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Aiming for Growth in the face of a Labour Market Exodus

  • Posted By Ben Odams

Rather than talk about economic inactivity, we should focus on labour participation. This way, we can better consider what people need at different points in their lives and reshape approaches away from outdated unemployment models.

The use of a term like ‘exodus’ may seem a bit extreme, but the recent trends in economic inactivity have been nothing short of biblical in terms of the impact on a labour market that’s already at, or at least near to, full employment.

At around 1.27 million, the rate of unemployment is at its lowest since 1975:

[1]

The numbers of people who are considered inactive that want a job is also at a generational low:

[2]

Both charts are taken from the Labour Force Survey and show, in my opinion, near enough full employment. In such circumstances, the demand for labour is a serious issue presenting local economies with a challenge: how to support economic development, ensuring an adequate supply of skilled employees and guaranteeing that local areas benefit from the growth. The challenge right now is that the feeling of growth is being offset by inflation and general uncertainties around the cost of living.

How we deal with these challenges will shape the next couple of years as the hunt for ‘pro-growth’ fixes is set to dominate. One solution is instead to understand how the local workforce participates in the local economy, and how local approaches and policies can harness it.

 

Factors impacting the labour supply

The first thing to appreciate is that economic inactivity is not a problem per se; rather, it represents various groups of people who have different reasons for not working, but are also not classed as unemployed. The trend in economic inactivity has been a downward one for the last decade or so, yet historically it has remained reasonably level:

[3]

What this represents is a mixture of retirements, carers and students, who together make up a consistent body of people who are inactive. As I have said, this isn’t a problem, especially when you consider the costs of providing care; what we see here is a reserve population of labour. As the next chart shows, the composition of economic inactivity is being driven mostly by the long-term sick, rather than an explosion of over-50s taking up golfing.

We should be wary of jumping to too many conclusions about the above diagram, because it would be too easy to overstate the long-term consequences of what is clear a major economic shock from COVID-19. What we can say, however, is that the increases in economic inactivity offer a glimpse of the factors that can impact the labour supply, especially where there is not a ready supply of external labour which can be utilised. 

 

Why are the over-50s leaving the labour market?

Effectively the problem is twofold. Firstly, understanding the reasons why significant numbers of people have recently flowed into inactivity. Secondly, discovering what is needed to help those that want to get back into work.

This requires us to spend a moment looking at the over-50s. The following chart shows the percentage of people aged 50-64 who are economically inactive:

[4]

Clearly, there has been an increase of people leaving the labour market aged 50 and above, but this has still had less impact than the consequences of long-term ill health. Rather, we need to understand why this is happening. A recent study has found the following issues to be significant drivers for over-50s in terms of their likelihood to retire:

  • Significant negative attitudes towards their jobs are driving inactivity
  • Higher levels of financial comfort
  • Concerns over access to healthcare
  • Those with ill health, disabilities and caring responsibilities are more vulnerable
  • Those who own their home outright feel more secure about retiring[5]

None of these factors should be surprising, but they undoubtedly central to understanding what can be done in response. Firstly, it’s clear that there is a wealth element here: those who can afford to do so are retiring and are unlikely to come back, except in small numbers.

Secondly, those whose financial situation is less secure are likely to return to work, much like the long-term sick, who face this and other forms of precarity.[6] We should shape our responses to reflect the support needs of these groups.

 

How to address the workforce ‘exodus’

So, what should be done?

The first recommendation is a conceptual response. I would prefer we use the term ‘labour participation’ instead of ‘economic inactivity’.[7] For one thing, the idea of participation is something that can be supported, whereas the sense of being inactive just seems unnecessarily negative to describe a complex set of different groups of people and problems.

Linked to this, we know that:

  1. Healthcare is a critical factor for people across the working population
  2. Ageing cohorts have a noticeable impact, but our data is limited  
  3. Our current unemployment focus is possibly outdated


The response, then, is to shape our response accordingly:

  • We need better local data and insights about the impacts on sectors and industries
  • We must look at an employment support model that is supportive of different types of returning workers – focused initially on the long-term sick and returning older workers. This should identify specific training and support needs for both employment and self-employment


Longer term, the recent experience should shift local approaches to:

  • Addressing the question of how we maintain labour participation and support people through the work cycle
  • Considering whether labour participation is a better objective to measure, as it brings forward important discussions about pay, quality and progression

This is likely to mean a system which is local in delivery but will need to be based on:

  1. Proactive engagement: clear information and guidance
  2. Clear links to local labour market: making sure that support is into local jobs
  3. Simplifying the commissioning landscape:  to compliment national schemes and long-term projects
  4. Acknowledging progression rather than outcomes: if we set a target of X over-50s back in work we are going to be disappointed, but if we can improve participation then we may succeed.

Economic inactivity is not a problem; people lacking the preparation, support and access to participate in the economy is. Responding to such a challenge must include helping those who want to work to navigate the various systems, schemes and funds that are available. And this guidance has to be part of a wider approach to supporting the individual with their needs.



[1] LFS: Unemployed: UK: All: Aged 16+: 000s: SA: Annual = 4 quarter average - Office for National Statistics (ons.gov.uk)

[2] Inactive wants a job people: 000s - Office for National Statistics (ons.gov.uk)

[3] LFS: Economically Inactive: UK: All: Aged 16-64: Thousands: SA - Office for National Statistics (ons.gov.uk)

[4] From New data show signs of over 50s returning to the workforce | Institute for Fiscal Studies (ifs.org.uk)

[5] Beyond the great retirement | Phoenix Group (thephoenixgroup.com)

[6] Costly differences • Resolution Foundation    

[7] Not to be confused with Labour Participation measure.

Graph 1