Division of labour

  • 29 April 2022 (5 min read)

A fall in the UK unemployment rate to close to its pre-pandemic level has been welcome, but the striking headline figures hide a more complicated reality.

Employment remains below pre-pandemic figures. The reason unemployment is so low reflects the large numbers of people that quit the labour force. Whether they return or not will have a bearing on the tightness of the labour market and implications for monetary policy.

When the furlough scheme closed at the end of September 2021 it still had around one million people on it. The unwinding of the scheme was expected to lead to a slight uptick in the jobless rate as the labour market readjusted. Instead, we have seen unemployment continue to fall, with the rate decreasing steadily to 4.1%.

Despite this drop, there are still 600,000 fewer people in employment than before the pandemic. The reason for this apparent contradiction is, post-pandemic, the UK labour force remains 500,000 smaller. The reduced pool of potential workers has exacerbated the current pressures.

Help Wanted

Job vacancies are at a record high of 1.3 million. The number of unemployed people per vacancy is also the lowest on record since 2001, with just over one unemployed person for every vacancy. This apparent scarcity of labour supply has exerted upwards pressure on wages, creating concerns of persistent inflation.

During the pandemic, inactivity rose as people left the workforce to reduce exposure to infection, to care for others or became unable to participate for health reasons. A key uncertainty involves the persistence of this increase of inactivity and how abour force participation will evolve as the economy continues to recover.

In the UK, the uptick in inactivity has primarily been driven by an increase in the number of people studying, which often tends to rise during recessions; long-term sickness, which reports suggest may, in part, be related to people suffering from long Covid; and those opting for early retirement, a decision likely to have been influenced by the pandemic.

The fall in participation has compounded the longer-term issue of an ageing population that was weighing on growth prior to the pandemic but has aso likely been amplified by a decrease in global migration.

Gender Gap

Internationally, women lost jobs at a faster rate than men during the pandemic, in a large part due to the fact that women were over-represented in those sectors most affected by lockdowns, such as retail and other consumer-facing services.

Even with the rebound in activity, gender gaps remain in employment as these sectors have nor yet fully recovered.

Unemployment for women has lagged behind that of men, where the pre-Covid gap has closed entirely. As well as the lingering short falls in employment, the difference in unemployement rates can be explained by disparity in participation between women and men. 

The manjority of women who exited the workforce have returned, whereas large gaps for men.

Generation game

Inactivity has risen across all ages but the sharp increases are concentrated in older age groups, reversing the pre-pandemic trend of increased participation of older workers.

For younger people, while inactivity remains higher, people have begun to return to the workforce, and we have started to see the rate unwind from the peak.

Participation rates for workers aged 50-64 are at the lowest levels since the start of the pandemic, suggesting this may be a more permanent shift.

The reasons for the divergence between older and younger workers are multifaceted. Organisations that support older workers suggest that, while some may have chosen to withdraw from the workforce, some of this may be due to ill health and a reluctance of firms to hire older workers or provide the lexibility they may need.

Work ethics

The government recently introduced polices aimed at easing pressures, announcing a 'way to work' scheme designed to incentivise the unemployed back into work.

But given the issue appears to be one of low participation rather than high unemployment, and without consideration of how to support re-entry for those who have left the workforce, the impact of such policies is likely to be limited.

The Bank of England expects most of these absent workers to return as the recovery continues. The risk is that if this re-entry takes longer than expected or is not realised, pressures in the labour market will remain. This would mean more monetary tightening will be needed over the medium term.

The immediate challenge is to gauge how many of the pandemic- related exits will naturally return and to understand the risk of persistent withdrawals. Given ongoing uncertainty around future migration and demographic changes in the UK, the risk of a persistently tight labour market is real.

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