RECRUITMENT AND EMPLOYMENT CONFEDERATION – WRITTEN EVIDENCE ULS0011 – UK LABOUR SUPPLY

About the REC

The Recruitment & Employment Confederation (REC) is the professional body for the recruitment industry. We represent 3,000 businesses who help more than a million people find a new permanent job each year, and on any given day place nearly 1 million onto a temporary, contract or freelance assignment. We drive standards and empower recruitment businesses to build better futures for jobseekers and businesses, and we do this by providing legal advice, business support, training and labour market intelligence.

The REC is committed to working with the government to find workable solutions to current labour market challenges, not least ongoing labour and skills shortages. Our members give us valuable insight into what’s happening in the labour market, as well as an understanding of the impact government policy has if implemented.

The data we share in this written response comes from several of our data sources, including:

• REC's Jobs Outlook – our monthly survey of employers on their hiring intentions, conducted in partnership with Savanta ComRes
• REC & KPMG's Report on Jobs – our monthly survey of recruiters on hiring activity in the month just gone, making this the earliest lead indicator on UK job market performance. This has been completed by S&P Global (formerly IHS Markit) on behalf of the REC for 25 years.
• REC’s Labour Market Tracker - analyses job posting and vacancy data with labour market intelligence experts Lightcast (formerly Emsi-Burning Glass).

Summary

Over the past two years, labour and skills shortages have dominated headlines and been felt by businesses across the country. At the REC, we have been talking about the issues the UK labour market faces for many years. And as we have seen over recent months, they have the potential to significantly damage the UK economy by curtailing our ability to invest and grow in the future.

Our recent report, Overcoming Shortages: how to create a sustainable labour market, shows that the economic impact of not addressing labour shortages could see UK GDP fall by up to £39 billion every year from 2024. 

While the pandemic has thrown the situation into sharp focus, labour and skills shortages have been with us for years. Latest REC data shows:

• Ongoing skills shortages, a reduced supply of foreign workers and greater hesitancy among some people to apply for new roles has resulted in a marked drop in total candidate supply.
• The ongoing imbalance between the supply and demand for workers and the cost-of-living crisis has driven further increases in starting pay.
• Demand shows no signs of slowing down. In the last week of August 2022, there were 2.08 million job adverts in the UK, a new record high for 2022.

Our national challenge is that there are over half a million fewer people in the labour market than before the pandemic. Solving this participation problem is essential for economic recovery and growth. We know that workers are the most important asset for business - they help drive their success and contribute to the success of our economy. To create a sustainable labour market and stoke economic growth, we need to put people first.

Much of this challenge lies with business to address – from getting offers of employment right to investing in skills training. If businesses say people are their most important asset, they need to act that way. But we also need an environment that helps businesses make the changes and investment needed.

We want to work with government to develop a cohesive, long-term plan for how the UK will put people planning at the heart of its growth strategy, and the unified role government can play. This must go well beyond just skills. This plan should be 'owned' by Cabinet Office or an independent commission. Government must work closely with business and others on developing and monitoring progress and commit to keeping the approach in place over many years.

We have answered questions from the Committee where we can share data and insights. Our latest research is included at the back of the submission.

REC data demonstrates the scale of the challenge

Labour and skills shortages are affecting every sector, and in every part of the UK. The REC first flagged a return to strength for the labour market last April - based on the day-to-day insights our recruiter members were seeing. However, labour and skills shortages remain one of the biggest concerns for recruiters and their client businesses.

While there are fewer unemployed people in the UK, employment levels and hours worked are still lower than pre-pandemic levels. This is because of rising economic inactivity, with more people not working and not seeking employment. Over time, this capacity constraint will slow growth and contribute to inflation.

Shortages aren’t new, in fact we’ve been talking about them for years at the REC. However, Brexit and the pandemic certainly exacerbated the issues, and had a profound impact on the way we work. According to 2021 ONS figures, net migration fell by 88% in 2020 compared to the previous year – likely caused by the pandemic and Brexit. An estimated 268,000 people moved to the UK in 2020. This is a significant decline compared to almost 600,000 in 2019. Emigration fell as well, but to a lesser extent. Net migration in 2020 for EU nationals was negative with 94,000 more EU nationals estimated to have left the UK than to have arrived.

