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Deloitte: unemployment peak flattens as labour market evolves

Author: ICAEW Insights

Published: 09 Jun 2021

Ian Stewart, Deloitte's Chief Economist in the UK, believes the job market has surpassed resiliency estimates as the OBR now predicts an unemployment peak of 6.5% from the pandemic, down from the 12% forecasted last year.

Among the many unusual features of the COVID-driven recession, perhaps the most striking is the resilience of the jobs markets. Unemployment rates have risen, but far less than had been feared based on the experience of recent recessions, stated Ian Stewart, Deloitte’s Chief Economist in the UK. As part of the Big Four firm’s weekly insight, Stewart unpicked what the surprising unemployment data means for the UK job market and how different age groups, sectors and nationalities are affected.

“The UK unemployment rate has risen from a low point of 3.8% before the pandemic to 4.8% now,” said Stewart. “Roughly 3.4m people are still on furlough and as the scheme is unwound, the Office for Budget Responsibility expects UK unemployment to peak at 6.5%. This compares with an OBR estimate of a peak of 12.0% last year and an actual peak of 8.5% seen after the 2008 recession. For a downturn of historic proportions, the UK is heading for a remarkably low peak in unemployment.”

In the UK, the furlough scheme has supported one in three jobs, around 11m in all. Many businesses have found ways to keep operating during lockdowns, through remote working, social distancing or by moving into new types of business. Stewart believes that decades of labour market reforms and changes in the structure of work have created more flexible labour markets, which are more able to manage shocks. The move to working from home is the most striking example cited by the Deloitte economist.

Overseas workers

Stewart believes that a dramatic reversal in immigration has also played a big role in flattening the unemployment spike. About 650,000 overseas workers have left the UK since the first quarter of last year. This is a huge shock to a labour market in which overseas workers have long played an outsize role. It is a measure of the scale of the shock that Britain’s overseas-born workforce has shrunk by almost 20%, reducing the total labour force by 2%.

He added: “While the number of foreign workers has declined, employment of UK-born workers rose by around 100,000 to record levels last year. This is the exact opposite of what happened in the financial crisis; it hardly dented the growth of employment among foreign workers but shrank the UK-born workforce by around 500,000. Just as job growth in hospitality, recreation and retail was accompanied by rising levels of migration so the knock to these sectors last year has disproportionately affected foreign workers.”

Young workers

The worst recession in British economic history has been accompanied by rising employment among UK workers and growth in full-time jobs, which Stewart finds ‘extraordinary’. Leaving aside those on furlough, the effects of the pandemic have been felt most acutely by foreign workers, those in part-time work, the self-employed and, above all, younger people.

“The unemployment rate for 18-24-year-olds stands at 13.3% and over 250,000 more young people are claiming benefits now than in January 2020. The dearth of opportunities has encouraged many young people to stay in or return to college or university. Applications for teaching and nursing courses have surged,” he said.

A push for full-time Brits in work

Relative to the past and the rest of Europe, the UK has high levels of workforce participation among women, older workers and the young. But there are still significant numbers of people in these groups who might be tempted into employment.

Stewart pointed out that: “In the absence of a plentiful supply of EU labour, and with migration policy favouring those with higher skills, employers will need to pitch jobs to a broader home market. Competition is already having this effect, with some smaller pub chains offering full-time jobs instead of part-time work to attract staff.”

What does the future hold?

Job prospects are set to improve further. Economists expect to see unemployment fall next year with a tight labour market pushing average earnings up by 4% this year and 3% next. The steady rise in the minimum wage, which has nearly doubled in real terms since 1999, and is set to rise by a further 10% in the next three years, has lifted prospects for those on lower levels of pay.

Stewart concluded: “The period after the financial crisis was marked by low levels of unemployment and surprisingly sluggish wage growth. The post-pandemic era looks set to deliver low unemployment; this time coupled with rising wages.”