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The UK’s workforce is being squeezed on multiple fronts – government and business must respond

The rise in inactivity poses serious challenges to the UK economy (Adobe)

4 min read

Since the start of the pandemic, economic inactivity has increased by about 570,000 people, as seen in the ‘help wanted’ signs on high streets across the country.

The Lords Economic Affairs Committee recent inquiry sought to understand who had left the labour market and why, alongside identifying why the UK is almost alone in developed countries to be facing this issue.

These are important questions. The rise in inactivity poses serious challenges to the UK economy. Shortage of labour exacerbates the current inflationary challenge; damages growth in the near term; and reduces the revenues available to finance public services, while demand for those services continues to grow. To help to limit, or reverse, the impact of a tight labour market we felt it was important to fully understand the driving forces.

The Committee found that, over the past three years, the UK’s workforce has been squeezed by four factors: retirement among those aged 50-64; increasing sickness; changes in the structure of migration; and the impact of an ageing UK population.

Importantly, we identified that whilst previous inferences from data suggested that an increasing rate of sickness had driven economic inactivity, most of this rise was amongst people who were already inactive and therefore it was not the biggest driver in the changing trend. The population is getting sicker and that is concerning, but early retirement is the biggest contributor to the rise in inactivity since the pandemic.

It is unclear why earlier retirement has risen. One possible explanation is that the impact of lifestyle changes during the Covid-19 pandemic, including the furlough scheme and increased redundancies, could have prompted some people to consider earlier retirement. Other possible explanations include increased savings during the pandemic and the UK’s pensions flexibilities, which could have enabled earlier retirement.

“The population is getting sicker and that is concerning, but early retirement is the biggest contributor”

Many have instinctively attributed some of the labour shortages to changes in the rules around migration since the UK left the EU. At a macro level the departure of EU workers has been counterbalanced by the arrival of non-EU workers but, the change in structure has created a mismatch in the labour force.

By prioritising skilled workers this has accentuated vacancies and labour shortages in certain sectors, such as agriculture, whilst not being the root cause for the decrease in available labour across the board.

Underlying all these changes since the start of the pandemic is us getting older. The nature of demographics in the UK means that there is an increase in the proportion of the population in age groups which have lower participation rates. Before the pandemic, this impact was largely offset by higher participation of older workers, but this is no longer the case. Whilst this is a slow-moving effect that cannot explain why we’ve seen such a change since the pandemic, it is vitally important that government and businesses respond to it.

 

 

Overall, our report clarified what is contributing to the rise in economic inactivity, but this understanding alone will not solve the UK’s labour shortages. What does this mean for the Department for Work and Pensions review into workforce participation?

With the majority of those over 50 who have left the workforce since the Covid-19 pandemic saying that they neither want nor expect to return to work (although they may yet feel the full a further impact of the cost-of-living crisis) the Department must work with urgency to establish the next steps for Government and businesses.

Lord Bridges of Headley is a Conservative peer and chair of the Economic Affairs Committee.

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