Economic inactivity has increased by 565,000 people since
the start of the pandemic - a stark reversal of what was
happening before 2020. The biggest contributor to this
change has been an increase in early retirement, the House of
Lords Economic Affairs Committee concluded today in its report
“Where have all the workers gone?”
Earlier retirement is the biggest of four factors that have made
it harder to fill jobs. Increasing sickness; changes in the
structure of migration; and an ageing UK population, whose impact
was previously concealed by other trends, have also contributed.
The rise in inactivity poses serious challenges to the UK
economy, as it:
- exacerbates the current inflationary challenge
- damages growth in the near term, and
- reduces the revenues available to finance public services
while demand for those services will grow.
of Headley, Chair of the House
of Lords Economic Affairs Committee, said:
“Why have so many workers left the workforce, after years of
declining inactivity? Earlier retirement seems to be the biggest
reason. Those who are already economically inactive are becoming
sicker, meaning they’re less likely to return to work. So, while
other factors were previously masking the impact of an ageing
population on the size of the workforce, they are now reinforcing
it.
“Taken together these findings are, like mid-winter, bleak. The
rise in economic inactivity makes it harder to control inflation;
damages growth, and puts pressure on already stretched public
finances. That’s why it’s critical the Government does more to
understand the causes of increased inactivity, and whether this
trend is likely to persist.”
Although the population is getting sicker, most of the rise in
sickness-related inactivity is among people who were already
inactive. Instead, the decision to retire early among 50-64
year-olds has been the key driver in the change in trend since
2020. It is critical to understand better what drove this wave of
retirement. Possible hypotheses should be explored. First, the
impact of lifestyle changes during the Covid-19 pandemic,
including the furlough scheme, could have prompted some people to
consider earlier retirement. Second, increased savings during the
pandemic and the UK’s pensions flexibilities, could also have
enabled earlier retirement.
The majority of those over 50 who have left the workforce since
the pandemic neither want nor expect to return to work.
Furthermore, most appear reasonably well-off. Although this group
may yet feel the full impact of the cost of living crisis, it
would be unwise to proceed on the basis that a significant
proportion of those who have exited the labour force since 2020
will come back, or be persuaded back.
Changes to the structure of migration have had an impact on
vacancies, which recently hit record high levels. In recent years
many EU workers, who filled lower paid roles (especially in
sectors like agriculture and hospitality), have left the UK. In
numerical terms, their departure has been counterbalanced by the
arrival of non-EU workers, who were granted visas under the new
immigration system which prioritises skilled workers. This has
contributed to a mismatch within the labour force, accentuating
vacancies and labour shortages in certain sectors.
Since the pandemic, ageing has continued to drive down labour
supply. The key difference is that the ageing effect is now being
reinforced, rather than offset, by other factors. The impact of
an ageing population as a contributor to the workforce squeeze is
a factor which has not received the attention it deserves.
The findings of the report underscore the urgency and importance
of the Department of Work and Pensions review into workforce
participation, which was announced by the Chancellor of the
Exchequer in the 2022 Autumn Statement.
