Business and People Strategy
Summary Notes: HRD Community: Labour Market Trends
On 1st November 2023, CRF hosted an HR Director roundtable discussion on current labour market trends. During the session, the ONS’ Darren Morgan, Director, Economic Statistics, and Philippa Bonay, Director of Operations, provided their expert analysis on the main trends shaping the labour market, present and future challenges, and ways that organisations can improve their use of data. There were also opportunities for participants to share their experiences and practitioner expertise. This summary shares key insights from the session. Slides from the session are available here.
Labour Market Overview
During the Covid-19 pandemic, the labour market confounded all expectations and predictions of high levels of unemployment never materialised:
- Unemployment peaked in 2020 at 5.2% and has since slowly fallen. It is now at a 50 year low.
- There was a record level of vacancies in 2022 and, for the first time ever, there was a vacancy for every single person unemployed.
- The much greater issue for businesses is labour shortages (though these have recently fallen very slightly).
Economic inactivity is now a key talking point:
- Economic inactivity refers to people who are disengaged from labour market – they are not in work and are either not looking or not available for work.
- Since the pandemic, the economically inactive have become dominated by people aged 50-64.
- This trend is impacting all socioeconomic groups, though there has been the biggest acceleration in areas of higher deprivation.
Many developments are happening in earnings:
- Earnings growth has been very strong due to the tightness of the labour market.
- However, real wages have actually fallen when adjusted for inflation. This has led to a wage inflation spiral, though this is finally starting to soften slightly.
- Inflation is starting to fall, though is still high at 6.7%. Real wages are now just starting to increase for the first time in two years. With nominal pay softening and real pay increasing, we are now entering a different phase for earnings.
Older people are increasingly disengaged from the labour market, contributing to labour supply issues:
- There are now 0.25m fewer people aged 50-64 in the labour market than before the pandemic. These are not people who were going to retire anyway – the vast majority report that they finished work sooner than expected.
- The top two reasons for leaving stayed the same from February to August 2023 (retirement and health related reasons including stress, mental health, illness and disability). However, ‘change is lifestyle’ is becoming more prevalent and is now the third greatest reason for 50+ leaving work.
- The 50+ are now more likely to say they would consider returning to work (likely linked to the cost of living crisis – money is now the second most popular reason for returning to work). However, very few want to return to full time work.
Present Challenges
- Long-term sickness is at record high levels – 2.6m people are self-declared to be out of work and not looking due to ill health (most commonly mental health, musculoskeletal conditions and respiratory illnesses including long covid). There are no signs of this trend slowing down.
- Aged 16-24, mental health is the main cause of long-term sickness, though the contributing factors to poor health become more complicated and numerous as people get older.
- Organisations need to consider what they can do to support these people to return to work.
- Aged 16-24, mental health is the main cause of long-term sickness, though the contributing factors to poor health become more complicated and numerous as people get older.
- Whilst more and more females have entered the workforce over the last 20 years, this trend stopped at the start of the pandemic and did not return once the pandemic eased and the economy normalised. This has been driven by women looking after the family or home, though is an important area to watch as there are initial signs that this trend might be changing.
- This inactivity is likely true disengagement – the majority of the inactive say that they do not want a job. This is a challenge for businesses as it is very hard to motivate people to return to work who are choosing to be outside the labour market.
The above are supply side problems, with fewer and fewer people in the jobs market. There is also increasing demand from businesses:
- Whilst 800,000 is a standard benchmark for vacancies in the UK, this number accelerated to 1.2m in 2021 and only just started to soften in 2022 and 2023 (and there are still 200,000 more vacancies than usual):
- This trend is widespread across all industries.
- The reasons for the high number of vacancies include: a lack of applicants, a lack of qualified applicants and a reduced number of EU applicants.
- Whilst this trend is softening, it is still a challenge for businesses to get people to their organisations and to stay there – there were record job to job moves last year, and these remain high this year.
The OBR forecast that the Chancellor’s Spring Budget 2023 policies could lead to the largest ever increase in labour supply. These included:
- Childcare policies to encourage women or people with caring responsibilities back to work (e.g. 30 hours of free childcare)
- Health policies for long term sick (e.g. a disability employment programme)
- Older worker related policies (e.g. pension tax reform)
Labour market: demography challenges in the immediate future
- It is estimated that the 60-64 population will increase by over 700,000 from 2019 to 2026. This aging population means that inactivity will naturally rise, though has also been worsened by the pandemic shock; businesses should consider what they can do to retain their older workforce.
- There will also be an increase of nearly 0.5m in the 16 – 20 years age group in the same time period, meaning that there will be a large number of young people flowing into the labour market. This is likely to be a one-time phenomenon, meaning that HRDs should carefully consider how they can tap into this potential resource pool, ensuring that there are avenues for them in the job market and that they are attracted. Participants discussed how one area could be recruiting for attitude or mindset amongst younger age groups, and then supporting them to build the required skills.
- Over the last 2-3 years, the younger workforce has increasingly held multiple jobs. This is often due to choice, rather than financial need. The data is not yet clear whether this is a longer-term trend.
- In summary, there are two main opportunities: the cohort of people aged 55-64 who could be tempted back to the labour market for the right reasons, and the cohort of people aged 16-20 who are coming in to the labour force for the first time.
Data implications for HR Directors
- HR leaders should ensure they have the right data that is meaningful for their business. They should also consider how this will be shared with the rest of the organisation (e.g. at the ONS it is self-service) and know when to stop and start taking action.
- At the ONS, they have used data internally to identify organisational issues (such as a lack of diversity), hold leaders to account every six months on what the data shows is happening, and to involve HRBPs in discussions.
- Through data, the ONS can see what happens across the whole employee lifecycle and the experience of different groups. For example, they found a large bonus gap between men and women, which they realised was due to part time workers getting less recognition and were then able to address this.
- As well as using data to drive action, HR practitioners can return to the data to assess the actions they have taken.
Q&A
Q: Why does your analysis not focus on people aged 65+?
A: Most of this analysis covers up to aged 64/65 as the government was interested in people remaining in their 50s – this where they wanted to intervene in policy.
Q: How does this data compare to other countries?
A: In other countries, when the economy started to reopen post-pandemic from mid-2021, people started to slowly flow back into the job market. We are seeing the same pattern in the UK, but we are around 15 months behind. We still don’t really know why this is – we are an international anomaly in not yet being back to pre-pandemic levels.
It also seems that the UK takes many more hours to produce the same output as other countries. Some theories about the causes of this include poorer management practices and less automation or innovation in the service sector.
Further Resources
CRF. 2023. HRD Briefing 2024: Navigating Change in an Uncertain World
CRF. 2023. Research Report. Strong Foundations: Evidence-Based HR
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