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Economic Affairs Committee

Corrected oral evidence: the UK labour supply

Tuesday 25 October 2022

4 pm

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Members present: Lord Bridges of Headley (The Chair); Viscount Chandos; Lord Fox; Lord Griffiths of Fforestfach; Lord King of Lothbury; Baroness Kramer; Lord Layard; Lord Livingston of Parkhead; Lord Monks; Baroness Noakes; Lord Rooker; Lord Skidelsky; Lord Stern of Brentford.

Evidence Session No. 9              Heard in Public              Questions 82 - 86



I: Eliza Forsythe, Assistant Professor, School of Labor and Employment Relations, University of Illinois; Tony Wilson, Director, Institute for Employment Studies; Werner Eichhorst, Coordinator of Labor Market and Social Policy in Europe, IZA.



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Examination of witnesses

Eliza Forsythe, Tony Wilson and Werner Eichhorst.

Q82            The Chair: Welcome to this second session of the Economic Affairs Committee investigation into where all the workers have gone. I am delighted to be joined by three experts in this field from various parts of the world. Please introduce yourselves, starting with Eliza Forsythe.

Eliza Forsythe: Hello. I am from the University of Illinois in the United States. Thanks very much for inviting me.

Tony Wilson: I am the director at the Institute for Employment Studies based here in the UK.

Werner Eichhorst: Good afternoon from Germany. I work at IZA, the Institute of Labor Economics. I do mostly European labour market issues.

The Chair: Thank you very much. We have an hour and there is a lot to cover. I am going to hand over immediately to my colleague Baroness Kramer to ask the first question.

Baroness Kramer: I should confess to Eliza that I am also a graduate of the University of Illinois.

Eliza Forsythe: Wonderful.

Q83            Baroness Kramer: I got my MBA from there.

I am asking the set-up question and my colleagues will follow up, pushing on far more detail and on specific issues.

Will each of you give us a short summary of the situation and recent trends in labour supply in your area of specialisation? Maybe we ought to start with Tony and then go on to Werner and Eliza to give us that general scope. Tony, I will hand over to you. When you are done, if Werner takes over and then Eliza, that would be brilliant.

Tony Wilson: Thank you. I am happy to go first. As you will know already from the inquiry and as we heard in the previous session, we have seen a really significant decline in the size of the labour force in the UK since the pandemic began. Internationally, we are very unusual in having seen that, and we are seeing rising economic inactivity.

There are about 500,000 fewer people in the labour force than before the pandemic and nearly 1 million more people economically inactive. It is even more stark because it has come on the back of three decades of pretty much continuous growth in the size of the labour force, which has grown through thick and thin since the early 1990s, and it is the first time that we have seen that go into reverse. The gap between where we are now and where we would have been if that growth had continued is more like 1 million or 1.1 million fewer people in the labour force. They are really significant and quite unprecedented changes.

More importantly, when we look at the most recent changes, we are seeing no sign at all of employment recovering or economic inactivity falling. We seem a little stuck for the last few months, since spring this year.

Baroness Kramer: Werner, I suspect you are going to describe a rather different situation.

Werner Eichhorst: Yes, indeed. It looks like the continent is in a different situation, especially Germany. We see in 2021 and 2022 record levels of employment, labour force size and labour force participation rates, and this is quite significant. As Tony said, this long-term rise in labour market participation has basically continued, or started again, after the pandemic in most European countries. Inactivity has been going down, and especially in Germany we see a record level of employment.

I have checked a couple of figures for the last few months. What we see is still a continuous rise in employment among older workers—50-plus—and women, and some additional net migration to Germany and other European countries. There is something like a normal trend that looks like the labour market is very much absorbing all those people at the moment. We see some shortages in some occupations, but no withdrawal from the labour force.

Maybe one important factor is that many countries in continental Europe tried to stabilise employment and labour force participation through job retention during the pandemic, and this helped in a way to stabilise the links to the sphere of employment in 2020 and 2021. This is also beneficial in the current situation.

Baroness Kramer: Eliza, we are often told that the UK is very similar to the US in so many ways, but this one is a little different, if I understand correctly.

Eliza Forsythe: Yes, that is right. The US labour market was very strong before the Covid pandemic, but the contraction was very acute in April 2020. We had 20 million jobs lost and unemployment spiked to nearly 15%, which was quite different from what happened in Europe, mostly because of how our jobless aid was structured. We used our unemployment insurance system and did not preserve the links between employers and employees in the same way. It turned out that most employees seemed to go back to their previous employers, and we were able to wind down that stock of unemployment over the subsequent years.

