Chapter 2: Labour shortages—an overview of the problem
11.Labour shortages occur when the supply of labour is low relative to demand and are typically evidenced through a high number of job vacancies or from employer surveys highlighting recruitment difficulties.
Vacancies
12.The number of job vacancies in September to November 2022 was 1,187,000, which is 65,000 lower than the previous three-month average in June to August 2022.18 However, the number of vacancies in the latest three months are 364,000 higher than before the COVID-19 pandemic (in December-February 2020).
Figure 1: The number of job vacancies
Source: 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]
13.Figure 2 shows how during the lockdown periods the number of vacancies dropped sharply in a range of sectors, especially hospitality. Following the easing of lockdown restrictions, the number of vacancies in the hospitality sector increased by a larger proportion than other sectors. There may be some sector and geographic causes for the rise in vacancies. For example, we heard that property prices in regions such as the Lake District are limiting the pool of available lower wage labour in sectors such as hospitality.19 However, high housing costs were an issue pre-pandemic.
14.This increase in vacancies can partly be explained by an increase in consumer demand. Lauren Thomas, Economist and Senior Data analyst at Glassdoor, a job review website, told us:
“During coronavirus, there was a lot of pent-up demand that led to a quicker than expected surge in consumer activity after the pandemic … We were all cooped up and we did not have the opportunity to go travelling, or to spend on hospitality.”20
Figure 2: Number of UK job vacancies by sector, indexed to January 2019
Source: Written evidence from Glassdoor (ULS0004)
15.The Bank of England said that between March 2020 and November 2020 households saved an extra £125 billion.21 This increased to over £200 billion by June 2021.22 This was because of restrictions on social contact and economic activities leading to significantly reduced household spending.23 Once the economy came out of lockdown, there was a steep decline in households’ rate of saving as consumption rose sharply.24
16.High levels of vacancies for a period after the easing of lockdown restrictions may also have been related to a high number of people changing jobs. People who were unable to move jobs during the COVID-19 pandemic made up for it in large numbers afterwards.25 Job-to-job moves tend to create further vacancies as employees leave their old posts behind. Huw Pill told us, “not only is the vacancy rate high but the hiring rate is high. That is symptomatic of the fact that we are seeing more churn in the labour market.”26
17.Figure 3 shows this increase in job mobility rates, with more people moving between jobs—measured through employment to employment (EE) flows.
Figure 3: The quarterly rate of job-job moves for the population aged 16-64
Source: Office for National Statistics, ‘X02: Labour Force Survey Flows estimates’ (15 November 2022): https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/labourforcesurveyflowsestimatesx02 [accessed 14 December 2022]
Labour supply
18.However, we heard that, while short-term increases in vacancies may partly have been driven by pent-up consumer demand and job-to-job turnover, changes in labour supply are also likely to have been a major factor. Donald Houston, Professor of Economic Geography at the University of Portsmouth, said: “The current vacancies crisis seems to be driven principally by a reduction in labour supply.”27
19.Prior to the pandemic, labour supply had grown due to net immigration, increases in the state pension age and higher participation of women in the workforce, which more than offset the impact of an ageing population on labour force participation. This increase in economic activity has been reversed since the COVID–19 pandemic. A small component of this change may have been predictable, for example as the state pension age for women stopped rising. This does not, however, explain all the changes, for example the change in inactivity among men for whom there were no state pension age changes prior to the pandemic.28
20.Changes to migration trends following Brexit and during the COVID-19 pandemic have disrupted the growth in labour supply for some sectors, by changing the skill structure of the migrant population. This will be explored further in Chapter 4.
21.However, Lauren Thomas and Kate Shoesmith, Deputy CEO, Recruitment and Employment Confederation, told us that a reduction of labour supply, due to more people becoming economically inactive, is the main cause of labour shortages. The rise in economic inactivity will be covered in the next chapter.29
22.The COVID-19 pandemic reduced the ability of households purchase goods and services and caused employees to delay job moves. When lockdown restrictions were eased, pent-up consumer demand and labour market churn caused vacancies to increase to record high levels
23.However, the tighter labour market has also been due to lower labour supply. In the current circumstances, the reduction in labour supply, especially due to economic inactivity, is probably playing a more significant role than pent-up demand and churn.
18 Office for National Statistics, ‘Vacancies and jobs in the UK’ (December 2022): https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/latest (this number is an average over the three months) [accessed 14 December 2022]
21 Bank of England, ‘Monetary Policy Report’ (February 2021): https://www.bankofengland.co.uk/monetary-policy-report/2021/february-2021 [accessed 12 December 2022] and Bank of England, ‘Thirty years of hurt, never stopped me dreaming: speech by Andy Haldane’ (30 June 2021): https://www.bankofengland.co.uk/speech/2021/june/andy-haldane-speech-at-the-institute-for-government-on-the-changes-in-monetary-policy [accessed 12 December 2022].
22 Ibid.
23 Office for National Statistics, ‘Economic modelling of forced saving during the coronavirus (COVID-19) pandemic’ (6 June 2022): https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/articles/economicmodellingofforcedsavingduringthecoronaviruscovid19pandemic/2022–06-06 [accessed 9 December 2022]
24 Bank of England, ‘The inflationary consequences of real shocks: speech by Ben Broadbent’ (20 October 2022): https://www.bankofengland.co.uk/speech/2022/october/ben-broadbent-speech-at-imperial-college-the-inflationary-consequences-of-real-shocks [accessed 9 December 2022]
28 Office for National Statistics, ‘Employment in the UK: November 2022’: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/employmentintheuk/latest [accessed 9 December 2022]