In 2021, we saw record-breaking recruitment figures - a trend that our lead indicator data shows is beginning to level off. A slowdown from those record-breaking highs is by no means an indicator that labour and skills shortages are over. For example, the REC’s latest Labour Market Tracker showed that in the last week of August, there were 2.08 million job adverts in the UK, a new record high for 2022.

The REC represents recruitment businesses working in every sector throughout the UK and our members are reporting shortages across the board - from education to construction, hospitality to manufacturing. Below are just a few examples of what we are seeing in some specific sectors.

Health and Social Care

The REC’s Labour Market Tracker showed there were about 86,000 vacancies for nurses in August 2022 and 95,000 for care workers and home carers. Even before the pandemic, the NHS’s own numbers showed that thousands of nurses were leaving the profession every year, creating a high level of vacancies. The biggest concern is the inability to easily fill these vacancies. Our Report on Jobs data shows that jobs in the Nursing/Medical/Care sectors are continually in high demand for both permanent and temporary roles. At the moment, 15,000 NHS roles, equivalent to 5 million hours of shifts, are filled by agency workers each quarter. For nursing vacancies, agency workers fill 3 in 4 roles.

IT and Cyber

According to the 2021 (ISC)[1] Cybersecurity Workforce Study, the global cybersecurity workforce needs to grow 65% to effectively defend organisations’ critical assets. Software development and software engineering skills also feature heavily in job adverts. Unsurprisingly, REC data shows that programming skills (SQL, Python, Javascript etc.) are in increasingly high demand. For example, out of the 2.4 million jobs within the STEM field advertised between June and July 2022, just over 45,000 mentioned software development skills. In the same period, more than 76,000 jobs mentioned SQL programming language. The numbers tally with insights from our members too with one recruiting in the sector saying "they’re [software engineers and developers] just not around anymore. Supply just isn’t keeping up with demand.”

Driving and Logistics

The driving and logistics sector experienced 'crisis' level shortages in 2021 and although media attention has waned, the sector is still seeing serious shortages, particularly as it struggles to attract new drivers. According to REC member, DriverRequire, at least 8,000 drivers under the age of 30 left the profession in the last three months of 2021. In August 2022, just 1% of the 22,858 Large Goods Vehicle (LGV) drivers were female.

Veterinary

An REC member, operating within the veterinary industry, has experienced significant difficulties since the UK's departure from the EU. Prior to Brexit, around 20% of the workforce was made up of employees originating from the EU. As the tables below show, there are now more EU vets leaving the UK profession than joining. In 2018, EU vets accounted for almost half (52%) of the total new registrations. Part of the reason for this drop in workers is because of visa costs and new eligibility requirements, including qualifying from an accredited university and the introduction of a language requirement.

(All)                                                                                                  (EU qualified only)

We know why people are leaving the workforce

We’ve seen economic inactivity - those not working and not looking for work – on the rise since the start of the pandemic. The two main groups accounting for that are 16–24-year-olds and over 50s. During times of economic uncertainty, it’s common for younger people to stay in education, a trend that generally rights itself, but having 50–60-year-olds stepping back from the labour market is a concern, particularly when the majority of those people are too young to retire.

It’s also impacting certain sectors more than others, for example, we know there are more drivers over the age of 60 than under the age of 30 and our members tell us this is a growing concern. Similarly, in education and healthcare, we've seen teachers and medical professionals leave after training, with many then choosing to work via an agency because that offers them more control over their working patterns.

We know that one of the groups of people who actively choose flexible work, including temporary contracts, are those aged 50 and over. In some instances, they want to try something new, balance work with other responsibilities (often caring - for children on the one hand, and elderly parents on the other), or are just facing burnout and want to take a step back. Unless we can genuinely harness flexibility in the labour market, we will lose that group entirely.

The 2021 Census showed the number of people aged 65 and over has surpassed the number of children aged under 15, highlighting why planning for the future workforce needs to be at the top of the government's agenda. That’s why we’ve called on government to consider introducing statutory two-week leave for grandparents and requiring businesses to conduct a review with all staff over the age of 55 on flexible working arrangements.