What was unusual about the pandemic recession—it may have been similar in other placesis that it was a recession but there were not that many jobseekers per vacancy, so it was a relatively tight recession. It was a recession where workers did not have as hard a time finding a job as we normally see, and I think that really helped the recovery go relatively quickly. At this point, we have pretty much returned to employment levels that we saw pre-pandemic. The remaining gap is being driven by older workers who have retired either at the expected pace or a bit faster than we would have expected. It is really a story about older workers in the United States at this point.

The Chair: Very good. On that point, you mention older workers retiring. Can you clarify that, Eliza? I think I read in one of your research papers that these are workers who are of the expected age—mid-60s to late-60s—retiring. It is not 50-plus year-olds retiring. Am I right?

Eliza Forsythe: Yes, that is right. In the US, it seems to be workers over the age of 65. Workers in their 50s and early 60s have returned to employment levels that we saw pre-pandemic.

Lord Layard: That is a very different picture in Britain compared with elsewhere. Will you tell us why you think that is so? Tony, why do you think we had that different pattern here?

Tony Wilson: There are a few different factors at play. The first is that although we had really significant job protection measures during the pandemic—we had a lot of people on the furlough scheme—a lot of people have drifted into economic inactivity and into longer-term economic inactivity. People were leaving their jobs all around the world, in some cases being protected through furlough and in other cases not. Our furlough scheme was relatively generous but also pretty passive; it did not keep in touch with people while they were off, there was no access to employment-related support through Jobcentre Plus or other services, and there were no active requirements on employers to facilitate return to work for people.

One part was that the very rapid, but in many respects effective, design of our furlough scheme may have led to some people drifting into longer-term inactivity. We have done analysis, which we will publish next month, showing that the growth in economic inactivity is almost entirely explained by the growth of people who have been economically inactive for a long time—a number of years—and in particular we started to see this from a couple of years ago.

Related to that, we do not support people through our employment services unless they are claiming the searching for work bit of universal credit and treated as claiming unemployment. For people who are economically inactive, there is no entitlement to go into Jobcentre Plus and get support. There is no active engagement or outreach to those groups. There is no availability of employment services there.

The third factor for older people is pensions flexibility and the ability to draw down pensions, savings and other sources of income. We know from the ONS analysis published a few months back that probably about four-fifths of people who have left the labour force in their 50s are supporting themselves through pensions, savings and probably redundancy pay. Nearly 1 million people were made redundant in 2020. It is fewer than 500,000 in normal times.

Through a combination of those factors, people are living off savings, not benefits. They are able to do that because of flexibilities, but that may mean they are not hurrying back to work and are becoming longer-term workless.

Importantly, many will not be entitled to benefits because if you have savings of more than £16,000 you cannot even claim universal credit any more. This pushes people away from employment support. If they are not on benefits, they cannot get support.

A final point that I will chuck in is around the nature of work. We know from some ONS analysis published last month that a lot of people who left work said that they were leaving because of stress, because they were laid off, because the job was not a right fit for them and it was not as flexible as they needed, and so on. People’s experiences of work may have led in that turnover to people being reluctant to come back and possibly not being able to get the flexibility or the support they need to make an effective return to work.

We have big mismatches on the supply side where people have probably drifted into economic inactivity, they are out of reach of support, they are supporting themselves financially through other means, they probably have not always had massively positive experiences of work, and they have left a job and may be struggling or reluctant to come back quickly. In many of those respects, we probably are quite unusual compared with other countries.

Lord Layard: I would have thought that many of the earlier points you made about systems not being great and so on would certainly apply in the United States equally, yet we are not seeing the same outcome.

I want to ask in particular a question about health. We know that a lot of the inactivity is among people who say that they are not well. That might not be the reason, but they are saying that. Do you, or either of the other two witnesses, have information about comparative health trends in Britain and other countries that could explain why we are so affected by inactivity, apparently at least some of it health-related, as compared with other countries? Are any of you in a position to tell us about comparative trends in health, particularly among people aged 50 and over?

The Chair: Who would you like to answer that question? Should we ask Eliza to start, please?

Eliza Forsythe: I do not really have any data on the comparisons. The impact of Covid will affect all countries, but it is hard to know exactly whether there are differences between countries in that effect.

The Chair: Werner, would you like to comment?

Werner Eichhorst: I looked into some data that is available for Germany regarding long Covid. It looks very difficult to identify because of the diagnosis. At least for one major sickness found in Germany, there is data that shows that it is about 0.3% of all those in the sickness stock at any time. This is a very small effect from Covid.

