MNI INTERVIEW: UK Participation Rate Fall Sticky - OBR Miles

Increased economic inactivity in the UK is largely due to the rise in long-term sickness and the hit to labour supply looks unlikely to be reversed rapidly enough to have any influence on near-term monetary policy setting, David Miles, a senior official at the Office for Budget Responsibility and former two-term Bank of England Monetary Policy Committee member told MNI.

The decline in labour force participation has been a post-pandemic puzzle for the BOE, often referred to by Governor Andrew Bailey. But detailed work by the OBR suggests that the inactive are unlikely to return to work in sufficient numbers, even if health care provision is speeded up, to make any real difference to labour supply and policy setting.

The OBR explored whether a rapid reduction in health service waiting lists would eat substantially into the stock of inactive people.

"We spoke at length to the experts in the health department and the Chief Medical Officer about the kind of things that might get people back into labor force very quickly. Our best guest was that the vast majority of people who are isolated for self-reported health reasons were not the sorts of people who could get something fixed and then and say ‘OK, now I can go back into the labour force’," Miles said.

SUPPORT SYSTEMS

Going forward, changes in the benefits system and employer support to stop workers dropping out in the first place are likely to yield better results than trying to get the currently inactive back to work, Miles argued, but those effects would take time to materialize.

"Stopping people getting to the point where they're sufficiently ill that they drop out of the labour force is probably far more powerful in the long-run than looking at people who are already out of the labour force, may have been out of it for two or three years or more. Trying to get them back into the labour force is a much more difficult thing," Miles said.

"The numbers are sufficiently large that they have an impact on the total size of the labour force and, therefore GDP and, if you are looking at the fiscal position five, ten years down the road, yeah, I think it is material. Is it going to change the settings of monetary policy over the next 12 months? It is hard to see that,” he noted.

NO BOE QT POLICY IMPACT

The OBR's Fiscal Risks report, published July 13, also looked into the sharply rising projected cost of the BOE's unwind of its asset purchases, with estimated losses from gilt sales GBP55 billion higher than the GBP63 billion previously assumed.

Miles stressed that the projected losses should have no effect on either the pace of asset sales or on reserve remuneration, and ending the latter would just be a covert tax on banks.

"The idea that if the Bank follows a particular time profile for the running off of the stock of debt that's going to cost less, or make more money, would only be true if the central bank in making its decisions has an ability in some sense to outsmart the financial markets,” he said.

“You would be thinking of the Monetary Policy Committee as a super hedge fund that can outsmart the markets and .. they are not,” he added.