Labour shortages: Where are all the workers?

Happy foreman in helmet greeting one of warehouse workers

Tom Pugh, UK economist at RSM, spoke to Business Leader about the current UK labour shortages that is causing issues across multiple sectors.

As long as we are right about labour shortages and big wage rises being limited to a few sectors then underlying pay growth across the economy as a whole should remain relatively steady. In this case, the Monetary Policy Committee (MPC) will probably continue to signal that rate hikes remain some way off. But if labour shortages start to push up pay growth more widely and inflation expectations start to rise, then the MPC may act to tighten monetary policy in the first half of next year before the economy has properly recovered from the crisis.

The lack of available workers has been all over the news in recent weeks, but labour shortages will start to ease over the rest of this year. There are three key reasons for that.

First, the government’s furlough scheme ends this month. According to the latest official data, there are still almost two million people on the scheme. While most of them will probably return to their jobs, other workers will find their old jobs are no longer viable and seek employment elsewhere.

Second, the number of people fully vaccinated against coronavirus continues to grow. Even though around 350,000 people were asked to self-isolate in the first week of August, that’s a significant drop from the height of the ‘pingdemic’ in June, when almost 600,000 people a week were told to stay home. The number in self-isolation should continue to fall as this fourth, and hopefully final, wave of the pandemic eases.

Third, university students have been learning from home so have not taken up their normal part-time jobs. Students in this position aren’t technically unemployed because they are classed as ‘inactive’ ie haven’t looked for a job for at least four weeks.

The number of ‘inactive’ students has risen by about 250,000 compared to before the pandemic, a number that more than accounts for the total ‘inactivity’ rise across the UK of 160,000. Many of these students should re-enter the workforce once universities go back to in-person learning in September.

Workers in all three situations are already classified as either employed, if they’re on the furlough scheme or have a job but are self-isolating, or inactive if they’re students, so their return to work won’t affect the unemployment rate, which will probably still be around 4.7% by the end of the year.

Instead, it’s the labour force participation rate that will change. It will probably rise from 63.3% to about 64.0% as inactive people become employed. The large number of people becoming available to work over the next few months will ease most of the labour shortages, especially in areas like retail and hospitality. What’s more, this influx of labour should prevent wages rising too quickly and feeding into higher inflation and interest rates. That said, shortages will persist in certain sectors, especially those that have been heavily reliant on labour from the EU. To boost output, it will be essential for middle market business leaders in these areas to invest in productivity-enhancing technology, rather than relying on hiring more labour.