Latest ONS labour market statistics show another worrying indicator behind all of this; a strong correlation between economic inactivity and long-term illness. These sharp falls in employment and participation are coming despite unemployment falling to its lowest level since 1974 and continued labour demand creating an extremely tight labour market. Economic inactivity because of a long-term health condition has reached 2.46 million – its highest since comparable records began in 1992. That’s also up by 350,000 since the start of the pandemic.

How to keep people in work

We urgently need better workforce planning in the NHS, something the REC has been calling for Fundamentally, we need to work out what our ageing population needs from the NHS and care sector, and then ensure enough doctors, nurses and other professionals and support staff are in training, providing more funding for education and in-work training. In the short-term, introducing phased retirement for NHS workers could be an option, however working conditions need to be right, so that workers actually want to adopt this.

We can also do more to support those who are out of work and who want a job to prepare for, find and keep work, not least because almost 600,000 of those out of work due to long-term ill health say that they want a job. That means improving our activation programmes to help Job Centres get people into work quickly, radically reforming the skills system to help fill some of the gaps, including redesigning the Apprenticeship Levy so that funds from it can be used by temporary workers also. The levy would be most effective if it facilitated shorter, modular courses that genuinely plug some of the gaps that employers want filled. We also need an immigration system that is flexible enough to address the shortages we’re seeing in some parts of the economy. Simple policy changes like extending work visas to at least five years – from the current two or three years, updating the Shortage Occupations List (SOL) every six months, and reducing waiting time for asylum seekers to be eligible to work in the UK from 12 months to six months would be extremely effective, and ensure our immigration system is fit for purpose.

There is already welcome work underway which demonstrates the value of business and government collaboration. For example, the REC is part of the 50 Plus Choices taskforce, set up by the former Minister for Employment, which aims to provide advice and recommendations on recruiting and retaining older workers. As part of our work in an earlier working group under this taskforce, we were one of a small number of business bodies that published a report on menopause and employment which made recommendations aimed at bringing about comprehensive change around menopause transition awareness. There are close to 4 million women aged 45-55 in work in the UK - meaning there are few workplaces where the menopause is not being experienced by staff. We know menopause is a key recruitment and retention issue. Working with the Department for Work and Pensions, the REC also acted as a Gateway organisation for the Kickstart Scheme, delivering 210 placements, and we're currently working in collaboration with Maximus (employability services provider) to support the Restart Scheme, placing 130 people into new roles through REC members so far this year.

Higher wages must be driven by UK competitiveness and productivity 

According to REC data, in March 2022, recruitment consultancies saw the sharpest increase in permanent starting salaries in the 24-and-a-half years of data collection amid reports of intense competition for staff. Our latest Report on Jobs data showed that average starting salaries for permanent staff were still rising rapidly in August, though the rate of increase softened from March's survey record. Higher rates of pay were frequently linked to intense competition for candidates and the rising cost of living.

While the post-pandemic jobs rush is now abating, there are no real signs of a slowdown in employer demand. In fact, reports from REC members suggest that any lowering of confidence in the market is driven primarily by candidates playing it safe, resulting in further tightening of the market. So, it’s no surprise that pay rates continue to rise, especially considering increasing inflation. The main challenge now is sustaining this positive position, as labour shortages damage growth and pay over the long term. Controlling inflation and a clear plan for growth are essential parts of making sure the UK is resilient to economic uncertainty. Ultimately, higher wages are only sustainable where the economic growth is being driven by better UK competitiveness and productivity. 

It’s also important to recognise that for those not moving jobs, ‘real pay’ hasn’t gone up but decreased because of soaring inflation. In addition, REC members are reporting that the offer and counter offer is on the rise. For some companies that simply can’t afford to increase wages any further, finding other ways to attract and retain staff is key. REC members tell us that factors like flexible working, enhanced maternity/paternity packages, and better pensions, can be just as important (if not even more important) to many candidates in today's job market. We can't overemphasise the value of good working conditions - now, more than ever, candidates want (and expect) to have a great place to work.

