Sunday, December 11, 2022
How to fix a labour market that has stopped working
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

It has been a momentous year in many respects, some good, plenty bad. For Britain’s labour market, it has been mostly bad. For years, a flexible labour market had been one of this country’s great advantages. It delivered a rise in the number of people in employment of four million, or 14 per cent, between the start of 2010 and the end of 2019.

A year ago, there was relief that the end of the furlough scheme was not followed by a significant rise in unemployment. Strikes were such a rarity that the Office for National Statistics had suspended publication of the monthly figures for industrial disputes in the pandemic. Labour shortages were starting to emerge in some sectors, but they appeared to be a temporary, post-pandemic phenomenon and not particularly out of the ordinary.

Today, things look different. Strikes, concentrated in the unionised public sector and former nationalised industries, have begun to do serious damage and tell of a country that does not seem to work anymore. We have not seen a concentration of strikes like this since the winter of discontent of 1978-9, which helped bring down the government of the day.

Labour shortages are rife, preventing businesses that want to expand from doing so and forcing plenty of others to limit hours of operation. According to the latest Recruitment and Employment Confederation/KPMG report on jobs, permanent job placements have fallen for the second month in a row, as candidate availability continues to fall because of “tight labour market conditions, fewer foreign workers and a greater hesitancy among people to take up new roles due to increased economic uncertainty”.

The number of working age people (officially measured as those aged 16-64) who are economically inactive is up by more than 600,000 since early 2020. Michael Saunders, a former member of the Bank of England’s monetary policy committee, now with Oxford Economics, estimated in a recent commentary for Oxford that the workforce is a million smaller than pre-pandemic trends would have suggested.

In sharp contrast to the strong employment growth of the 2010s, the UK now has the weakest record in the G7 and as the Institute of Employment Studies (IES) points out, has tumbled from sixth to 12th place for employment rates (the proportion in work) among OECD countries.

If the pre-pandemic trend had persisted, the total number of people employed might have been expected to rise by about a million over the past three years. As it is, the actual figure shows a drop of 300,000. Even allowing for the damage from the pandemic recession, this is a very weak performance.

We will get new figures from the Office for National Statistics on Tuesday, though employment has been flat at best since the spring. UK employment is down by about 1 per cent since before the pandemic, compared with a rise of 2.1 per cent for the EU, 1.6 per cent for Germany and 1.5 per cent for France. If employment is now turning down, we may not get back to that pre-pandemic employment level for some time.

What can be done about our dysfunctional labour market? Starting with strikes, each differs in the detail, but the root cause is similar. For public sector workers, and for those where the government stands behind employers, such as the railways, the biggest falls in real wages are happening.

A situation in which private sector pay is rising by rising by nearly 7 per cent a year against public sector pay of 2 per cent would not be sustainable in any circumstances, let alone when inflation is in double figures.

A government that, admittedly under a different prime minister, was willing to announce big unfunded tax cuts will have to find more money for public sector pay settlements. A 19 per cent pay increase, demanded by England’s nurses, is impossible to justify. A 7.5 per cent increase, which the Scottish government has offered to its nurses, avoiding strike action, is not.

There is little danger that higher public sector pay settlements would trigger a wage-price spiral. Rather, it would be public sector pay rises catching up. The government wants to limit strike action by essential workers by legislating for minimum levels of service but that is a long way down the track and of little relevance to current disputes. The Treasury, of course, gets back some of the cost of higher public sector pay awards in tax and national insurance. Bigger public sector pay increases would flow directly into the economy in these recessionary times.

Where wage negotiations are bogged down by attempts by employers to push through changes in working practices, it would be better if these were delayed. There will be time to revisit these when inflation is back down to 2 per cent. Negotiating such changes when inflation is 11 per cent is not a good idea.

As for rising inactivity and labour shortages, the worst thing would be to assume that it will all be self-correcting. There is a clear Brexit impact, as noted by Huw Pill, the Bank of England’s chief economist, a few days ago. Worker shortages had been avoided in the past because they were “met by the inflow” of EU migrants. Now that is no longer the case, though there is a flow of migrant workers from the rest of the world.

Even these, part of the government’s ambition to attract the best of the global talent pool, are far from guaranteed. A survey by the Institute for Management Development (IMD) showed that this country has dropped down the league table as an attractive location for international executives, partly for quality-of-life reasons.
Brexit is one reason why the UK is an outlier when it comes to employment performance since the pandemic. But there may also be a contribution from other factors, including the policies designed to fight the pandemic.

The furlough scheme, a first for the UK, achieved its main aim – at considerable cost – of preventing what could have been a huge rise in unemployment during the pandemic. But there are growing suspicions that it may have contributed to the rise in economic inactivity.

This may have been as simple as giving older workers, those most responsible for the rise in inactivity, a rehearsal for retirement. But also, as Tony Wilson, director of the IES, points out, the furlough scheme was “passive and prolonged”.
Other countries combined their pandemic job support with “active” measures to encourage workers to train or re-train rather than just sit and home, notably France. Some tried to anticipate the changes in job demand.

Most had previous experience with furlough-type schemes. For the UK it was novel. As Wilson notes, people were “parked in furlough” with few obligations on them or their employers.

Re-establishing the flow of EU migrants is not an option, at least in the short-term. Getting the newly inactive (and some of those inactive longer-term) into work, notably those not suffering from long-term ill health, must be a priority.

Governments used to do this in response to high unemployment. Now they need to do it in response to rising inactivity, its 2022 equivalent. Both Wilson and Saunders emphasise that there is no shortage of potential “active” labour market measures, as used by other countries and recommended by international bodies.

The labour market needs some help, a necessary element of supply-side policy to boost long-run economic growth. Doing nothing is not an option.