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MNI INTERVIEW:Shrinking UK Labour Pool Risks Wage Price Spiral

MNI (London)

Wages could start to rise sharply within months, according to the director of the Institute for Employment Studies.

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A significant number of working age people appear to have left the UK workforce permanently, increasing the risk of a mild wage price spiral, Tony Wilson, Director of the Institute for Employment Studies and previously an employment and skills specialist in the Treasury and Department for Work and Pensions, told MNI.

Many older women employed in sectors such as cleaning, particularly hard hit by the Covid pandemic as offices emptied, appear to have drifted off into retirement. Even if participation picks up again, it may do so from a lower base rather than returning to its previous trend, Wilson said.

“I would definitely say that there is enough evidence now that there is a cohort of people who have left permanently. As a consequence, we will just end up with a smaller labour market,” Wilson said.

If the labour market shrinks in line with the economy that would not add to pressure on wages but Wilson, noting that over 100,000 fewer women were working in cleaning than pre-pandemic, said he was concerned it could be “quite a lot smaller.”

Around three quarters of the missing cleaners were working part-time, and it is not clear that these jobs will come back.

“I think many of them may well just drift into retirement,” Wilson said.

PAY TO RISE SHARPLY

The annual government study of older workers, published in September, noted that the UK has both an ageing workforce and lagging participation rates among older workers, with the employment rate gap between those aged 35 to 49 and 50 to 64 widening from 12.9 percentage points in 2020 to 13.9 points in 2021.

The Bank of England in its November Monetary Policy Report forecast that potential labour supply would be around 1% lower by the end of the forecast period than it had assumed in August and cited the risk of “greater than expected upward pressure on wage growth from: a continuation of a lower availability of workers … due to a lower path for participation or migration.” This was despite controversially cutting its central earnings forecast for 2022.

“I think pay is going to rise sharply in a few months,” Wilson said, pointing to “energy bills rising really fast and goods inflation rising as well.”

The official fiscal forecaster, the Office for Budget Responsibility, predicted unemployment would go back above 5% but the latest data have shown it still declining. If the OBR has overestimated the level of slack then, even without the conventional mechanism of workers negotiating higher pay due to higher prices, wages could still spiral upwards.

“I think they are wrong on the level of slack … With less slack I think it is more likely there will be a wage price spiral,” Wilson said.

His comments came after criticism of the Bank of England for underestimating the potential for wage-price gains from economists including National Institute of Economic and Social Research Deputy Director and former senior BOE economist Paul Mortimer-Lee, as reported by MNI. (See MNI INTERVIEW2: BOE Too Optimistic On Inflation- Mortimer-Lee)

One offsetting effect is that the UK could see labour supply rise among the young who have opted to stay in education while doing less part-time work than in previous eras. As the economic recovery continues these people could be attracted into work.

Wilson noted that the very latest data is showing an increase in participation amongst people who are also studying. During the Covid crises, the proportion of young people in jobs hit a record low of 23% but has risen to around 28%, still low compared to some four-in-ten who were studying and working two decades ago.

“If it went back up to 40% … which would be a hell of a change, it wouldn’t happen straight away, there would be maybe 400,000 more people (from this segment) in the labour market than there are now,” Wilson said.