I would rather argue, and I think there is more research in this direction, that, given that front-line workers have been exposed to unfavourable working conditions, including health risks, during the pandemic, if available they have moved to different occupations by now, maybe after some period of being out of the labour force as in the UK or maybe more swiftly and more smoothly in the countries where we have not seen that decline in labour force participation or in employment in 2020-21. There is some movement within the labour market to safer and more attractive positions at the moment.

Lord Layard: Is there talk in continental European countries of a healthcare crisis? Are there signs of increased waiting times for healthcare or increased queues in European countries, as we have here?

Werner Eichhorst: There is some concern. Most of this has to do with the shortage of healthcare workers. There is a shortage of healthcare workers because they face demanding working conditions and have been exhausted during the pandemic, and this has potentially negative effects, especially on hospital services. There is something that has to do with labour shortages other than with the overall health situation.

Lord Layard: Tony, what is your take on the health issue?

Tony Wilson: First, on the comparisons point, we have been looking at that as well. It is quite challenging. Looking at the European Labour Force Survey and reporting of disability employment rates and employment gaps, it is fair to say that there are very different treatments and definitions being used. It is self-reported, so it is very hard to get to a consistent measure of the incidence of ill health or disability across nations.

We know that the UK has a relatively large disability employment gap compared with other countries, despite our having had relatively high employment pre-pandemic. There does not appear to be any good-quality recent data about cross-country comparisons of how ill health has changed since the pandemic.

Looking at the UK data and the Labour Force Survey data, we have seen a growing incidence in the number of people reporting that they have a long-term health condition. That is reported every quarter and appears to have increased somewhat in the last two years. There appears to have been a slight increase in that trend, but it has been rising over years because we have an ageing population and because of greater reporting of mental ill-health in particular.

Our employment gap has remained stubbornly wide and has actually widened during the pandemic. If you are disabled, you are about 30 percentage points less likely to be in work, or you are two and a half times more likely to be out of work than if you are not disabled, and your chances of being in work have got worse during the pandemic.

On the point about economic inactivity and ill health since the pandemic, health waiting lists and access to treatment, for both physical and mental health conditions, must undoubtedly be part of this. As you know, you get access to employment support through things such as talking therapies alongside employment advisers. The Government announced welcome additional investment in this just recently. If people are not getting access to the talking therapies, they might not be getting access to the employment support. There will also be people who have conditions that they cannot manage and need health support before they can return to work.

The other factor is around the availability of employment support for people with health conditions and the availability of health-related support—good-quality occupational health support and vocational rehabilitation—while you are in work. There are gaps in the provision both of support while you are out of work and of support while you are in work.

In the pandemic we have seen a huge turnover in work. We have seen millions of people leaving jobs and starting new jobs. I suspect that a large part of what we are seeing is people with health conditions who were previously just about managing in a job. They have seen that job change or be lost and are struggling to get access to the flexibilities they need when they start a new job.

So often for people with health conditions, you get that flexibility while you are in work. You do not always get it on the day you apply, and employers often are not as receptive to making those changes. Or you will not even apply if the job is not advertised as flexible or if you do not think you will get that support.

There is a combination of factors. I am sure long Covid is part of it, but there are other factors around support through health services, support at work, support in job design flexibilities and help to stay in work when you are sick.

The Chair: I am going to bring in Baroness Noakes.

Baroness Noakes: I think my question has been asked.

Baroness Kramer: I want to come in on that. Tony, in a lot of the evidence that we have taken, the first response seems to be that it is all about long-term sick and then there is a bit to do with migration, but what I am hearing from you is far more nuanced. Do you have any data that you could either provide to us or direct us to?

I am hearing things about employment support playing a far more significant role, rather than simply that there is an NHS waiting list or that it is long Covid. I am interested in what you are saying because it starts to square the circle with the other two people who are giving evidence from two other countries. If long Covid has an impact, it surely does not observe national borders. Trying to unpick the problem would be very helpful.

Tony Wilson: I am really happy to provide that information. I will send it to the clerks separately. Next month we are about to launch a commission on the future of employment support in the UK. We will have some new analysis that covers this sort of ground.

My focus on employment support may reflect my prejudices around what I think matters on the supply side for helping people who are out of work and those who are marginally attached to work. There is an important point of difference around job design and employment support.

