Employment growth set to halve in next decade as labour and skills shortages bite

New analysis shows that major reforms to our employment and skills system are needed, to avoid weaker jobs growth contributing to higher inflation and falling living standards in the longer term

• Combination of ageing population, falling birth rates and lower labour market migration will see employment grow in the years ahead at less than half the rate than we’ve seen since 2000 – equivalent to 3.4 million fewer people in work by 2040 than if the trends of the last two decades had continued  
• At same time, UK has the least well-used employment service in Europe – with rates of engagement at just one third of the European average, and a quarter of the rates in Germany and France  
• Report summarises evidence gathered in the first six months of the Commission on the Future of Employment Support – which has been the largest consultation of its kind, hearing from over 200 organisations, individuals and employer bodies  
• Report calls for major reforms to employment services to raise participation in the labour force and boost productivity at work – with next stage of the Commission due to develop options for reform

New analysis published on Tuesday 25 July will show that employment growth in the UK is set to slow dramatically in the coming years, as a result of our ageing population, lower birth rates and lower labour market migration since the EU referendum.

The analysis, by the Institute for Employment Studies and abrdn Financial Fairness Trust, uses official population projections to forecast employment growth for different age groups through to 2040. In the central scenario, we find that employment will grow by less than half the rate we have been used to in the two decades before the pandemic. Between 2000 and 2020, employment grew by on average 300 thousand a year; while between 2020 and 2040 this will fall to around 120 thousand. Over twenty years, this means that there will be 3.4 million fewer people in work than if the trends of the last twenty years had continued.

Labour and skills shortages have been a constant feature over the last two years and have contributed to persistently high inflation. This analysis shows that far from being a post-Covid blip, these issues are set to continue for decades. This means that governments will no longer be able to rely on strong employment growth to support higher economic growth and lower inflation – instead we will need to do far more both to raise participation in work and to be more productive in work.

This analysis is being published as part of the interim report from the Commission on the Future of Employment Support, which is being hosted by the Institute for Employment Studies in partnership with the abrdn Financial Fairness Trust. The report presents findings from six months of consultation and analysis, engaging with over 200 organisations and individuals – including training providers, local authorities, employers and unemployed people.

The report sets out that our approach to employment support needs major reform if it is to meet the challenges that we will face from a smaller labour force and changing economy, and the opportunities from advances in technology and the transition to Net Zero. In particular, it finds that our system:

• Is too narrow in its focus
• Overly emphasises entry to ‘any job’ rather than the right job
• Prioritises the quantity of jobsearch rather than its quality
• Offers very little to employers beyond vacancy gathering and advertising
• Is locked in a cycle of short-term funding, contracts and initiatives

Some of these challenges are laid bare in analysis by the OECD which shows that the UK has the least well-used employment service in Europe – with fewer than one fifth of jobseekers regularly accessing support. This is just one third of the European average, and one quarter of the equivalent figures for France and Germany.

Commenting on the report, Mubin Haq, Commissioner and Chief Executive of abrdn Financial Fairness Trust, said:

“There are huge concerns in relation to current labour shortages. But today’s report highlights this is not a temporary blip, with employment growth set to shrink significantly. Our support services to get people into jobs are too short-term, under-used, under-funded and not working for many employers and those locked out of the labour market. That’s a massive loss to our economy and to raising living standards, which we must prioritise.”

Tony Wilson, lead report author and Director at the Institute for Employment Studies, added:

“This analysis shows that we just can’t rely on ever-stronger employment growth to deliver future economic growth. We need a new approach, that can help more people to get into work and to be more productive in work and that can work far better with employers, industry and wider partners. If we don’t do this then we risk getting stuck in the rut we’re in now, of labour shortages, skills gaps, stagnant growth and high inflation.”

Sector Response

Recruitment & Employment Confederation (REC)’s Deputy Chief Executive Kate Shoesmith said:

“Today’s report shows how desperately the country needs a workforce plan from government, advised by business, that looks at reform of employment support, skills, immigration, and labour market activation. It should also work with labour market experts to better understand and address the causes of economic inactivity, such as the scope of back-to-work schemes and the provision of childcare.

“The picture painted of continued labour shortages in today’s report shows why businesses must look to broaden their help by building deeper partnerships with recruiters. Likewise, recruiters must embrace technology to improve the efficiency, speed, and reach of their service, as we set out in our own recent ‘Tech-enabled humanity’ report.”

Kate Shoesmith added:

“The next stage of the report will look at how employment support links up with skills and training programmes. A smart move for the government would be to expand the courses where costs can be drawn from the apprenticeship levy pot, making it more flexible so that more people can access shorter and modular courses and licence-to-practise style training.

“The report also shows how high the stakes are for the government’s Local Skills Improvement Plans (LSIPs). LSIPs must involve SMEs, recruiters and other labour market experts to lessen the ongoing mismatch between the jobs that are available locally and the skills, education, training opportunities and infrastructure available to local people. Mayors, working alongside local business leaders, the public sector and labour market experts, should develop plans to meet emerging needs and get ahead of demand for future skills to unlock innovation.”