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SSomething strange is going on in Britain’s job market. Even as unemployment is near its lowest level since the mid-1970s and businesses across the country struggle to hire enough staff to fill roles, increasing numbers are leaving the workforce altogether.
The rise of economic inactivity — when working-age adults are neither employed nor looking for one — is one of the biggest challenges facing the economy as the country grapples with the twin dangers of hyperinflation and weak economic growth. Both are affected by the loss of more than 600,000 “missing workers” from the Covid pandemic.
According to experts at the Institute for Employment Studies, the most recent official figures from the Office for National Statistics put the number of people leaving work for unemployment below one million for the first time on record. More than twice as many quit because of economic inactivity, meaning they’re not only not working, they’re not even looking for a job.
More than 9 million people between the ages of 16 and 64 are now out of the labor market altogether, a group made up of students, those with long-term health conditions, early retirees and those caring for young children or elderly relatives.
No other advanced economy has failed to bring employment back to its pre-pandemic levels, with the UK at the international level. It’s a trend that has puzzled leading economists. It’s a conundrum because, in theory, offering higher wages – with the worst impact on living standards since the middle of the last century – would bring more people back into the labor market.
Simply put, if people are not working, how are they coping with the cost of living crisis?
The government has launched an inquiry in search of some answers, while economists around the world are examining the question. Business leaders fear that Rishi Sunak has so far failed to grasp the gravity of the situation.
Economists see a mix of reasons behind the trend, with positive and negative factors driving people out of the job market. Many people will happily work if their circumstances permit. For others, work is a four-letter word they’ll forget.
One of the main drivers identified by economists is Britain’s haphazard public services. Long NHS waiting lists, inadequate support for people with health conditions and disabilities as well as prolonged covid are frequently cited. Lack of affordable childcare and support for elderly relatives, or refusal from employers to offer flexible working, are other frequent complaints.
It is this group that has grown the most since the coronavirus pandemic, reaching record levels, with more than 2.5 million working-age adults chronically ill. According to Andy Haldane, former chief economist at the Bank of England, for the first time since the Industrial Revolution, health benefits that helped boost the size of the workforce have reversed. Part of this is due to the continued erosion of public services after 12 years of Conservative government. It’s a trend that has been exposed as a fictional Tory dogma that shrinking the state is always positive for the economy.
At the other end, the boom in early retirement suggests that a growing number of over-50s feel financially secure enough to leave work. After years of rapid home price growth, for those lucky enough to pay off a mortgage, it makes perfect sense to leave the rat race.
ONS surveys show that most 50- to 65-year-olds who have given up work since the pandemic own their homes outright and are more likely to be debt-free. Places where economic inactivity has increased are generally richer. The UK’s biggest jump since the end of 2019 has been in Chichester, West Sussex, followed by parts of Devon and Surrey. However, there has also been growth in places like Preston and Mansfield – areas with similarly aging but less affluent populations.
After the shock of the Covid pandemic, our working lives may be re-evaluated. The ONS said people nearing 50 were more likely to consider returning to work after their early retirement. However, there is a preference for more flexible hours, better pay and the ability to work from home.
Some critics suggest that welfare has played a role, with the Observer showing that more than 5.2 million people receive out-of-work benefits. The obvious suggestion is that life on the dole has become more preferable to work, and that reducing benefits or limiting eligibility could alleviate the UK’s worker shortage.
However, the figure ignores that around 3.3 million of these claimants were either on incapacity benefits or had “no work requirement” under the Universal Credit system. This means they are exempt from looking for work because they have a disability, care responsibilities or are over state pension age.
It is also based on the assumption that spending less than £400 a month for an adult over 25 is enough to keep millions out of selective work. This figure is close to 10% of average wages, making it one of the least generous out-of-work benefits in rich countries.
Even after the government announced it would increase benefits by the rate of inflation from April – an increase of more than 10% – the base rate will still remain at its lowest level in real terms for 40 years. This “barely clears the level of destitution for some adults”, according to the Joseph Rowntree Foundation, a charity working to tackle UK poverty.
What is clear is that worker absenteeism is a huge problem for the UK. In the decade leading up to the Covid pandemic, the economy benefited from rising workforce participation, while productivity increased. Now, without sufficient growth in the workforce or improvements in productivity, Britain is stuck in a cycle of low growth.
To avoid that, employers will need to do more to attract people back to work – through higher pay and flexible and better working conditions. Government must also play a role, with more investment in training, employment support and improving public services so people can be supported to work. Failure to act will condemn the country to its current development trap.
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