The really important point is that we have seen an increase in the number of people who report having long-term health conditions, but it has not been huge and I do not believe that it is enough to explain the increase in economic inactivity due to ill health. Given the huge turnover we have had in the labour market—we have had 1 million more people leaving jobs in 2021 than left them in 2019—many of them will have had health conditions, and it just follows that it would have been very hard for people with long-term health conditions to find those right jobs if they leave jobs, compared with people who do not have those health conditions or are not disadvantaged in the labour market.

The Chair: Can I come back to Eliza and Werner? Trying to disentangle the impact of Covid from what was the trend pre-Covid, could you see any rise in inactivity among the 50-plus year-olds due to long-term health conditions?

Werner Eichhorst: I cannot confirm that. There was some debate that it may happen in 2020. There was some expectation by some researchers. The trend is still in the same direction as it was during the 2000s and the 2010s—rising employment and rising labour force participation among older workers, especially due to the fact that we have curtailed early retirement completely.

Until now, we did not have a generous disability benefit scheme, as was the case maybe in the Netherlands or some other countries in earlier decades. That means older workers have no easy way out of the labour market, and it is clear that older workers in Germany typically do not have the option to opt out of the labour market, as Tony has described, using their pension funds or their private pension plans. That is not possible in the German context.

What we might rather see is some workarounds in larger companies. If they can afford and need to restructure, that may mean some type of early retirement. It has not affected the macro labour force participation and employment rates of older workers.

The Chair: That is very interesting. What about the US? Have you seen any other longer-term trends in long-term health conditions impacting the participation rates of 50-plus year-olds?

Eliza Forsythe: I am not as familiar with that data. In terms of the recovery of employment, it has been the 65-plus group, and it seems as if that is related more to retirement than to other health condition issues.

Q84            The Chair: Can I ask another question about mismatch to Eliza and Werner? To what extent are the US and European labour markets experiencing job mismatch where those who have left the workforce do not have the skills or are not interested in filling the roles with the biggest number of vacancies? Eliza, can you talk briefly about that—you touched on it—and then Werner?

Eliza Forsythe: Absolutely. There are certainly disparities in which jobs were lost immediately in the acute phase of the pandemic. I think this was common across countries. It was really customer-facing jobs—lower-wage jobs—that took the biggest hit. We still see shortfalls in employment in those types of positions, but we really think it is driven more by the worker side than the employer side.

One part of that is in some research I have done. We look at the job requirements for these jobs and see that employers have been reducing things such as skill requirements, educational requirements and experience requirements, and wage growth has been robust in these jobs. Employers seem to be trying quite hard to fill these positions and there are lots of vacancies posted, but they are having trouble getting workers to come to these jobs. We think that is really being driven by disparities in the people who have been leaving the labour force. It is the older workers, so that is where we see shortfalls in employment.

In fact, we are seeing that workers have been able to move to higher-quality jobs. It is essentially a job ladder, with people retiring who were further along in their careers and were not serving in entry-level positions to the same extent, which opens up space for people who were in lower-paying jobs to move up to higher-quality jobs.

Unfortunately, if we are thinking about shortfalls in the labour supply, even if some of the older workers decided to come back to work, with the skills and experience that they have they are unlikely to be coming to these more entry-level, low-wage positions in which we see the shortfalls. It is not really about mismatch in the sense that workers do not have the skills that employers are seeking; it is really about a structural change in terms of who is in the labour market and who has exited.

The Chair: That is very interesting. Werner, would you like to comment on that?

Werner Eichhorst: I can follow up on that. There is some research from the OECD and the IMF showing basically that there is no technologically induced mismatch or structural change going on that increases barriers to job mobility for workers. Rather, what we see is indeed, as Eliza has already mentioned, an upward movement of those people who have left the least-attractive positions during the pandemic, maybe moving to better-paid positions or to positions that are less exposed to front-line work or contact intensity. This is something that we observe.

Of course, this leaves behind some vacancies that are hard to fill, especially in the hospitality and care sectors. This is quite clear. That puts employers under huge pressure to offer better working conditions in those occupations. It also means higher wages and maybe more flexible, more autonomous working time and maybe other types of additional benefits that help make these jobs more attractive. The tightness of the labour market is even worse if you have an increase in the inactivity of the working-age population. Of course, that is not so much the case in continental Europe or Germany but rather in the US and the UK, as I understand.

Lord Griffiths of Fforestfach: I would like to ask Eliza a question not about health but about gender. I read in the British press about research done by a well-known demographer, now at the American Enterprise Institute but previously at Harvard, arguing that there is a marked difference in inactivity between male and female people in their 40s and 50s. Do you have any insights into that?

