This report was produced on 2 September 2020 with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide an unparalleled ability to forecast economic trends.
5. Employment prospects by sector and by region
5.1 Employment declines are mostly more muted than output declines
Clearly, the factors considered above all have impacts on employment trends by both sector and region. And although this year’s overall fall in employment is likely to be small, at -0.9%, thanks to the furlough scheme, the situation undoubtedly differs markedly by sector. Figure 17 shows our employment estimates, by sector, for 2020.
Figure 17: Employment growth by sector, % y/y 2020
At one end of the scale, ‘social consumption’ sectors, particularly arts, entertainment & recreation and accommodation & food, have seen large declines in demand, amid social and travel restrictions. Government support has, so far, helped to cushion the impact of that on jobs, but losses have nevertheless been widespread, with further difficulties potentially ahead. Most businesses are likely to continue operating below capacity for some time, even as lockdown measures are eased, because social distancing measures will continue to apply in the workplace. With the Government’s furlough scheme set to come to an end soon, there is a risk that employment will fall sharply in the final quarter of this year. As a result, we estimate that for 2020 as a whole, employment will contract by 8.9% in arts, entertainment & recreation and 8.3% in accommodation & food, compared with 2019 levels.
Manufacturing is also experiencing a notable fall in employment this year. However, the situation varies greatly across sub-sectors. Particularly badly hit is employment in transport equipment manufacturing, which is estimated to fall by 6.0% this year. In contrast, employment in basic pharmaceuticals products and chemicals and chemical products is set to expand this year, by 12.4% and 2.2% respectively, reflecting the surge in demand for healthcare, cleaning supplies, protective clothing and the like.
Employment in computers, electronic & optical goods is also likely to be fairly resilient in the current climate, with growth of 1.7% this year, boosted by homeworking and increased demand for home entertainment, while employment in food production looks to be up by 2.0%, as people eat at home more.
Employment in public sector funded activities has also been more resilient than employment elsewhere in the economy. One area where numbers have risen is, of course, health and social care. And the increased role of the state in supporting the UK economy means that public administration has been largely insulated from the disruption of this year. Information & communications and professional, scientific & technical activities are also seeing modest employment growth, which we put at 1.8% and 0.8%, respectively.
5.2 Unlike output, employment will probably not rebound next year
However, while output is projected to rebound sharply in the year ahead, employment is likely to slip a further 0.9%. This reflects the end of the furlough scheme later this year, and a clear need by many businesses to reduce costs, following the damage done this year to company finances. Manufacturing and financial services are set to see two of the largest falls in the year ahead, at -2.3% and -2.0% respectively, while employment in healthcare and social work may decline by 1.8% in 2021, reflecting an easing of demand after the unprecedented heights of 2020. And although the arts, entertainment & recreation and accommodation & food sectors are projected to see rises of 2.0% and 1.0% respectively next year, these gains will fall far short of offsetting the losses experienced in 2020.
5.3 Health and office-based sectors should see strong medium-term job gains
Looking further ahead, we expect to see employment growth in the health and social care sector, partly for demographic reasons, and partly because of the impact of the coronavirus crisis on social, political and cultural priorities. However, slightly faster jobs growth may occur in those private sector services that have traditionally been office-bound, but may be less so in the future: information & communications, professional, scientific & technical services, and administration & support. How much of that employment will actually be in offices rather than at home, remains to be seen. If there is a shift, then a reduction in employment in the transport sector may result, and the same will be true if demand for flying (both business and leisure) experiences only a weak recovery. That in turn may impact on manufacturing employment, given the importance of transport equipment within that sector in the UK.
Figure 18: Comparison of employment levels by sector in 2019 and 2025
Manufacturing overall is very likely to continue its long-term decline in employment in coming years. This reflects the growth in demand for services, relative to manufactured goods; the shift in manufacturing employment abroad, probably accelerated by the UK’s departure from the EU; and most of all, the introduction of new technology, which means that higher output does not translate into increased employment. Oxford Economics projects that by 2025, manufacturing employment will still be 8.8% below pre-crisis 2019 levels.
The outlook for financial sector employment is also relatively weak, with employment not returning to 2019 levels by 2025. Here too, shifting demand and new technology play major roles, as may the possible absence of a UK trade deal with the EU that extends to financial services. The sector’s ability to attract international talent may also be weaker than it has been in the past—something that could also impact on many other parts of the economy.
5.4 The impact on regional job prospects
These differences in industrial composition and growth will be important drivers of regional employment prospects. Those UK nations and regions with high shares of employment in vulnerable sectors such as hospitality and manufacturing will be more affected by the current health crisis than places which are more reliant on sectors where homeworking has proved to be a feasible option.
