Simon French: The Times Column: Solving the labour shortage is key to avoiding a deep recession

The UK looks set to have a shrinking economy during the second quarter of 2022. The contraction in Gross Domestic Product (GDP) during April, announced yesterday, is likely to supplemented by a slowdown in June due to the Platinum Jubilee bank holidays. This will leave the UK devoid of any real growth momentum heading into the second half of the year. Whether this slowdown translates into successive quarters of negative growth – commonly referred to as a recession – looks set to hinge on the labour market. Can demand from employers remain elevated, the scourge of unemployment be avoided and, crucially, can the widespread shortage of workers begin to ease? 

At first glance the signs from the labour market are encouraging. They are the government’s first line of defence when challenged on its recent economic achievements. Record payroll employment – even if total employment remains half a million below pre-pandemic levels due to a collapse in self-employment – suggests that work remains readily available for all in the UK economy who want it. Vacancies, often a timelier indicator of labour demand, are also close to an all time high. If the deep UK recessions of the past are synonymous for many Times readers with three million unemployed and a 10% unemployment rate, then this backdrop seems a long way off. There are also few signs of an imminent collapse in employee demand that would follow from consumers slamming their wallets shut or businesses paring back investment plans. A few isolated examples of job losses in online consumer services – amongst companies such as the buy now, pay later fintech, Klarna – may yet be the “canary in the mine”. However, at this stage these feel more like a function of adjusting to post-pandemic consumer patterns rather than a broad-based labour market reversal.

Digging deeper into the employment data, and in recent conversations with leaders in the recruitment industry, the problem is clearly supply, not demand. A broad-based inability to find workers is holding back the economy. Long order books are not the boon for economic growth and profits if they cannot be fulfilled. If the UK economy is to avoid recession later in the year this largely domestic impediment needs to improve, and fast. 

Current worker shortages have their roots in a confluence of at least five factors. Together these have left the UK economy with up to a million fewer workers than would have been expected had pre-pandemic trends continued.

Firstly, and by far the most worrying, are the number of working age Britons now reporting themselves as inactive due to long-term health conditions. In the latest labour market data around 2.3 million Britons reported themselves as inactive due to long-term sickness. This is around a quarter of a million higher than was the case before the pandemic hit. Characterising this as Long-COVID is also an oversimplification. Qualitative data suggests this is both the direct health impacts of exposure to the COVID-19 virus – but also the impact of lockdowns on pre-existing illnesses, including mental health, that are proving considerable barriers to returning to work. Whilst it is headline-grabbing for lobbyists and politicians to plea for reduced taxes, a more sustained impact on trend UK growth would be greater focus on reducing the backlog of occupational health cases.

Secondly, workers over the age of fifty have withdrawn from the labour market in record numbers over the last two years. This has reversed considerable progress in older worker participation over the last two decades. If pre-pandemic trends had continued there would be 11.4 million workers aged over the age of 50 in the UK workforce. Today there are just 10.5 million. Fears for health risks in the workplace given the age-related severity of COVID infections have played a big part in this reversal. Older workers have, so far, shown limited signs of returning to work as COVID risks diminish.

Thirdly, and linked to the decisions of older workers, has been a broader reappraisal of the work that workers are prepared to do, and how they are prepared to do it. This has stemmed from a combination of more remote working as well as workers reassessing their choices during lockdowns that left them with more thinking time. This has generated heightened flux, dubbed in some quarters as the “Great Resignation”, or at the very least a great rotation.  

Fourthly, the impact of an air pocket of licensing in heavily regulated parts of the labour market has limited these sectors’ ability to scale up as the economy has reopened. From the security clearance needed for airport operations, the licences needed for HGV drivers to the passports required for international travel – the ramp up in demand in these sectors has been impaired by the lag times of these regulatory activities so crucial to fulfilment. 

Finally, and most politically contentious, has been the changing composition of inward migration to the UK. The tightening of access thresholds for EU nationals and loosening of access for non-EU foreign nationals has changed the make-up of external labour supply – so often a pressure release valve for UK employers. According to the ONS there are now 9% fewer workers in the UK who were born in the EU-27 compared with pre-pandemic. By contrast workers born in countries outside the EU are up 4%. Nigerian, Indian, Pakistani and Filipino nationals are central to this increase. Recruiters have gradually responded to this change but there should be little surprise that this flux has generated a slowdown in candidates being matched to job vacancies.

Collectively this is a damaging cocktail of supply constraints – impairing the ability of the UK economy to grow through a cost-of-living crisis. However, it is also a largely domestic economic story that our policymakers have the power to address. This is in sharp contrast to the supply disruption from events in Russia, Ukraine and China. Jawboning about events beyond the UK’s control risks diluting the focus on making the UK domestic economy more efficient. That efficiency is key to avoiding a fast economic recovery morphing into a deep recession.

Simon French

Managing Director, Head of Research