Eliza Forsythe: I do not have any specific insights other than just that family caregiving and elder care often falls more strongly on women. If they are doing more of those activities, that could lead to more inactivity among those people.

Baroness Kramer: May I ask a question on that? Ironically, in the UK we are seeing a much stronger growth in inactivity in men over 50, whereas your presumption, Eliza, from the question—I know the source that this came from and its particular ideological bias—I suspect was about women dropping out in the United States. Is that why?

Lord Griffiths of Fforestfach: No, it was exactly the opposite; it was men dropping out—particularly single men—and it seemed to suggest that it was much more of a lifestyle choice, and it was more to do with preference rather than something you could explain directly by economic factors. The study suggested it was significant.

The Chair: Tony, would you like to pick up on the point of men in particular and the inactivity rise in the UK?

Tony Wilson: It is true. We have seen economic inactivity rising for men and for women. We have seen employment falling for both, but it has been much more pronounced for people in their 50s, and during the pandemic it has been somewhat more pronounced for men than for women, although in the most recent data there are still slightly more women than men who become inactive.

It links to a wider point and builds on the point about lifestyle choices. There is a real diversity in people who have left the labour force aged over 50. Definitely, some have been relatively higher skilled, relatively higher paid and in relatively more professional jobs, and those have predominantly been men. There have been people who have left from lower-paid, lower-skilled, less secure jobs, and that has been men and women, but more likely to be women. We are seeing this quite clearly in the data.

We are seeing declines in employment of people in the top SOC code, standard occupational classification code, which typically picks up chief executives and senior managers. That is predominantly older men. There are fewer of them. I suspect that in the pandemic a lot of people have sold up their businesses or they have left self-employment, as we know. They may have used the Self-employment Income Support Schemethe furlough money equivalent for the self-employedthey may have sold their businesses, they may have taken redundancy pay and so on, and they have decent pensions and are able to sit this out, at least for now.

There are many people in lower-paid jobs such as cleaning—domestic cleaning largely stopped during the pandemic—and I suspect that many of those people, predominantly older women, will not have made the transfer into industrial cleaning, which increased, and will have become detached from the labour force. There is a real diversity here, and there are definitely some relatively higher-skilled men who are at the moment able to sit things out.

The incentives to come back can be quite weak, because you may be pushing yourself into the top rate of tax by taking on an additional job. You will not get much money for taking on more work and you may decide to wait it out even longer or simply not to return at all as you get closer to the state pension age. Clearly, what is happening now in the markets and with inflation will mean that people’s pensions are not going to last as long as they might have thought they would.

The Chair: Very good. Lord Rooker, I do not know whether you want to come back to the issue of long-term sickness.

Lord Rooker: Only in one respect, because much of the issue has been raised. To be honest, I have got more confused as the week has gone by because it looked clear to start with, but it is not. The UK has the National Health Service, the biggest employer in Europe. It is not market driven; it is up to the Government. We had 12% fewer operations taking place last year than in previous years. Operating theatres are empty because of a shortage of staff and a shortage of beds.

We discussed the decline in social care where we do not train and pay people to look after people after they have come out of hospital. There has to be a connection in the cause and effect. It is not simple but there has to be a cause and effect.

I am not saying that the health service waiting list is the cause of inactivity. I have dismissed that. But these other factors that are unique to the UK, as far as I am concerned—it is not market driven and it is a nationalised system—must play a factor in what has happened in the UK that has made it different from elsewhere. Tony, have I got that right? Are my questions okay?

Tony Wilson: Yes. I certainly do not want to give the impression that NHS treatment waiting lists are not a factor; I am sure they are. Other factors are contributing to it too and are maybe as important or more important. Related to that, if people are in work and waiting for an operation, unless they are made redundant by their employer, they would still be counted as employed. They would be off sick but counted as employed.

There is a little bit here of being unlucky enough. We are maybe seeing people who have long-term health conditions who are unlucky enough to have left work during the pandemic and are waiting for treatment, so they are unable to find a job that they can go back to. They may be capable of working reduced hours or doing some work. If they had not lost their job they may have been able to stay in that job, but they are not able to go back in, so they are appearing as economically inactive.

Many of those people with long-term health conditions waiting for treatment will be in work; they just will not be working. They will be off sick, but they are still counted in the figures as being employed. There will be other factors that are affecting it.

Q85            Lord Skidelsky: I would like to ask you a factual question, and this applies to Europe and America. Has there been an increase in the number of people retiring in their 50s and later in the last two years? Has there been a change in trend? We know that people are retiring earlier in their lives. Has there been a change in trend in continental Europe and the United States? That is a factual question because I think that we are trying to establish some differences.

