World’s worst dropout rate adds to headaches for UK work force

Britain is leading much of the world when it comes to people dropping out of the work force, not filling jobs despite a historic squeeze on living standards.

That shortage of staff is now causing chronic problems, from travel chaos at airports to coffee chains that have to close shops temporarily. It’s creating headaches for both Prime Minister Boris Johnson’s government and the Bank of England as workers strike for better pay, which officials fear will only drive inflation to fresh 40-year highs.

“I’ve not seen anything like this in my experience,” Olivier Blanchard, the 73-year-old former chief economist at the International Monetary Fund, told Bloomberg at Amundi’s World Investment Forum last week.

The issue came into sharp relief on Tuesday with official statistics showing real wages dropping at their fastest pace in 21 years and little progress on employment. There are 360,000 fewer people in work than before Covid in February 2020, due in part to a 450,000 jump in inactivity, those under 65 who neither have nor want a job. 

Against pre-crisis trends, the UK is short a million workers and for the first time ever employers are advertising more job vacancies than there are people looking. Tony Wilson, director of the Institute for Employment Studies, said it was “the tightest labor market on record.”

According to Office for National Statistics analysis of data from the Organization for Economic Cooperation and Development, of the Group of Seven industrialized nations only Britain and the US have a participation problem, with more work force drop-outs than before the pandemic. The rise in inactivity is most severe in the UK, which faces further economic setbacks if it is not resolved.

The OECD this month warned the government that “a prolonged period of acute supply and labor shortages could force firms into a more permanent reduction in their operating capacity,” effectively shutting down parts of the economy because Britain can no longer find the staff.

Despite Britain’s exit from the European Union, the problem is not migration. The number of foreign nationals working in the UK is 265,000 higher than at the end of 2019. There are 640,000 fewer Britons in employment.

That fall is due to two trends: Britons choosing to drop out of work altogether and long-term sickness. 

How can people afford not to work when life is getting more expensive? Blanchard puts the shortage of workers in the US down to direct cash handouts during the pandemic, which are providing a financial cushion as they have yet to be spent.

The UK’s equivalent are the 290,000 aged between 50 and 64 who left work early, many of whom are graduates with a career in professional and technical activities, ONS data shows. They didn’t get direct cash handouts as in the US, Canada and Japan but they did accumulate much of the £200 billion of “accidental savings” built up in lockdowns as they could not spend their wages.  

“We’ve had a shock which allowed people to assess how nice it was to work from home,” Blanchard said. “This has led people to think differently. It’s like the integration of women in the labor force during World War 2. They had to work and then they continued to work. These are events that change the way people think. I think they are permanent.”

Blanchard suggested burnout may have been behind the change in mindset, citing a woman who quit her stressful job running a restaurant for a less demanding role. However, the ONS data indicates many—particularly women—don’t have that luxury.

Total employment is 1.1 percent below pre-pandemic levels but hours worked are down just 0.8 percent. The picture is stark for working women, who number 0.7 percent fewer but are working 2.3 percent more hours.

Stress, as well as the lingering affects of Covid, may explain the 90,000 increase in inactivity since the pandemic among those in the prime of their working lives, aged 25-50. Half of the increase in activity, 225,000, is among those aged 16 to 64 who are “long-term sick.” Many have declared mental health issues and the ONS estimates 376,000 people have had Covid symptoms for at least two years. 

According to Matthew Whittaker, chief executive at Pro Bono Economics, young women account for the majority with mental health problems. Tony Wilson, director of the Institute for Employment Studies, has crunched the welfare data and found “a staggering increase in those aged 25-49 and assessed as too ill to work.”

Those dynamics raise tricky questions for the government about work incentives. 

UK Chancellor of the Exchequer Rishi Sunak initially tried to sharpen those incentives, providing little support for poor households while cutting payroll taxes for those on low pay and telling them the best way to deal with the cost of living crisis was to get a job. 

Last month, he reversed tack and increased support for the 8 million most vulnerable households to £1,200 to top up benefit payments to help with soaring energy bills. He also committed to lifting benefits next year by a forecast 9.5 percent, the biggest annual increase since 1991.

Whittaker said it was plausible that the combination of existing welfare, one-off cost of living support and the promise of an inflation-busting benefit rise next year may deter some people from rejoining the labor force, particularly as statutory sick pay is not as generous.

“If you are living with long Covid or have other health issues, you may ask yourself ‘Do I go back to work with a skeptical employer?’” Whittaker said. “If the mental health problem is self-declared, there is the question of whether the employer will accept that. People may be doing these sums in their heads.”

Image credits: Bloomberg