in public services (where pay growth is barely 2%).
The Adzuna Intelligence portal, which displays a wide range of key datapoints derived from their comprehensive vacancy data, shows that in the past month (21/10-21/11), there were over 2.3 million job postings on the Adzuna website, with the median salary listing up 6.9% year-on-year. This most in demand occupation over this period was social care workers, with approximately 56,000 listings and a year-on-year increase in median salary listing of 10.7%.
3) Living standards are falling sharply.
Inflation overall is so high that pay cannot keep up – with pay in ‘real’ terms down by 3.3% since the turn of the year, the steepest fall in at least twenty years. And for those out of work, the hit to living standards has been greater still.
James:
But surely over time as the Covid-19 shock to the labour market passes through, these crises will naturally subside?
Tony:
So while recent falls in labour force participation have been driven by the pandemic, they are likely to signal a permanently smaller labour force: first as the ‘Baby Boomer’ generation continues to retire over the next decade; and secondly because of lower migration (in part due to Brexit).
For more than three decades, the story of the UK labour market had been of higher labour demand being met with higher supply. The pandemic put that growth in labour supply into sharp reverse and it has not recovered since. At the same time, we are also facing significant changes in what we do and how we work, which will bring challenges as well as opportunities – driven by technology and automation; the transition to net zero; and a future with greater barriers to overseas trade and higher borrowing costs.
So if we want to grow the economy and reduce inequalities we need to do far more and far better at helping people who are out of work to get back into work and helping employers to adapt, to grow and to make work more productive and rewarding.
James:
How do we compare to our international counterparts? Are other developed economies facing similar challenges?
Tony:
Other nations certainly struggled during the pandemic, but the UK is almost unique in seeing employment fall over the last two and a half years – with every major economy faring better than the UK, and employment up by on average more than two percentage points across the European Union.
Furthermore, employment rates are rising across most of the developed world even as they stagnate in the UK. So it is plausible that by early next year, the UK will be the only developed economy in the world whose employment rate is lower than it was before the pandemic began.
The relatively high poverty and inequality rates that have become characteristic of the UK labour market compared to other developed economies are also not inevitable. The UK performs above average on employment and pay, but performs poorly on pay gaps and low pay, income inequality and poverty, and on employment ‘gaps’ for disadvantaged groups (the gap between the employment rate of the disadvantaged group, for instance, the disabled, and the employment rate of the wider population).
In part, this reflects low levels of social security benefits – among the lowest rates of ‘income replacement’ (the amount of in work income that an individual would receive in benefits were they to become unemployed) of any developed economy – but also structural factors including childcare, housing, employment protection, representation at work and access to employment and skills support.
Many other northern and western European countries have managed to combine relatively high employment with high pay and low(er) inequalities. The UK can – and must – do better, and would not even have to climb to the top of the table in order to see substantial economic and social improvements.
If our employment gaps for disabled people and older people improved from being mid-table to just being at the bottom of the top quarter of developed economies then that would mean nearly a million more people in work than now and an employment rate of just over 80% – with nearly 600,000 more disabled people and 350,000 more older people in work.
James:
This would certainly help to quell the labour and skills shortages, with its knock-on effects on wage and price inflation, that we are currently facing. So how do we go about doing better?
Tony:
High-quality employment support can help meet these challenges, and is a key supply-side policy for supporting economic growth, raising productivity and reducing inequalities.
The UK’s current employment support has its strengths, including the capabilities of work coaches, but it could be doing far more to provide wider support to groups other than those who are claiming benefits and are required to look for work, to support employers to fill their vacancies and fulfil their other needs, and to improve on partnership working with other local and national services.
Read more: Are you looking to make better decisions, faster? Speak to one of our team about Adzuna Intelligence; your trusted source for labour market insights with granular location-level data across key facets such as industry, salary, occupations and more…’
In collaboration with Daniel Muir, a Research Economist (Fellow) at IES.
IES is an independent, apolitical, international centre of research and consultancy in public employment policy and HR management. It works closely with employers in all sectors, government departments, agencies, professional bodies and associations. IES is a focus of knowledge and practical experience in employment and training policy, the operation of labour markets, and HR planning and development. IES is a not-for-profit organisation.