Eliza Forsythe: Absolutely, there has been. For workers 65 and up, we have both an increase in what would be expected due to the normal ageing population and excessive retirements among those groups compared with the trends before the pandemic. In the US, it is really about 65s and older.

Lord Skidelsky: It is primarily 65 and older. Is that what you are saying?

Eliza Forsythe: That is what we have found in our research.

Lord Skidelsky: That is where you have a change in trend.

Eliza Forsythe: Yes, that is right.

Lord Skidelsky: What is the case in your experience, Werner?

Werner Eichhorst: It is a diverse field across Europe. Looking into the data for the last 10 years or so, employment rates of workers in the age ranges 50 to 55, 55 to 60, and 60 to 65 have rather increased in European countries due to the basic withdrawal of other retirement schemes. That means rising employment even in 2020, 2021 and 2022, it seems. That means no trend towards early retirement and inactivity at an earlier stage but rather at a later stage.

Europe is definitely not talking that much about 65-plus at the moment. This may be an issue for the next two decades or so when the statutory retirement age might be raised to 67 or 68, but for those who are supposed to work at the moment up to the age of 65 or so I see a positive trend in labour market attachment.

Lord Skidelsky: So the problem, if at all, is in the over-65s.

Werner Eichhorst: Yes, but they are, in a way, expected or allowed to retire at some point.

Lord Skidelsky: I see.

Werner Eichhorst: I would not say it is a severe problem. It is desired by many of those in the labour force.

Lord Skidelsky: I have a couple of follow-ups. Have specific income groups driven the increase in early retirement? Can you distinguish between the prevalence of it among different income groups? Is it poorer people or wealthier people?

Eliza Forsythe: We have not looked at it by income group, but one thing that we were able to see is that, at least earlier in the pandemic, exit from employment for older workers was not really explained by industry or occupation compared with other groups. That suggests that it is a bit more broad based and that it is not just particular income groups.

Lord Skidelsky: Is that true, Werner, in continental Europe?

Werner Eichhorst: There is nothing specific to be said about this. I argue strongly that we see an extension of working life in particular for those in higher occupational groups because they like to work and are maybe more autonomous in deciding when to retire. We also see a tendency to have second jobs or additional jobs, even after retirement, for those with lower pension entitlements. The medium segment is rather following the collective rules more strictly in terms of retiring.

Lord Skidelsky: Sorry, I did not want to cut you off. We have heard a lot about pension arrangements affecting the divergences between countries. I am very unclear about what the different pension systems are. Would you say that the way the pension system operates in the United States encourages people to retire earlier than they would if there was a different pension system?

Eliza Forsythe: I am not an expert on pensions and social security in the United States, but I think there are lots of incentives to continue to work over 65. In the social security system, you can delay claiming. I do not think we have as strict a cut-off as maybe in other countries.

Lord Skidelsky: We have been told a lot about our pension system as a possible cause for the increase in early retirement, and I am trying to get to the bottom of that. Do you think it is a factor, Werner?

Werner Eichhorst: Of course, I can hardly assess the UK pension system. As soon as a social policy offers some pathways out of the labour force, it will be used, maybe even in combination with funds being made available by employers. We have seen that in the past in many European countries with instruments such as old age part-time work or some extended unemployment insurance benefit periods. All these things can be used to encourage early retirement, but for now I do not see a trend in European countries to reintroduce such schemes after they were abolished in the 2000s and 2010s.

Lord Skidelsky: I have one last question. How likely are your countries to regain their previous levels if expected incomes fall as a result of inflation? People may retire with an expected income from pensions, savings or whatever it might be, and then they find that income is reduced in real terms because prices are going up. Could that produce some movement out of inactivity into activity, in your view?

Werner Eichhorst: In most European countries, the pension system is attached, or indexed, against wage developments or inflation, or a combination of the two. There is some sort of a fair sharing of the burden between the active population and pensioners. Both the active population and the retired population are suffering from some losses in real income at the moment. Given all the vacancies, that could mean postponement of retirement or taking on a side job then or after retirement. I expect young pensioners, especially those between the ages of 65 and 70, if they are able and healthy, to look for some of these jobs more so than some years ago.

Lord Skidelsky: That would not affect private savings. They are not indexed at all.

Werner Eichhorst: I think savings play a much smaller role in continental Europe than in your countries. This also affects behaviour quite significantly, as Tony has pointed out.

