Workforce contraction ‘costs UK economy £16bn a year’
The UK has suffered the biggest contraction in its workforce since the 1980s, costing the public finances at least £16bn a year, according to a study.
Hundreds of thousands of people have quit the labour market since the pandemic, undermining the strength of the economy, said the Institute for Employment Studies (IES).
The “participation crisis” is shown by the 1.5 percentage point fall in the share of people aged 16 and over in work or looking for work since the eve of the pandemic – equivalent to about 800,000 people and representing twice the contraction seen after the 2008 financial crisis.
Without the trend, the economy would be £25bn larger and more workers would be paying tax, equating to £16bn in extra tax receipts.
The report, based on the findings of a two-year commission on the future of employment support, and funded by abrdn Financial Fairness Trust, shows that many people who were out of work before the pandemic have remained jobless, when they would previously have retrained and found work again.
Meanwhile there is a growing band of young people who have never worked, often staying out of the jobs market after leaving school or college because they suffer from ill health.
Tony Wilson, the institute’s director, said the UK was an outlier in the developed world where workers had returned to the labour market since the pandemic, often in even larger numbers than before the crisis.
“This situation has parallels with the one Britain found itself in during the 1980s, when deindustrialisation pushed many people to the margins,” he said. Much of the blame could be pinned on the last government’s employment reforms, which introduced strict conditions on people of working age, preventing them from receiving support and unemployment benefits.
“A strict conditionality regime is pushing people away from finding work,” said Wilson. “It is so draconian, people won’t engage in it. The new rules were introduced without any thought for the consequences. That was always going to be the reaction, and we are living with the consequences today.”
The government plans to overhaul the employment support service and local jobcentres in line with recommendations in the report. The employment minister, Alison McGovern, who is speaking at the launch of the report today, is expected to say that the state needs to offer encouragement and a helping hand to those out of work and fewer sanctions.
The report found that the UK is one of the only countries in the developed world to have seen employment fall post-pandemic: slipping from having the eighth highest employment rate in the world to fifteenth.
The reduction can be blamed on fewer people entering work rather than more leaving it – with 90% of the growth in economic inactivity due to more people off work for at least four years or who have never worked at all.
The solution to the crisis could include reforming employment support to guarantee help for those who need it; ending the “compliance culture” in jobcentres; and creating new Labour Market Partnerships to meet local priorities and join up delivery.
Wilson said: “People out of work or at margins have become much more disadvantaged because of bad policy, and that’s now become more entrenched and is a bigger problem. But like the late 80s, the solution is to reach people with the right support.”
‘This situation has parallels with the one Britain found itself in during the 1980s’
Tony Wilson Director, IES