Shortages aren’t just a UK problem

Labour and skills shortages aren’t just a UK issue. The REC is a member of the World Employment Confederation (WEC), and we see shortages featuring high on the agenda of national federations around the world. Part of the reason we looked to our G7 counterparts in our ‘Overcoming Shortages’ report, was to demonstrate how businesses and governments in other countries are approaching this issue, so that we might be able to learn and share best practice.

According to the Business Development Bank of Canada survey, 55% of Canadian entrepreneurs are struggling to hire the workers they need. According to Canada's National Business Survey, to close this skills gap, 47% of executives are offering more training for new employees, compared to only 36% of executives who expect prospective employees to be better prepared for the labour market.

When looking into sector-specific disparities, in a recent 2022 survey by Statistics Canada, the sector most impacted by labour challenges was accommodation and food services – with two-thirds of businesses in the sector facing labour shortages. Construction and manufacturing are also expecting heavy recruiting challenges.

In a 2022 survey by the Business Council of Canada, the most effective action taken by businesses to alleviate the labour shortage was reported to be work-integrated learning. This is being increasingly adopted as part of recruitment strategies and businesses are collaborating with post-secondary education institutions to do so. In a study looking at the biggest strategies employed by Canadian businesses to deal with labour and skills shortages, investing in technology and automation was amongst the most popular strategies.

In addition to substantial investment to boost numeracy and soft skills, and better digital adoption, immigration is amongst the top priority policy being used in Canada. Immigration and Citizenship Canada implemented the Global Skills Strategy to support businesses in attracting foreign talent in a simpler way. This includes shorter application processing times and exemptions from having to acquire work permits targeted towards workers who are most in demand.

In Germany, according to the Federal Ministry for Economic Affairs and Climate Action, between 2011-2018, vacancies in occupations with labour and skills shortages rose from 43% to 79%. More than 50% of businesses view labour and skills shortages as the greatest threat to the development of their business. As recent as the second quarter of 2022, labour and skills shortages were reported to disrupt the operations of 44% of businesses.

According to the International Labour Organization, the working-age population in Germany is estimated to drop by 3.9 million, to 45.9 million, by 2030, and to fall by 10.2 million by 2060. This is on top of pressures to the labour force caused by Germany facing a below-average participation rate of 61%, which compares to 79% in the UK.

To boost vocational qualifications, the Federal Government, the Federal Employment Agency, commerce, trade unions and the Länder (16 federal subdivisions of Germany) formed the Alliance for Initial and Further Training. A main aim is to promote the 300 professions for which vocational training is available to young people. To increase the participation rate, a campaign was established to involve more women and older people in working life, as well as providing support to companies to promote a diverse workforce. This kind of joined up work is a model the UK should be following to deal with shortages.

Immigration has been a key policy for Germany. The Federal Ministry for Economic Affairs and Climate Action has supported 170 refugee recruitment advisors to help companies in filling their vacancies and vocational training positions with refugees since 2016. These advisors organise work placements, job shadowing opportunities, support in acquiring basic skills, and find jobs and vocational training positions. As of 2018, they helped 9,700 refugees find work and 2,585 took up dual vocational training.

REC recommendations

Although much of the challenge lies with business to address, in our Overcoming Shortages report, we set out a number of practical policy interventions government can make on skills, immigration, levelling up and labour market activation.

On skills:

Although skills policy is devolved, all four nations need to make improvements to ensure that policies are genuinely responding to local need. Governments’ role should be to ensure that supply is available for business needs locally, and that the quality of that supply is high. Funding arrangements need to ensure that public money catalyses private investment and creates an atmosphere in sectors and local areas where free riding by non-training employers is challenged. The current apprenticeship levy doesn’t do that – and this has always been businesses’ primary complaint.

