MNI INTERVIEW: Pandemic Leaves UK Labour Market Less Slack

The largest single driver of the shrinkage in the UK workforce has been a rise in claims of ill health, potentially reducing measures of labour force slack being closely watched by the Bank of England as it tightens monetary policy, Stephen Evans, a former Treasury official now heading the Learning and Work think tank told MNI.

With a 1.1-million reduction in the workforce compared to pre-pandemic trends as well as 1.2 million job vacancies, determining how many former workers would be prepared to return to employment is a major question for the Bank of England as it tightens policy. But while 1.69 million of those not currently in the labour force have indicated a desire for some employment, many are dealing with health problems which might limit their contributions, Evans said in an interview.

This means the BOE, whose Chief Economist Huw Pill recently highlighted the Bank’s “big call” that labour market slack will re-emerge, pulling inflation back down in the latter part of its forecast, may have to contend with less slack than it might otherwise as it raises rates.

"When Mark Carney was Governor of the Bank of England, he said that we will have to start thinking about raising interest rates when unemployment gets below 7%. Here we are and it is 4 point something now. So, it is pretty difficult to estimate the natural rate of unemployment,” he said.

UNABLE TO RETURN FULL-TIME

There is evidence that many of those currently inactive are willing to do some work but not necessarily the full-time jobs being offered, Evans e said, noting that the biggest factor behind the contraction in the workforce has been a rise in older people citing disabilities or ill health. In addition, about a third of the 1.1-million decline has probably resulted from reduced net migration, with some of the rest coming from increased participation in education amongst the young, which has lowered the pool of workers for the hospitality sector.

“From the second half of 2021 onwards, the biggest growth has been in that over 50s group dropping out of the labour market and, particularly, a rise in people citing sickness and long-term health problems,” Evans said.

He is highly sceptical that the Great Resignation, the voluntary withdrawal of labour highlighted by some U.S. economists, is a key factor in the UK.

“The number of people citing early retirement has gone up a bit, but not massively, but most of it is long-term health problems," he said, pointing to survey responses.

There are “an increased number of people with mental health issues and there is general growth over time in long term health issues, partly because there is greater awareness and partly because of an ageing population as well,” he said, also noting physical health problems among former industrial workers.

JOB MISMATCH

High vacancy levels may highlight mismatches between work offered and sought.

“It sounds a bit weird to say that high vacancies may be a bad thing but I think to an extent they definitely are. There is this mismatch between 1.1 million fewer people in the labour market and about 1.2 million vacancies," Evans said.

The BOE is alive to the heightened uncertainty as it seeks to monitor potential inflation pressures from the labour market.

Its February Monetary Policy Report noted that the pandemic warned that the changing structure of the labour market “may make the experience of the past twenty years less relevant for the outlook of wages.”