Expanding the UK’s shrinking workforce

The Spring Budget is expected to try to reduce economic inactivity. What’s the problem and what might work?

Understanding the issue

The workforce – the number of people either in work or either looking or available for work – is one million smaller than if pre-pandemic trends had continued. Our Missing Workers report shows that some of this is due to slower population growth and some due to an aging population (we estimate almost all the rise in the number of over 65s outside the workforce is just because there are more over 65s).

But at least some of our shrinking workforce is down to people being less likely to work than before. Three quarters of the rise in economic inactivity among 50-64 year olds is down to a reduced likelihood of being in work rather than population growth, and there’s been a big rise in people citing long-term sickness as a reason for economic inactivity.

There’s a lot of talk about how we can tempt over 50s who quit work during the pandemic off the golf course. But a. good luck with that and b. this is only a small part of the challenge. Our research shows stark inequalities: people who’ve retired early are most likely to be from higher earning roles in predominantly male-dominated fields like finance; whereas people out of the workforce due to long-term sickness are more likely to be from lower earning roles in female-dominated sectors like caring.

And in any case this isn’t just about the pandemic. Nine million people are economically inactive. But many can’t work, 1.9 million people receiving Universal Credit don’t have to look for work largely due to disability. Many don’t need to work, including better-off early retirees. And many will work in the future, the second biggest reason for economic inactivity (up 62% in 30 years) is being a student. They’re focusing on studying (and maybe could benefit from work experience) but most will work thereafter.

So the 1.7 million economically inactive people who say they want to work is probably a better measure of potential labour supply than the 9 million people who are economically inactive in total.

We can (and must) do better

None of this is inevitable. First, the UK is an outlier internationally. Most other countries have lower economic inactivity rates for over 50s than before the pandemic and the UK’s employment recovery is the slowest in the G7 (though in both cases from a relatively strong starting point).

Second, economic inactivity rates had been falling for several decades before the pandemic. This reflected falling numbers of people out of the labour market due to caring responsibilities as female employment rates rose, and rising employment for older people as the State Pension Age rose. We need to restart stalled progress.

Not only can we do this, we must. Over the next 17 years, 1.4 million more people will retire than young people will join. This demographic crunch means we must widen our workforce to include more older people, disabled people and those with caring responsibilities if we are to avoid prosperity-sapping worker shortages.

Five priorities for change

We should set a higher ambition for an 80% employment rate, the highest in the G7, boosting the economy by £23bn per year.

1. Widen access to employment support. Only one in ten out-of-work disabled people and 50-64 year olds gets help to find work each year. This is because most employment schemes focus on people on unemployment-related benefits. A few more bootcamp places won’t cut the mustard. We need to expand and open up employment support like Restart, UK Shared Prosperity Fund, and programmes run by local government and social housing providers to all who are out of work but want a job.
2. Services working together. People need joined-up support, particularly health, work and skills, but often it’s siloed. There’s some great examples, like Greater Manchester’s Working Well, but we need to make this business as usual. Could devolution deals help to promote this? Similarly the Government has said it wants to abolish the Work Capability Assessment, but it still needs a gateway to disability-related support and to decide who must look for work – how will it do this without the WCA? Would a souped-up Personal Independence Payment assessment work?
3. Invest in social infrastructure. It’s difficult to work if you can’t get the health support,  childcare or social care you need, or if the bus or train isn’t affordable or doesn’t run reliably. This social infrastructure is vital for work (and much more) but much of it is creaking at the seams. Plans to increase the cap on Universal Credit childcare payments and pay them up front, rather than in arrears, are a big step forward.
4. Work with employers. We need to help employers think about how they design jobs to attract people with disabilities or caring responsibilities and how they recruit, as well as tackling ageism. There’s lots of good practice, but a lot of it is patchy. Initiatives like the Centre for Ageing Better’s Age Friendly Employer Pledge aim to change that. We also need to help people stay in work when circumstances change, including promoting take-up of occupational health support and Access to Work.
5. Financial incentives. For some people on higher incomes, pension rules (such as ability to draw down pension early or the lifetime and annual allowance limits) can deter people from working longer. For people on lower to middle incomes, Universal Credit childcare rules (with payments capped and in arrears) and the effective tax rates people end up paying (due to the taper rate and work allowances) can be a barrier.