PROF DONALD HOUSTON, PROFESSOR OF ECONOMIC GEOGRAPHY AT UNIVERSITY OF PORTSMOUTH – WRITTEN EVIDENCE ULS0027 – UK LABOUR SUPPLY

 

Rationale for submission

I have almost 25 years’ experience researching and publishing on local and regional labour market trends in the UK, including the impacts of health and migration on regional labour markets.  I have been closely monitoring and analysing labour market trends, and their geography, since the beginning of the COVID-19 pandemic, also with an interest in assessing any impacts on labour supply arising from Brexit.  As such, I have a certain amount of accumulated knowledge and expertise that may help the inquiry understand and interpret the current pressing labour supply situation.  I respond to the inquiry’s six questions below.  Unless otherwise stated, figures are taken or calculated from the Office for National Statistics’ A01 Summary of Labour Market Statistics dataset.  The analysis and interpretation are all my own.

 

Summary

 

 

 

 

 

 

 

 

 

 

  1. What are the recent trends in labour supply? How large are reductions in the size of the labour force?

In the years leading up to the COVID-19 pandemic, labour supply and demand were rising in parallel, although demand surged and growth in supply slowed somewhat from late 2018, meaning the labour market was tightening going into the pandemic (Figure 1).  The pandemic period saw labour supply reduced by almost exactly half a million in a little over a year between winter 2019-20 (Nov-Jan ’20) and Spring 2021 (Feb-April ’21), from 34.328 million to 33.829 million.  The reduction in labour supply almost exactly matches the rise in job vacancies since the pandemic (from around 800,000 to 1.3 million).  Although demand fell by a much greater amount due to social restrictions to control the pandemic, demand has rebounded to slightly above its pre-pandemic level, whereas labour supply has had a stuttering recovery and throughout 2022 has stabilised (for now) around 3-400,000 below its pre-pandemic level.  Although labour supply is actually higher than it was only a couple of years before the pandemic and its drop was less than that experienced during the recessions of the early 1980s and 1990s, its growth trajectory, and therefore its ability to keep pace with growing labour demand, has collapsed.  Had labour supply continued growing on its pre-pandemic trend, it is not unreasonable to assume the workforce could be up to a million larger than it is now in 2022.  The current vacancies crisis therefore seems to be driven principally by a reduction in labour supply.  If stagnant (or worse, declining) labour supply continues, growth in labour demand will also, by necessity, stall as businesses are unable to fill vacancies and meet customer demand, raising the risk of recession. 

In normal recessions, reductions in labour supply occur in response to a fall in labour demand, with supply picking up again during recovery.  However, both the COVID-19 pandemic and Brexit are exogenous (or external) downward shocks to labour supply, i.e. not driven by a recessionary fall in labour demand.  This is likely to explain why labour supply does not appear to be picking up in response to recovery in labour demand, contentions investigated in response to question 4.  In normal circumstances, it could have been expected that labour supply would have also resumed its upward pre-pandemic trend. 

Recent historical context is that labour supply (and demand) have been on long-term upward trends, reflecting sustained economic and demographic growth.  Since labour shortages following WWII, labour demand and supply have broadly keeping pace with each other, although with acute periods of labour surplus (unemployment) during recessions, most notably in the early 1980s and early 1990s, which led to entrenched detachment from the workforce particularly for older men, and to a lesser extent during the Great Recession following the Global Financial Crisis of 2008.  Economic recovery following the Great Recession saw relatively strong and sustained growth in both labour demand and supply (albeit concentrated in low-productivity sectors).  Growth in labour demand outstripped growth in labour supply during the recovery from the Great Recession, with low unemployment leaving little slack in the labour market to absorb downward shocks to labour supply.

Growth in labour supply has been boosted over recent decades has been boosted by rising economic activity rates among women.  However, the rate of increase has slowed and the gender gap in participation in the labour market has narrowed over time.  Looking forward, it could be expected that growth in labour supply from rising labour market participation among women will be less than in the past.

 

  1. Which sectors and regions are most affected? Are the public and private sectors affected differently?

Detailed analysis would need to be undertaken of previous occupation in the Labour Force Survey to definitely answer which sectors are most affected by workforce contraction.  Given the recent large contraction in labour supply, a reasonable proxy of reduction in labour supply is the increase in job vacancies by sector.  Nationally, job vacancies have increased by 59.0% between Jan-March 2020 and Jun-Aug 2022.  All sectors have seen increases in the number of vacancies.  Economically important or large sectors for employment with above average percentage increases include: Manufacturing (+75%); Construction (+69.2%); Accommodation & Food (+97.6%); Financial services (+82.8%); Professional scientific & technical (+76.7%); Health & social work (+61.0%).  Various wholesale and retail sectors have recorded lower, but still very substantial (16.3% to 29.0%), increases.  Real Estate is the lowest of all sectors, yet still records an increase of 7.1%.