Baroness Kramer: I just want to try a quick counterfactual going back to Eliza. My understanding is that the equivalent of the state pension, the social security system in the United States, is far more generous than the state pension in the UK. You would have thought that that would trigger a willingness to retire earlier, but it does not sound as though that is the pattern you are experiencing. There certainly is a question about the role that pension plays if countries with a far more generous pension system—it sounds as though it is more generous in Germany as well—are not seeing the same trend of early retirement. Multiply by five to get a comparison between social security here and in the States.

Eliza Forsythe: Most people will wait until 65 to get full retirement and social security benefits in the United States, and it is indexed to inflation. It is certainly keeping up with inflation faster than wages of workers.

Q86            Lord Stern of Brentford: This is for you all. We are getting a bit short on time, so please be as brief as possible. I want to go to the other end of the age distribution. What changes do you see in the behaviour of younger people? Do they stay in education longer or less long? How is the behaviour of people with young children changing, if at all? In the latter case, how would that be influenced, in your view, by childcare policies? Could we start in the United States and then move east?

Eliza Forsythe: In the US, we had a reduction in the number of people going to college during the pandemic, which I believe has not fully recovered. Young individuals seem to be more likely to go to employment. My understanding is that their employment rates have pretty much recovered, although there have been some shortfalls in summer jobs. Younger individuals seem less likely to be taking on jobs during the summer than we saw previously.

Certainly, caregiving responsibilities are an issue in the United States in terms of things such as female labour force participation. We do not have terribly generous leave policies. That drives women to either come back more quickly or step out of the labour market, but that has not really changed much over recent years. Women have come back to work since the pandemic.

Lord Stern of Brentford: Thank you. Shall we just go through the UK and then on to Germany, if we are taking an easterly path?

Tony Wilson: With young people, we have seen a significant increase in participation in education. That was partly by accident rather than design with the A-level fiasco in 2020, which then led to a widening of participation in higher education, but it was a happy accident because it meant that people could sit out the worst of the pandemic impacts on the labour market. Of all young people, about 43% were in full-time education pre-pandemic. That has been a step change to about 47% now. That is a comparable step change to what we saw in the aftermath of the great financial crisis, when there was a similar step up and then a plateau.

We are at the highest rate ever with participation in full-time education. It is worth saying that about 30% of young people in full-time education work, and that has held up fairly well, but it is lower than it used to be. When I was young, about 40% of people in full-time education also had jobs. This is also a potential source of labour, a potential untapped pool for employers, particularly when you think about migration and your last discussion. If 40% of young people in education worked, there would be about another 300,000 people in the labour force than there are now. It is for another inquiry, but there are all sorts of reasons why young people in education do not work. There is definitely more that we could potentially do there.

On parents, and particularly mothers, the figures are really worrying now. The lone parent employment rate is falling for the first time in 30 years, and the number of people who are outside the labour force because they are looking after family at home—typically parents of younger children—appears to be increasing after 20 or 30 years of decline. That is worrying, especially given the narrative about flexible work and hybrid work and so on. It looks as if people are now really squeezed around availability and affordability of childcare and the flexibility they can access at work.

Childcare and issues around rising ill health and mental health among younger children are a factor, as are elder care and the pressures on health services that we have talked about. I am really worried about this. I am glad you mentioned it, because I forgot to mention it earlier. That is, in some respects, as concerning as what we are seeing in the growth of long-term ill health. It is the reversal of a trend. It is not really going up by much, but the trend has definitely reversed around participation of carers—people who are caring for children—in the labour force.

Werner Eichhorst: The youth labour market in Germany is relatively stable, as is the rest of the labour market. During the pandemic, there was some policy emphasis to stabilise the apprenticeship system. That was very important, especially to keep employers interested and engaged with it.

We now see, given the demographic change and very small, young cohorts entering the labour market, that it is becoming increasingly difficult to fill the vacancies in the apprenticeship system for the craft sector, the care sector and all the medium-level skills.

This becomes increasingly difficult and poses many questions regarding making the system more attractive, because young people in Germany tend to go to universities much more than they did in the past. However, this may also be a positive trend given all the technological change that we see in the labour market and the structural change. A change in skills at a high level may still be a very positive long-term outcome of this particular trend.

Regarding women or mothers, overall we see a positive trend in labour force attachment. Germany has a conservative, Catholic background. It has moved into long-term modernisation, which is still going on. One element here is definitely the increasing availability of subsidised childcare. That is becoming more and more standard in Germany and in other countries, including full-day schooling. After all the breakdowns and hiccups that we observed in 2020 and 2021, we hope to return to a more stable and reliable public infrastructure, kindergarten and schooling, and that will be really crucial to maintain in order to facilitate the participation of mothers and fathers in a reliable fashion.

