More UK workers are retiring early, complicating life for the BOE.
An exodus of older workers from the UK labour force is likely to persist, tightening supply side constraints for an economy already facing high inflation and complicating Bank of England monetary policy, associate director at the Institute for Fiscal Studies Jonathan Cribb told MNI.
The UK workforce has shrunk by 450,000 since 2019, the last year before the start of the Covid pandemic, a fall described by BOE Governor Andrew Bailey as very large by historical standards, and an study IFS of survey data found that much of this shift was driven by early retirement. Past evidence shows that those who retire are unlikely to return to work, a troubling finding for the Treasury which faces a permanent loss of tax revenue and for the Bank of England as it considers how to respond to a tight labour market and surging inflation.
“If this was about labour demand, people losing their jobs in the pandemic, (if) they got a bit discouraged from looking for work, that would suggest that it would unwind itself a little more easily because of very high rates of vacancies,” Cribb said in an interview.
“The implication would be that there is a little bit less supply in the economy so what are you going to do about interest rates to balance aggregate demand and aggregate supply?” he added. (See MNI INTERVIEW:Shrinking UK Labour Pool Risks Wage Price Spiral)
Post-pandemic early retirement appears to be much more pronounced in the UK than in other advanced nations, with the number of economically inactive people jumping 3% since 2019, and 43% of this increase driven by changes among 50- to 69-year-olds. Cribb said this could be a product of changes to retirement rules allowing workers early access to pension pots.
“One potential reason why it could be different here to continental Europe is that we have … a more flexible pension and retirement income system. We rely a lot on private saving or private pension or occupational pensions … In places like France and Italy people’s pensions are almost entirely through the state and they have earnings related pensions there,” Cribb said.
“Historically, we would expect a lot of these changes would be permanent. Once people have left the labour force around these ages and retired, they might do a little bit of work here and there, but particularly not returning to a full-time job or even a concrete part-time job.”
This time, though, it is possible that high inflation may drive some retirees back to work.
“Very few people right now are very well inflation proofed,” Cribb said, noting that state pensions were uprated in line with consumer prices in September when the relevant rate was just 3.1% while the BOE now forecasts 11% inflation in October. Private pension incomes are also rarely inflation protected.
“Maybe that will mean some people will be encouraged back into work,” according to Cribb. “That said, lots of people in their 50s and 60s do have quite a lot of accumulated wealth and if they have decided their life is better off having a bit more leisure and not working maybe the change won’t be so big.”