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How do we fill the hole in our labour market?

Author: ICAEW Insights

Published: 21 Sep 2022

We’ve left the EU and dealt with a pandemic. How has this affected the labour market, and what can be done about it?

After the past few decades of a strong labour market in the UK, the three-pronged impact of COVID-19, Brexit and now the energy crisis have begun to unsettle a once stable and flexible workforce.

Fears of the widespread unemployment of as many as four million workers weren’t borne out during the pandemic thanks to historic government intervention, remote working, an adaptable workforce and swift adoption of technologies to work and shop.

Following the Brexit referendum in 2016, participation in the UK workforce had already tightened due to the loss of significant numbers of non-UK born workers. This, in turn, led to a recruitment crisis, which is now fuelled by the cost-of-living crisis.

Tony Wilson, Director, Institute for Employment Studies, says: “The main thing that we didn't really anticipate is this significant contraction in the labour force. That's mainly been because of higher economic inactivity. That has been driven by a lot of older people leaving the labour force, and more recently, worryingly, by large growth in people out of work with long term health conditions. The third factor, though, is this significant reduction in the number of non-UK born workers. And that's been happening since 2016 – since the day of the referendum.”

Since the pandemic hit our shores, the UK labour market has lost around 500,000 people. Nowadays, the UK population is older with a much smaller workforce. This is forcing employers to rethink recruitment and training strategies.

Ian Stewart, Chief Economist, Deloitte, says: “The really striking feature of the UK labour force in the last 20 years is very high levels of labour market participation. More and more people, particularly women and older people, have entered the labour market or stayed in the labour market.”

Other economic factors, such as an imminent recession, are coming into play that will further muddy the waters.

The unemployment rate fell to 3.6% in the three months to July, the Office for National Statistics data showed – the lowest since 1974. However, this does not suggest the economy is healthy. The Bank of England (BoE) said in its August report that “although the labour market may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023”.

The BoE said unemployment could reach 6.3% by 2025. This forecast is probably the worst-case scenario. If energy prices stabilise or fall by the middle of next year then the bank predicts that unemployment will not rise as much.

For now, official figures from the Office for National Statistics show that the number of job vacancies in June to August 2022 was 1,266,000, a decrease of 34,000 from the previous quarter, and the largest quarterly fall since June to August 2020.

Despite fewer people working, there are suggestions that the forecast recession, rising inflation and increased employer flexibility may encourage people back into work.

Stewart says: “With the greater flexibility that comes with more home working, some people who may have previously felt office working didn't suit them might re-enter the workforce.”

As well as greater employer flexibility through hybrid working, the CIPD labour market outlook, summer 2022, says it is seeing signs of increased training and development among employers in a bid to retain staff as well as recruit.

Jonathan Boys, CIPD Labour Market Economist, says in the report: “Employers are now more likely to say they plan to upskill existing staff in response to recruitment and retention difficulties. This is a positive step, as recent years have seen a decline in employer investment in training. In the battle to secure the labour supply needed to meet demand, retention is as important as recruitment.”

In nominal terms UK pay has been rising, but with inflation currently at close to 9% and rising, real terms pay is falling and few people – either in the public or private sectors – will secure a big enough pay rise to match the inflation rate. So, it’s up to employers to get more creative with recruitment and retention.

Wilson says: “Employers are realising that we either have to get a lot more productive with fewer workers or we need to be able to outcompete our competitors. We need to offer more money, more security or flexibility, better quality work, better support at work, better training.”

The CIPD suggests that reform of the apprenticeship levy, which has not achieved its goal, could help by aligning incentives and allowing organisations to spend the levy on training that suits their business’s needs.

Yael Selfin, Chief Economist at KPMG, says: “Businesses really need to focus on people much more in a world with a more restricted labour force. It is time to think about how they can retain and upskill their staff and look to get them to advance within the business, rather than have a very high turnover of staff – which we have seen in certain industries like hospitality – that may no longer be feasible.”

Wilson says that pre-2006 when the EU enlarged its borders, the UK managed to recruit enough workers into jobs such as fruit picking with seasonal job visas. That is an option for the future, but more technology investment will be needed in industries such as farming, while managing with fewer workers.

“Employers need to be more creative in having better co-investment and industry-led approaches to align business funding with government funding to boost intermediate training. And then we just need more support generally from employers around job quality, inclusive recruitment, job design, flexibility and job security. For some of this, we do need an employment bill to tighten up on labour market standards,” Wilson says.

As for the shortage in social care, Wilson says that requires better pay and improved working conditions because, although it’s relatively low skilled, it’s an important sector, especially with an ageing population.

Traditionally lower paid, lower skills jobs such as in retail and hospitality will always remain in the economy and are, in part, required for younger British workers looking for their first job experience or part-time working. But also, it may be that those industries will have fewer workers in general.

“I don't think we'll ever have an economy without low paid work. And actually, low paid work is a really important stepping stone for people for all sorts of reasons who are coming back into the labour force or starting out for the first time,” Wilson says.

We’re likely to see a slowdown in demand and the unemployment rate if a recession takes hold, which will relieve pressure on employers in part, but it won’t solve the productivity problem or the need to upskill the workforce for a digital future.

Stewart says: “When economies slow, demand for labour weakens, and I think what we are going to see is a decline in the number of vacancies. Next year we're likely to see the unemployment rate, which is exceptionally low, rising. In a recession, there's often a shift in demand. I think we are on the verge of seeing that coming through.”

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