• Accept that the apprenticeship levy has failed in its ambitions, and work with business to redesign it in ways that encourage high-quality early-career apprenticeships, good retraining options and modular interventions that help move careers on quickly by addressing shortages and helping to level up through increased salaries for enhanced skills. The issue is not the existence of a levy – it is making sure it funds the right things.
• Give even more power over skills policy to devolved governments and local and regional mayors – along with control over the fiscal measures required to fund this. Consolidate this by ensuring that local businesses and recruiters are consulted on the skills needs in their area.
• Expand Local Skills Improvement Plans (LSIPs) across England with a view to supporting the model across the entire UK, in ways which are appropriate for each devolved system. Improvements should be made to build on the success of the eight current schemes, including offering more short and modular courses, and ensuring that participating colleges have access to current employer data.
• Create a tax credit scheme for employers who invest in training, and specifically, a ‘green tax credit’ for businesses that invest in green skills, green jobs and reduce their carbon footprint.XXX

On immigration:

We should have an 'immigration for growth' policy approach. Part of a responsive and responsible labour market has to be an immigration system that meets business needs to facilitate growth, innovation and encourage increased productivity.

• Extend work visas to at least five years – from the current two or three years.
• Update the Shortage Occupations List (SOL) every six months to make the immigration system more responsive.
• Reduce the waiting time for asylum seekers to be eligible to work in the UK from 12 months to six months.

On levelling up and labour market activation:

There are a number of opportunities that the government can provide to a wide range of marginalised groups who are currently excluded from the labour market. The government needs to review the current legislative and benefits framework, so they provide the right type of support to accommodate different people such as older workers, ethnic minorities, people with disabilities, young entrants to the jobs market and those with caring responsibilities.

• Further invest in local transport, involve local businesses in local transport plans, and reward businesses who operate private transport services for their workers.

• Build on the success of the Gatsby Benchmarks to ensure every young person gets effective, locally relevant careers advice
• Improve access to childcare for working families by reforming childcare benefits and improving funding for childcare providers.
• Introduce statutory two-week leave for grandparents and require businesses to conduct a review with all staff over the age of 55 on flexible working arrangements.
• Mandate ethnicity and disability pay gap reporting for large businesses to further diversify the labour market and retain talent.
• Create the next iteration of the Kickstart Scheme, learning from past experience.

To deliver these policy recommendations, government should first create a future workforce strategy, which will help avoid future recessions, boost productivity and increase investment. Without this collaboration, the government won't achieve its ambitions for a high-wage, high-growth economy.

Latest REC data

Report on Jobs

The latest UK Report on Jobs showed hiring activity growth slowing amid increased economic uncertainty.

• Nursing/Medical/Care topped the permanent staff demand league table in August, followed closely by Hotel & Catering.
• All monitored job categories recorded higher temporary vacancies midway through the third quarter. Nursing/Medical/Care signalled by far the steepest increase in demand for short-term workers.
• All four monitored English regions recorded marked increases in temp billings, with the sharpest expansion seen in London.
• Candidate availability continued to fall sharply in August, with permanent worker availability deteriorating at a quicker pace than that seen for short-term staff.
• Starting salaries for permanent staff continued to rise rapidly in August, though the rate of inflation softened further from March's survey record. Temp wages meanwhile rose at a slightly sharper pace in August.

JobsOutlook

The REC’s latest JobsOutlook showed that employers’ confidence in both the UK economic outlook and their own ability to invest in their business dropped quickly in the second quarter of 2022, with inflation and labour shortages causing widespread concern.

In April-June 2022, employer confidence in making hiring and investment decisions for their own business hit net: -13. This is the same level as April-June 2020, at the height of the pandemic. Meanwhile, business confidence in the economy fell by 40% from January-March 2022 to net: -50.

Despite this, labour shortages mean that many firms are still trying to hire new staff. The hiring outlook stayed positive, although it slowed slightly from the first quarter of this year. In the short term, hiring intentions for permanent staff decreased by 5 percentage points to net: +23, while demand for temporary workers fell by 4 points to net: +12.

Labour Market Tracker

In the last week of August 2022, there were 2.08 million job adverts in the UK, a new record high for 2022 

• There were 269,000 new job postings in the same period – the second highest figure on record 
• All occupations in the UK, except dancers, actors and entertainers, recorded notable increases in job adverts 
• All regions in the UK recorded an increase in job adverts 

23 September 2022

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