Lost: 700,000 workers - The Monday Briefing

A recession radar

Alone among rich countries, the UK has seen an exodus of people from the labour market, since the pandemic. In the last four years the proportion of the population of working age who are not working has risen by 1.4 percentage points to 21.9%. Roughly 700,000 people have been lost to the UK job market.

Higher student numbers partly explain this loss of workers with the pandemic giving a further impetus to the trend of more young people going to university. Early retirement surged in 2021 and 2022 but numbers have since returned to pre-pandemic levels. It is rising levels of sickness and disability that explain most of the increase in inactivity. This, rather than rising student numbers or early retirement, is the central concern for the economy and for policymakers.

The data are imperfect and sometimes contradictory, but we estimate that health problems have led to an increase of roughly 500,000 in the number of people who are unable to work in the last four years. A record 2.7 m people of working age are classified as long term sick or disabled today, a number equivalent to 8% of the entire workforce.

Leaving the labour market due to ill health results in depressed incomes and a diminishing chance of returning to work for those involved. For the economy it means slower GDP growth. For the government it involves higher spending on benefits.

The search is on for solutions to this social and economic challenge. The government hopes that encouraging those with health conditions to work from home and tightening eligibility for disability benefits will make a difference. Earlier this month, shadow work and pensions secretary, Liz Kendall, said that under a Labour government there would be “no option of a life on benefits” and that the sickness benefit bill would fall.

The UK predicament is unusual. In other major economies tight labour markets and the switch to hybrid working have enabled more people to work and inactivity rates to fall. In the US more people than 1.8 m people with a disability have joined the workforce since the pandemic, a 28% increase, reflecting the way in which the spread of remote working has created new routes into work.  So why have rates of sickness, disability and economic inactivity risen in the UK?

Lengthening NHS waiting lists are likely to have played a role. The number of people waiting for elective care has risen from 4.6 m in late 2019 to 7.6 m today. Over this period the median waiting time for treatment has almost doubled to 15 weeks. It seems obvious that disruption to health provision will raise sickness and inactivity rates, but it is hard to prove. Analysis by the Office for Budget Responsibility shows that more than half of those on waiting lists are of retirement age, so would not show up in the inactivity numbers. And only about a quarter of those who are classified as long term sick or disabled are awaiting medical treatment.  

Other factors also seem to be at work. Analysis by the Institute for Fiscal Studies shows what it describes as a “staggering rise” in mental health issues in recent years, particularly among those in their 20s and 30s.  Between 2019 and 2023 the number of people who were inactive due to a mental health condition rose by 38%. One of the report’s authors, Heidi Karjalainen, said greater understanding and reduced stigma mean people are more likely to report mental health problems. As the report notes, “Regardless of their cause, people’s subjective assessments of their situation and level of disability are likely to drive multiple behaviours…such as smoking, drinking and diet, labour market behaviours, such as sickness absence, job search and connectedness to the labour market…and…social behaviours”. In short, people’s experience of illness, whether physical and mental, have huge real-life impacts.

The Economist argues that to understand the scale of the increase in sickness and disability we also need to look to the benefit system. Disability benefits are paid at higher levels than unemployment benefits, with fewer requirements to find a job. In the late 2010s the government eased the assessment criteria for incapacity benefits in response to concerns that the system had become excessively restrictive and that too many people were not getting benefits to which they were entitled. The proportion of claims that were accepted rose significantly. Then, during the pandemic, with the benefit system overloaded, the decision was made to green light most claims, with the approval rate rising still further. The OBR estimates if the approval rate for sickness and disability benefits had remained at 2016-17 levels 670,000 fewer claims would have been approved for these benefits in the ensuing years.

Rising economic inactivity has been one of the worrying features of the UK economy in the last four years. I see three reasons for thinking this is not a permanent change.

First, the trend in the 25 years prior to the pandemic was of rising, not falling workforce participation, with the number of people of working age recorded as sick and disabled declining. By international standards, the UK was successful in getting more people into work. Even after the recent exodus of people from the workforce a higher proportion of working age people are in jobs in the UK than in the US, Japan, Germany or France. The rise in inactivity during the pandemic may prove to be an aberration in a long trend of rising workforce participation.

Second, the pandemic era surge in university admission and early retirement seems likely to unwind. Retirement behaviours have already changed. As the OBR observes, “the average retirement age for men rose steadily for two decades to reach 65.3 in 2020, and then fell to 65.1 in 2021…it then rebounded to a five-decade high of 65.4 in 2022”. 

Third, institutional factors are likely to boost workforce participation. The NHS should recover over time. Waiting lists have fallen slightly since September and, as the pandemic moves into the distance, demand and capacity in the NHS seem likely to get into a better balance. The government and the Labour Party want to tighten eligibility for some benefits and to provide more support to help people back in to work.  America’s experience of rising workforce participation by disabled people since 2020 suggests that the shift to hybrid working is creating new opportunities in the labour market. In the UK the expansion in hybrid working probably explains why people with family or home responsibilities are more likely now to work than before the pandemic. Some 250,000 more people with such responsibilities are in work today than in 2020.

So, the hope is that economic activity rates will revert to their upward trend. Perhaps the greatest risk to that view is posed by the increase in mental health problems, especially among younger people. The role of social isolation, technology and disrupted education in driving this phenomenon have been much debated. Whatever the causes, improved mental health will be key to helping more people back into work.  

PS: We wrote last August that UK inflation data were failing to capture quite how tight the private rental market was, with official measures showing rents falling relative to prices and wages. The data are now catching up. ONS estimates published last week show that rental price inflation reached 9% in the year to February, both far above headline inflation and at the highest level since records began in 2015. We expect this still has further to run. Private sector sources suggest that new rentals prices have risen by over 30% since the eve of the pandemic while the official measure, which looks at all tenancies including existing ones, is up only 20%. Over time we expect the two to converge. The good news? The rent on new tenancies appears to be stabilising.  Zoopla and Rightmove have recently reported the slowest rate of inflation for new tenancies in several years.