Summary of conclusions and recommendations
Labour shortages—an overview of the problem
1.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 (Paragraph 22)
2.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. (Paragraph 23)
Economic inactivity—who has left the workforce?
3.The UK stands out among developed economies in having a growing inactivity rate and not reverting to its pre-pandemic trend. The recent increase in inactivity is also significant because it breaks from the historic trend of falling inactivity in the UK. (Paragraph 57)
4.While sickness is rising and does appear to be one factor contributing to higher inactivity, it is unlikely to have been the overwhelming driver of labour force exit that it first appears. Much of the rise in sickness-related inactivity is among people who were already inactive, rather than people who were employed then becoming inactive due to sickness. This points against expecting future improvements in health to feed quickly through into a reversal of recent increases in inactivity. (Paragraph 58)
5.The impact of long COVID-19 and NHS waiting lists on economic inactivity is unclear. We recommend that further work be carried out, as part of the Department for Work and Pension’s review into workforce participation, to understand the potential effect of NHS waiting lists and long COVID-19 on the labour supply. (Paragraph 59)
6.The evidence suggests that an increase in people retiring earlier has probably been a lifestyle choice for many, rather than a reluctant departure from the labour market. It is possible that people got used to different habits and ways of working during the COVID-19 pandemic, which prompted them to reflect on their careers. The longer-term question that the Department for Work and Pensions workforce review should address is whether future cohorts of older workers will retire earlier in greater numbers, or whether the pandemic cohort have experienced a unique set of pull factors into retirement that will not apply to their successors. (Paragraph 81)
7.Greater flexibility of pensions and a bigger role for private pensions may explain some of the difference in UK and European inactivity rates. Similarly, the design of the UK furlough scheme may have prompted people to experiment with retirement as a lifestyle. However, we received limited evidence to substantiate these claims. Further research should be carried out, as part of the Department for Work and Pensions’ review into workforce participation, to understand the potential link between different pensions systems and economic inactivity and the impact of the furlough scheme on inactivity. (Paragraph 82)
8.Although detail on the wealth of retirees is limited, the majority of those who have left the labour force to retire do not wish to return to work. It is not clear that measures taken by employers, or the Government would encourage them to return to work, given their stated attitudes. However, the Department for Work and Pensions should consider, as part of its review into workforce participation, what measures could be taken, whether by the government or employers, to encourage future age cohorts to remain in the workforce. (Paragraph 83)
9.More timely high-quality information on the wealth holdings of early retirees, such as that which will ultimately be available through the Wealth Assets Survey or the English Longitudinal Study of Ageing, would be very helpful in assessing the financial resilience of people who have recently retired. (Paragraph 84)
10.The ageing of the population is exerting a gradual downward pressure on economic activity and has reduced the economic activity rate for people aged 16 and over by 0.6 percentage points since the start of the pandemic. Prior to the pandemic, although ageing was pushing labour supply down, other factors were pushing it up—hence the overall decline in the inactivity rate. Since the pandemic, however, ageing has continued exert downward pressure on labour supply and other factors are now reinforcing that effect. A key finding of this report is that those other factors—notably earlier retirement—which are the prime reason why our pre-pandemic trend in inactivity has suddenly reversed: but, looking ahead, ageing will continue to exert a downward pressure on labour supply. (Paragraph 93)
11.Given the importance of the ageing of our population to economic forecasts, it is critical that the Bank of England and OBR understand more about the determinants of older people’s labour supply, especially health; pensions arrangements (including the minimum state pensions age); and the flexibility and impact of macroeconomic conditions in general, and recessions in particular. (Paragraph 94)
Migration
12.At an economy-wide level, it appears that a fall in the number of EU workers has been counterbalanced by an increasing number of non-EU workers. This means that, at a macro level, there has been no reduction in the number of immigrants to the UK. (Paragraph 104)
13.However, changes in the structure of immigration are contributing to labour supply problems. Some sectors, especially agriculture and hospitality which relied more on EU workers are experiencing acute labour shortages. The changing structure of migration may explain why there are vacancies in roles associated with younger workers despite much of the rise in economic inactivity being in those over 50. (Paragraph 105)
14.We heard that, if recent changes to labour supply persist, these sectors will find that their only options are to adapt by re-organising the way they produce their output (such as replacing labour through automation or changes to terms and conditions). To the extent that it proves impossible or too costly to adapt in those ways, these sectors will be smaller than they would have been, and some businesses will likely fail. We recommend that the government considers (for example, in the Department for Work and Pension’s review of workforce participation) which combination of these outcomes is likely to materialise; and whether any of those scenarios would elicit concern and a policy response. (Paragraph 106)