Lord King of Lothbury: In trying to pull together the various points that you have made this afternoon, what is the one change in the trend of participation—whether it is young, old, sick, pensions—that was brought about by the pandemic and that to you, in your country, seems the most significant?

Eliza Forsythe: In the US, we have largely recovered to a broad extent, so there have not been, other than the issue of retirements, big structural changes. The one thing is the retirements—the older workers, the 65 and up, both the expected demographic changes and some additional retirements.

Tony Wilson: It is similar: people in their 50s leaving the labour force. This is unprecedented. The last time we saw people in their 50s leaving the labour force at this sort of scale was in the 1980s, and it was a deliberate act of public policy to try to retire people, particularly older men, from nationalised industries.

By accident we are seeing a similar thing—a combination of policy and practice leading to mass retirements and economic inactivity. The defining challenge for the DWP in the next Parliament will be about how we raise participation from people outside the benefits system who are older and who may, by that time, have been out of work for a number of years.

Werner Eichhorst: The stability is more striking against the backdrop of the US and the UK regarding labour force attachments. It is quite stable. What I see as unexpected and significant are the movements that go on within the labour force away from the more precarious low-paid jobs to better-paid jobs and away from front-line services to other types of services without much of a publicly administered requalification or mobility-enhancing labour market policy. This is just happening, and we still need to understand it.

The Chair: Werner and Eliza, can I just clarify something in my mind? Forgive me if you are repeating previous answers. Werner, what is most striking is the increase, or at least stabilisation, in participation of those aged 50 to 65 in Germany. Assuming I am right about what you said, can you clarify, if possible, whether there has been an increase in the number of people with long-term health conditions in that age group in Germany?

Werner Eichhorst: That may be something that I need to look into empirically after this session. There is not much of a debate on this topic in Germany.

The Chair: It would be very interesting. If you could have a look at any official statistics on that, it would be incredibly helpful to see them.

Eliza, likewise, can you clarify, using any official statistics, whether there has been any uptick or increase in long-term health conditions over the period of Covid and before?

Eliza Forsythe: I do not have those figures off the top of my head, but I would be happy to provide them.

The Chair: That would be very good. Finally, I have two questions for you, Tony. You said earlier that a number of the people who are in the 50 year-old bracket are leaving the workforce with relatively small amounts of savings. As you look ahead, to what extent do you think that those individuals may well need to return to the workforce in some shape or form as those savings diminish and the impact of the cost of living really bites?

Tony Wilson: It is likely. It is hard to know how many have relatively smaller or relatively larger sayings. My fear is that many do not have enough money to reach retirement age because we know that their pension pots, although they are usually five figures on average, are unlikely to be in the hundreds of thousands. It is very likely that people will at some point need to return to work.

Werner made an excellent point about how labour markets adjust, and they often do not need an enormous amount of a push to adjust. Many may well come back into jobs that they previously left, but I fear that many will not be able to; the world will have moved on and the economy will have changed, so they will need more support. At the moment, there is not really anywhere to go for that support if they are not claiming the right benefit. This is a problem that we are storing up for the next couple of years, I suspect.

The Chair: I have a final question for you, Tony. We are trying to answer the question of where all the workers have gone. We are identifying the 50-plus year-old age group, and in particular 50 to 55 year-olds. What I am hearing from you—forgive me if I am paraphrasing, so correct me—is that what we saw with Covid was potentially accelerating a trend that you saw existing before, of that age group with long-term health conditions leaving the workforce. Is that fair to say as a major, if not the major, contributing factor to what we are seeing?

Tony Wilson: Employment of older people has been on a long-term increase as the population has got older. That has been a reversal of a trend. We were seeing an increase in economic inactivity due to long-term ill health before the pandemic even began. The worry there was that the number of people out of work was declining, but those who were out of work were increasingly likely to be quite significantly disadvantaged, and our employment services and employment support largely are not facing that problem. That has become more pronounced.

These issues of ill health are overwhelmingly linked to things that happened in the last couple of years rather than pre-existing issues. More of those who were out of work were disadvantaged as unemployment fell and as employment rose, and our response had not really shifted to address that in the way it did pre-financial crisis when there was a big push on how we engaged people who were economically inactive and further from work.

The Chair: Very good. Thank you all very much for joining us today. That has been very useful.