In that regard, London has, by a small margin, the most sheltered labour market. It has the smallest share of manufacturing employment across all regions, and an especially large presence of sectors that are predominantly office-based. London has the highest shares of employment in information & communications (7.9%) and professional, scientific & technical activities (13.9%) of any UK region. Both of these sectors have been able to effectively transition to homeworking with limited disruptions to their operations. The scale of these sectors more than compensates for the difficulties facing London’s hospitality, tourism, culture, sports and entertainment sectors. This is reflected in the forecasts for 2020, with London experiencing the smallest fall in total employment of any part of the UK.
Figure 19: Total employment growth by region, % y/y 2020
Alongside London in experiencing only modest falls in employment this year is the South East. The region has a large manufacturing sector, but its share of the South East’s overall economy is nevertheless quite small. The hospitality and culture and leisure sectors are not especially large, while office-based employment is high by the standards of all other regions except London.
In contrast, Oxford Economics estimates that Yorkshire & Humber, Wales and the West Midlands are experiencing the biggest contractions in employment in 2020. The key factors here are that all three regions have above-average shares of manufacturing employment, while at the same time their shares of employment in office-based sectors are below the nationwide average.
But it is striking that, while the West Midlands is expected to see a fall in employment of 1.6% this year, in the East Midlands the contraction will be nearly one percentage point shallower, making the latter one of the least damaged UK regions, on this metric. The two regions have the highest shares of manufacturing employment across the UK, but marked differences between the two regions in the types of manufacturing that they possess explain variations in their overall experience. The West Midlands has particularly suffered from one of its largest sub-sectors being transport equipment, whereas the East Midlands’ largest sub-sector is food & beverages production—a part of manufacturing that has continued to operate during lockdown.
Across all regions, employment will probably slip further in 2021, for the reasons already discussed at the national level. It is, however, likely that employment will return to pre-crisis 2019 levels in 2022 in most of the UK’s regions. The exceptions are Yorkshire & Humber and the West Midlands, where it seems unlikely that employment will return to pre-crisis levels until 2023. And although employment in the South West is set to grow in 2021, it will probably not do so by enough to return to its 2019 level until 2023. The region has the highest share of employment in accommodation & food of any part of the UK, and its recovery is likely to be somewhat slow, not least because of the financial difficulties experienced by its many independently-owned businesses.
Figure 20: Annual average employment growth by region, % y/y 2020-25
Slower still are the recoveries in Wales and the North East, with employment only just returning to 2019 levels in 2024. The North East has a particularly muted outlook, with GVA growth over the next five years set to be the weakest of any UK region, which in turn hinders employment growth. The North East continues to struggle in moving its economy away from a reliance on heavy manufacturing and on the public sector. Employment prospects in the region are also being challenged by demographic factors, with total population expected to contract over the period 2020 to 2025—something that creates challenges across a range of service sectors, as well as impacting on the investment decisions of employers, looking to foster long-term workforce development.
In contrast, London will still stand as the regional frontrunner for employment growth over the coming five years, even if at a more modest pace than historically. Driving this growth will be the capital’s large information & communication and professional, scientific & technical activities sectors. Collectively, these two are likely to account for just over a fifth of total employment in the capital, comfortably the highest share for any region.
The global coronavirus pandemic and subsequent containment measures have created extraordinary economic conditions, and produced unprecedented intervention from the UK Government—and of course other governments throughout the world. As a result, declines in employment in the UK have been modest, and there are already signs that a recovery is beginning to take shape. It is likely that the UK economy will grow strongly in 2021.
However, the risks to recovery are high. A second wave of coronavirus infection might significantly derail the UK’s economic recovery, and just the fear of that happening may keep both consumer confidence and business confidence very weak.
Policy choices in the last few months of 2020 are in consequence extremely important, and the government needs to proceed with great care. Many companies across the UK, and some households, are currently in very difficult financial circumstances. This need for caution applies to the UK-EU trade negotiations, as well as to decisions about whether and when it becomes appropriate to restrict government borrowing, and how to unwind some of the specific temporary measures that have been put in place to protect jobs and businesses.
In making its choices, the government may wish to pay particular attention to the varying circumstances of different sectors of the economy, and of the UK’s many nations and regions. Businesses in the hospitality, leisure and cultural sectors have clearly been particularly badly affected by the health crisis, as have some retailers and some manufacturers, such as those in the machinery and transport equipment sector.
Overall, Yorkshire & Humber, Wales and the West Midlands are probably experiencing the largest falls in employment this year, while the North East continues to face some deep structural problems that are being compounded by this year’s pandemic. In addition, some parts of the UK are especially reliant on exporting, and hence could be particularly affected by the choices that are made with regards to trading arrangements. Again, the North East is one of these, along with Wales and to a lesser extent the East and West Midlands. And Wales is particularly dependent on EU export markets.
Meanwhile, other issues such as the long-term impact of automation on competitiveness and jobs have not gone away, and are likely to be high on the agendas of many business leaders in 2021, as they decide how to repair the damage to their finances wrought by the pandemic. Much attention has been paid this year to homeworking as a topic, but other equally significant changes to the world of work may yet be to come in some sectors, with potentially large implications across the UK’s nations and regions.