For the labour market it is quality not quantity that makes a difference

Employment has recovered from the pandemic and is at an all-time high, with 33.09 million people in work. The unemployment rate is low at 3.8 per cent. Despite this healthy picture there is concern about the UK jobs market. Two issues come to the fore.

One is just how tight the labour market is. Second is the need for a fundamental shift towards investing more in skills and labour. This is essential if we are to move away from being a low-wage, low-productivity economy and address future technical change. In the process, this would boost the economy’s supply-side potential and help to avoid inflation bottlenecks.


Our flexible jobs market continues to defy expectations. It is a decade since employment exceeded 30 million for the first time. Jobs also rose after the EU referendum. In June 2016 the UK’s unemployment rate was 4.9 per cent and the number in work 31.7 million.


Even last November the Bank of England expected a rise in the unemployment rate to 4.9 per cent by this autumn and 6.4 per cent by 2025. Now it forecasts 4.5 per cent by 2025. This is more in line with the Office for Budget Responsibility, which says unemployment will peak at 4.4 per cent in 2024 before settling at its structural rate of 4.1 per cent.


Although vacancies are below their spring 2022 high, they are elevated at 1.1 million. Thus, if growth is sluggish and the labour market cools, vacancies are more likely to fall before firms lay off staff. It may also reflect that companies are keen to hoard staff, recognising the difficulty of recruiting and retaining workers and the costs of retraining.


It is common for the challenges we face to be reported as if they are unique to the UK. The shortage of skilled workers is one example where challenges are common across western Europe. The German chamber of commerce has pointed to the country’s skilled worker shortfall of two million. Also, some industries that were hit by the pandemic are finding it hard to return to normal. Shortages in hospitality are common elsewhere, too.


The tight jobs market has focused attention on boosting labour supply with 8.7 million people between 16 and 64 economically inactive. This number has risen 384,000 since the pandemic but has been high since records began in May 1992, when it was 8.4 million and peaked at 9.5 million in July 2011. Thus, it is not clear that there are easy solutions to get people back to work, although affordable childcare and a path from benefits to work are areas of focus.


Although there are shortages of skilled workers in some sectors, the government has adopted a very liberal immigration policy post-Brexit to suit the economy’s needs, with targeted as well as temporary visas. In some areas, such as seasonal work, more visas appear necessary. The economy is close to full employment and a large number work in low-wage, low-productive jobs.


It is little wonder that inflation has prompted higher pay demands. Regular pay is rising by an annual rate of 7.2 per cent. Sensibly, minimum and living wages have increased, too.


To be clear, the surge in inflation in recent years was not caused by wages, it was explained by supply-side factors and poor monetary policy. Now, however, second-round effects are evident, with higher wages and rising prices as firms pass on increased costs.


This week’s annual report from the Bank for International Settlements warned western economies about “self-sustaining wage-price dynamics and a de-anchoring of inflation expectations”. Looking across the economy more pay, better training and a more flexible approach to working conditions is a route to ensure high labour force participation.


Existing problems suggest, though, that it is not just about the numbers in work but also about improving the quality of the labour force to address productivity challenges. If labour is more expensive the immediate temptation is to view that as a loss of competitiveness but that need not be so if it encourages firms to invest more and upskill.


If government policy has a role to play it should be to encourage firms not to cut their training budgets in difficult times, as well as making the apprenticeship levy more effective.


A large proportion of the least-productive workers are found in low-wage service industries, such as the retail sector, accommodation and food services. Previously, able to recruit freely and cheaply from overseas, many firms failed to train or upskill their staff. This, alongside the impact that immigration had on suppressing wages in many low-skilled sectors, coupled with poor educational qualifications, helps to explain the large numbers in low-paid, low-productive roles. More investment in skills and on vocational training is needed, plus raising overall educational attainment.


Last week at The Times CEO Summit it was suggested that AI and new technology would lead to higher structural unemployment. Such concerns seem misplaced. Previous technology change has been positive for employment. Also, the debate has moved on to examining how roles will change and how technology will affect business models and boost productivity, as opposed to whether jobs will disappear.


One UK problem is low investment in capital and people. Take industrial robots: the International Federation of Robotics shows that in 2021 the UK’s total stock of industrial robots was 24,445. Germany had 245,908, Italy 89,330. The bulk of such robots, globally, has been concentrated in capital-intensive manufacturing — but robotics is making inroads into service sector jobs and the UK must be mindful of that opportunity.


The UK’s tight labour market is placing a focus on structural issues. One is to avoid a wage-price spiral. The second is the need for a change in focus and to invest more and upskill our labour force.



This article was published in The Times on 27 June, 2023.


Please note, the value of your investments can go down as well as up.

Share this

Back to Our Views