Summary
Since the start of the pandemic, economic inactivity has increased by 565,000 people.1 This is quite different from what has happened in most other developed economies, where inactivity rose during the COVID-19 pandemic but has since fallen back. Job vacancies have peaked at 1.3 million, and unemployment has fell to its lowest level since 1974.2 Meanwhile, there has been a fall of 171,000 in the number of EU workers but a rise of 186,000 in the number of non-EU workers.3
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.
This report seeks to answer the question “Where have all the workers gone?” Our answer is 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. This final factor—ageing—reflects an increase in the numbers in age groups which have lower participation rates. This is potentially a significant factor. Before the pandemic, this impact was largely offset by higher participation of older workers. But the reversal of the trend in inactivity, and the different experience of the UK, cannot be explained by slow-moving demographic effects.
The reduction in labour supply has been driven by an increase in economic inactivity, in particular amongst 50–64-year-olds who do not wish to return to work. The causes of this rise are complex. The biggest contributor to this rise in inactivity has been increased earlier retirement, not increasing long-term sickness as many people have inferred from the data. Although the population is getting sicker, much of the rise in sickness-related inactivity is among people who were already inactive, rather than people who were employed becoming inactive due to sickness.
Instead, the decision to retire earlier has been the key driver of the change in trend in inactivity since 2020. It is unclear why earlier retirement has risen. 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.
Alongside the rise in inactivity, changes to the structure of migration have had an impact on specific sectors seeking workers for lower paid roles (such as agriculture, hospitality and care). Over the last few years many EU workers, who filled these roles, have left the UK. Counterbalancing their departure has been the arrival of non-EU workers granted visas under the new immigration system which prioritises skilled workers. This has contributed to a mismatch within the labour force, accentuating labour shortages in these sectors.
Finally, the impact of the ageing UK population on the workforce has, and will continue to have, a long-term impact on the proportion of the population seeking work. Prior to the pandemic, ageing was driving down labour supply, but this effect was masked by other trends towards higher participation. The key difference since the pandemic is that the ageing effect is now being reinforced, rather than offset, by other factors. The impact of an ageing population as a contributor to the shortage of labour is a factor which has not received the attention it deserves.
Looking ahead, the majority of those over 50 who have left the workforce since the COVID-19 pandemic state that they neither want nor expect to return to work. From the limited information available on their economic resources, it appears that most of them are reasonably well-off, suggesting that retirement may be financially viable for them (although the cost-of-living crisis may yet have an impact). It would, therefore, be unwise to proceed on the basis that a significant proportion of those who have exited the labour force since 2020 will come back, or be persuaded back, by changes in employers’ practices or by policy measures.
In the 2022 Autumn Statement the Chancellor of the Exchequer announced that the Department for Work and Pensions will “thoroughly review workforce participation” and report in early 2023.4 This report underscores the urgency and importance of that review. In this report we identify gaps in our understanding of what is causing changes to the labour force. Understanding more about the causes, and likely persistence, of the rise in inactivity should be the focus of the Department for Work and Pensions’ review.
1 Office for National Statistics, ‘Employment in the UK’, (December 2022): https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/employmentintheuk/latest [accessed 14 December 2022]
2 Office for National Statistics, ‘Vacancies and jobs in the UK’ (December 2022): https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/latest [accessed 14 December 2022] (this number is an average over the three months) and Office for National Statistics, ‘Unemployment rate (aged 16 and over, seasonally adjusted)’, (December 2022) https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms [accessed 14 December 2022]
3 Letter from Mike Keoghan, Office for National Statistics to Lord Bridges of Headley, Chair of the Economic Affairs Committee (5 October 2022): https://committees.parliament.uk/publications/30455/documents/175679/default/ (this data relates to the period between June 2019 and June 2021)
4 HM Treasury, Autumn Statement 2022, CP 751 (November 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1118417/CCS1022065440–001_SECURE_HMT_Autumn_Statement_November_2022_Web_accessible__1_.pdf [accessed 9 December 2022]