Since the beginning of the pandemic, rural areas have recorded the greatest reductions in labour supply, with London and most other large cities actually recording growing workforces – although some smaller cities have recorded large declines (e.g. Leicester (-7.6%) and Aberdeen (-5.4%)). Analysis of “NUTS3” localities (of which there are 168 across the UK), indicates that the greatest proportionate decline in the workforce between 2019-20 and 2021-22 (Annual Population Survey data to the end of March in each case) was in the North West Highlands of Scotland (-23.2%) and the greatest increase was in Hackney & Newham (+11.3%).  There is thus considerable spatial variation in changes to labour supply.  Broader regional patterns do not appear to display a consistent north-south pattern, with the largest declines in labour supply in the East Midlands (-2.4%), South West (-2.3%), North East (-2.0%) and North West (-2.0%), and growth in London (+1.8%), Yorkshire & The Humber (+0.5%) and the West Midlands (+0.1%).  For comparison, over this two-year pandemic period, the UK workforce as a whole declined by 0.7%.

 

  1. Which people have been leaving the labour market? What is the socio-economic and demographic breakdown?

Despite the pandemic and Brexit, the UK population has continued to grow over recent years.  The reduction in labour supply is thus due to a reduction in the economic activity rate, which has fallen by around one percentage point of the population aged over 16 years since the pandemic and stands at 63.0% in May-July 2022, down from 63.9% in the same quarter in 2019. The number of inactive people of normal working age (16-64 years) has risen by 565,000 between Jan-March 2020 and May-July 2022, although almost half of this increase is accounted for by students.  The number of working age people not in the workforce due to long-term sickness or disability has risen by 337,000 over this period, and the number describing themselves as retired as risen by 51,000.  There are, however, according to the Annual Population Survey around 300,000 more people over the age of 65 who describe themselves as retired in 2022 compared to 2020, for some of whom ill-health may have been a factor in their decision to retire.

Strong growth in the number of EU workers was curtailed from 2016-18 following the Brexit referendum in 2016 and after a minor recovery the number declined significantly during the pandemic (from 2.5 million to 2.2 million employed persons), although has made somewhat of a recovery since the ending of ‘lockdowns’ to stand at 2.4 million in the three months to July 2022.  There appears to be around 100,000 less EU workers in the UK in 2022 than at the beginning of the pandemic, a reduction which Brexit taking place on 1st January 2021 may have contributed to.  Although there are around the same number of EU workers in the UK now as at the time of the Brexit referendum, Brexit appears to have curtailed strong growth in the number of EU workers.  Without Brexit and the pandemic, it is reasonable to assume that had growth continued at its long-term rate of around 100,000 per year, there could have been around half a million more EU workers in the UK than is currently the case in 2022.  However, non-EU immigration has grown strongly since the Brexit referendum, from around 3.0 million non-EU workers in 2016 to 3.9 million in 2022, which may to some extent be substituting for EU workers.

 

  1. What factors are contributing to reductions in the size of the labour force?

As described in my answer to question #3, rising long-term sickness and disability among the working-age population (16-64 years) and accelerated retirement among the over 65s.  Long COVID has been estimated to account for around 100,000 of the rise in long-term sickness, a figure likely to rise further as vaccines only give modest protection against infection and Long COVID.  The rest is due to other conditions, not least due to demand for health services outstripping supply following the pandemic. 

Brexit has curtailed growth in the number of EU workers and the pandemic has reduced the number of EU workers, but this has been offset by strong growth in the number of non-EU migrant workers.  This churn in the workforce arising from Brexit and the pandemic may have contributed to frictions and mismatches in the labour market.

 

  1. What effect are wage levels having on the supply of labour?

I have not researched this directly, but given the rising prevalence of ill-health and retirement as reasons for economic inactivity, I would be surprised if wage levels were having a strong impact on labour supply at present.  Nevertheless, falling real wage levels due to high price inflation may have contributed to some decisions to retire, since some pensions rise faster than wages.

 

  1. How do recent changes in the UK’s labour supply compare with those in other developed countries?

I have not yet investigated this, but intend to do so in the near future.

 

30 September 2022.