By Dennis John, May 2020
The UK labour market shows the interaction between labour demand and labour supply in the UK. Following the coronavirus outbreak, however, like in many other countries, the UK’s labour market is not in a sustainable position. Before the coronavirus pandemic, however, many reports seemed to suggest that the UK labour market was faring relatively well following the onset of Brexit. However, if we delve deeper behind purely the bare numbers, it is clear to see that is not the case.
The primary, and most common metric looked at when studying unemployment levels in an economy is the unemployment rate in an economy. This can be measured via two metrics: the Claimant Count and the Labour Force Survey. According to the ONS, there was a jump of people claiming benefits of 856,500 in April, to 2.1 million. This represented a 70% rise in the number of people claiming means-tested benefits, and had it not been for the UK’s furlough scheme, these numbers would have been far greater.
There is also a very significant labour market issue in the UK which is actually very common in many OECD countries across the world: an aging population. For example, Japan has the highest population across the world, with around a third of its population being over the age of 65. By 2030, it is predicted there will be a fall of 8 million of Japan’s workforce, which would lead to a significant fall in labour supply, posing serious problems for Japan’s labour market. As a result of innovations in technology in the healthcare sector, the life expectancy of the UK has increased over time, currently at 81.4 years. Furthermore, there has been decreased levels of fertility in the UK, which has been caused by the increased availability of birth control, rising costs to bring up children and the emancipation of women. In 2017, the UK had a total fertility rate (TFR) of 1.74, well below the replacement rate of 2.075. Both of these factors, in conjunction, have resulted in a rapidly aging population within the UK. There are a few problems with an aging population on the UK economy. Firstly, an aging population means there will be an increase in the number of people above pension age in the UK, and there will be a contraction in the workforce. As a result, there is an increase in the size of transfer payments from the government, as there are increased pensions to be paid. Furthermore, a smaller workforce results in a fall in tax revenues from income tax. To fund this extra spending, the government will likely have to increase income tax rates on the shrinking workforce. As a result of a fall in UK residents’ net incomes, they will experience a fall in their standard of living, which could encourage emigration from the UK. This would simply further exacerbate the problem of a shrinking workforce.
There is another big issue that is often ignored: youth unemployment in the UK. This is a problem that started in 2005 and is only going to get worse as a result of the coronavirus pandemic. As a result of the pandemic leading to lower animal spirits in the economy, there has been a sharp fall in aggregate demand in the economy. This has meant that firms, which are rational and profit-maximising, will attempt to cut their costs of production as their revenue from products sold falls. This results in the firing of staff by labour, particularly by smaller firms who are unable to afford the extra costs of paying for labour. Job vacancies will also decrease, and this hits young people in the UK hard. This is because recruiters value experience very highly (29% stated it was ‘critical’), and as younger workers are likely to have the least experience. This results in a fall in youth employment levels. According to a study conducted by David Bell and David Blanchflower, being unemployed when young results in higher unemployment and subsequent lower pay. The primary cause for this is that when employers see periods of unemployment on a person’s CV, they may believe it to be as a result for them being inefficient workers. This dissuades employers from employing these workers in higher-paid jobs, decreasing the living standards of the workers.
Furthermore, a closer insight into the data makes it clear that despite the UK government having a very low unemployment rate, there is currently a very large gig economy in the UK of around 5 million to 6 million workers. Some estimates suggest that there could be as much as 18% of the active UK workforce in the gig economy. But what is the gig economy? The gig economy is a term used to refer to the freelance work commissioned on a short-term basis, as opposed to permanent contracted employment. The gig economy is often associated with zero-hours contracts, which are, in essence, employment contracted with no guaranteed hours. This means that employers are not guaranteed work by their employers, resulting in them having no guarantee of pay. The gig economy has grown in the UK as employers prefer the ability to have flexible employees. However, the resultant issue is there is significant instability on the level of pay an employee on a zero-hour contract receives. For example, in the retail sector, people on zero-hour contracts are likely to work more hours, and hence be paid more, during Christmas rather than in the middle of February, due to seasonal fluctuations in demand. Furthermore, since there is no guaranteed level of pay, workers often end up getting under-paid. According to the ONS, approximately 35% of those currently on zero-hours contracts would prefer to work longer hours. To follow up on my previous point, 8.8% of 16 to 24-year-olds are on zero-hours contracts, compared with just 1.5% of those from 35-49 years. As a result, despite youth employment increasing in the past few years before the onset of the coronavirus pandemic, it should be taken with a pinch of salt. Despite the fact that more young people are getting jobs, the increase in zero-hours contracts suggests that job satisfaction and stability are not likely to be increasing.
Another issue to be considered is the provision of skills in the current market. In 2019, there were 309,000 vacancies in the UK labour market, with approximately a third of those (106,000) being categorised as “hard-to-fill” and 79,000 (nearly three-quarters) of those considered as “skill-shortage vacancies” (SSVs). According to research conducted by the Open University, 68% of employers struggled to find the skills they required last year, resulting in a total cost to UK businesses of £4.4 billion. Brexit will just serve to exacerbate this problem in the UK labour market, as skills shortages which had been covered up in recent times by the arrival of EU immigrants will now be exposed as well. As well as SSVs, there is also a significant skills mismatch, with 28% of workers being underqualified for their job and 13% overqualified. Furthermore, this shortage in skills is one of the biggest reasons for the profound and pronounced drop in productivity growth in the UK in recent times. Estimates by the OECD suggests that if the UK’s skills mismatch were brought in line with other G7 countries, productivity could be boosted by around 5%. This would go a long way to closing the UK’s productivity gap with its fellow G7 countries. As of 2016, the UK had the second lowest productivity levels in the G7, only ahead of Japan (which, as mentioned before, is dealing with severe problems with its labour supply due to its rapidly aging population). Furthermore, output per worker was 15.4% below the average for the rest of the G7 economies in the same year.
There is currently no doubt that the coronavirus pandemic will have a substantial effect on the labour market in the UK. By midnight on 24 May 2020, 8.4 million jobs had been furloughed by the UK government’s Coronavirus Job Retention Scheme (CJRS). Similarly to the 2008 recession, some sectors will be disproportionately affected by the pandemic. Some workers have been hurt far more than others by this pandemic. Low paid workers are more likely to work in shut down sectors and less likely to be able to work from home. According to the IFS, one third of employees in the bottom 10% of earners work in shut down sectors, and less than 10% of the bottom half of earners say they are able to work from home. As mentioned before, like in the 2008 recession, young people, on average, will have a sharp fall in their incomes. Due to a fall in animal spirits in the economy, aggregate demand will fall. As a result, firms will lose profit, meaning that, to maximise profit, they must cut down on their costs of production. To do this, they will employ those on zero-hours contracts for less hours, resulting in lower wages. Young people are the most likely to be on zero-hours contracts, resulting in a fall in the average pay of young people.
In my opinion, the UK labour market has been in far better situations before throughout history. At the moment, there are deep, underlying structural problems at the heart of the UK labour market. Furthermore, the labour market is currently not very welcoming for young people, and as a result of the coronavirus pandemic, the problem will become far more harder to solve. Despite this, it is important to recognise that the UK labour market before the pandemic had been remarkably strong – albeit at the expense of productivity growth. The unemployment rate had fallen to below 4% for the first time since the mid-1970s, and the employment rate was at a historic high of 75%. Furthermore, the emancipation of women has lead to an higher female participation in the UK labour force. And the UK government have not completely ignored the issue of a rising average age of residents in the UK, increasing the state pension age for women in 2011. However, more needs to be done, particularly after the impact of COVID-19.
References:
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