The UK workforce has shrunk by around 177,000 people since the pre-pandemic peak. Unemployment remains low at 3.7%, while labour demand has been strong with high vacancy levels. Inactive groups such as students, retirees, and the long-term sick have increased.  Evidence also suggests that the increase in inactivity in the UK is more pronounced than in some other developed economies. 

 

More often policymakers must deal with a lack of jobs for those who want work. But the current lack of workers for the available jobs is not necessarily a better problem to have. This imbalance is affecting service provision, notably in key sectors, such as healthcare, social care and education. It is also pushing up wages at a time of already high inflation.  

The reduction in the workforce has been variously attributed to a loss of EU workersincreased long term sicknessearly retirementdemographic shifthouse prices inflation, and increased pension freedoms. A focus on the loss of over 50s and how to tempt them back has led to an increasing consensus that these people are gone for good.  

We have looked at potential sources of labour supply and the changes to public policy that might help maximise labour market participation. 

The vast majority of inactive would not like to work 

We started by looking at the non-working population by age and reason for not working. We then split this by whether someone would like to work, as the easiest wins are likely to come from those who would like to work. As the charts below show, the vast majority of inactive would not like to work. 

Source: Annual Population Survey Oct 21–Sep 22 

There are almost 3 million (2,957,722) people not working who would like to work, comprising: 

  • unemployed (1,227,074),
  • sick or disabled (639,348),
  • looking after family or home (376,357),
  • student (302,162),
  • retired (58,384), and
  • other (354,402).*

*  ‘Other’ inactivity includes waiting for the results of a job application, believing there are no jobs available, other (no reason specified). 

The unemployed may appear an easy win to boost labour supply, but the current 3.7% unemployment rate is what many would consider at or close to ‘full employment’. This is because we can expect a small amount of ‘frictional’ unemployment. For example, after a redundancy people might not take the first job offered but wait for a good match. But, one key group, young people (age 16–24) account for 34.5% of all unemployed. Their higher rates are the result of frictions in the transition from education to work.

Skills

Young people now spend longer in education, and away from the labour market. If we had the same employment rates for 16–24-year-olds today as we did 30 years ago there would be an extra 913,000 people in work. UK public policy focuses on full-time learning and university. This comes at the expense of nurturing work-based learning and development. It has been worsened by the collapse of part-time study which is a way to combine work and study. But public policy changes could help more young people into fulfilling employment.  

A lack of alternative vocational routes restricts the availability of technical skills, leading to more graduates ending up in low-skilled employment. The government is seeking to address some of these challenges through reforms to technical education, such as the introduction of T levels. It also aims to put employers at the heart of the vocational education and training system. 

Two areas of skills policy need urgent reform to allow more young people to transition successfully from education to work. 

Improve careers advice and guidance

CIPD research shows most young people don’t believe they received high-quality careers advice at school or college. While the majority received guidance, just a fifth report say it was high quality. And the majority think their school or college did not spend enough time helping them understand career pathways or options. For example, just 3% of 18–30-year-olds received advice or support on applying for an apprenticeship while at college, while 59% received support applying for university. Of those who attended university, over half said they would have considered an apprenticeship as an alternative route if it had been available. 

The CIPD is calling for the government to invest an additional £23m a year so all year 11 students have at least one face-to-face career guidance session. Research commissioned by the Careers and Enterprise Company suggests that each £1 the government invests in personal guidance, would lead to benefits to the exchequer of at least £3 based on higher potential wage premia and reduced drop-out rates (from HE). Adding in factors such as the reduced likelihood of becoming NEET and the benefits are likely to be higher. 

Apprenticeship Levy reform

Reform of the Apprenticeship Levy is another step needed to tackle the decline in vocational routes into employment for young people. Since its introduction in 2017, the number of apprenticeships going to young people aged under 25 has dropped 40%. If apprenticeship starts had simply plateaued for young people when the levy was introduced there would have been a cumulative difference of 375,550 starts (calculations based on 265,000 apprenticeship starts for those aged 24 or under since 2018/19). 

The levy as currently designed incentivises employers to create apprenticeships for existing staff as they seek ways to spend their levy funding beyond more traditional apprenticeships. This is evidenced by the phenomenal rise in the number of generic management apprenticeships, which typically go to older and already well qualified employees.  

A more flexible skills levy would mean employers could use it to develop existing staff through other more cost-effective and flexible forms of accredited training and skills development which are usually better suited to employees aged 25 and over. This would leave more levy funds for apprenticeships for young people who most need and benefit from them. 

Levy flexibility would also help employers fund their employees through training in further education colleges as most technical and vocational courses are not apprenticeships. This change would help meet the ambitions of the UK Government Skills for Jobs white paper and incentivise greater employer engagement with local further education colleges. 

Health and wellbeing

Debate has swung between the view that many older workers have left work due to retirement and that the main cause has been ill health. It’s generally now accepted that it is hard to know due to limitations in the data. When someone says they are retired, this could be for multiple reasons of which ill health could be one.

Research by the Institute for Fiscal Studies suggest that the health of the population is worsening with negative implications for labour supply. It finds that “9.6% (4.0 million) [of the working age population] now report that their health limits their daily activities ‘a lot’, up from 8.5% (3.5 million) at the start of 2021”. This ill health is spread across age groups and conditions.  

The most pertinent policy interventions here are clearly around raising the quality of the population’s health particularly considering the recent deterioration. There are also effective interventions that can be made at the organisation level to support people’s health and wellbeing and manage long term conditions. These include making reasonable adjustments, for example by being open to forms of flexible working, and a focus on providing access to occupational health services and support.  

Evidence suggests that employees in their 20s and 30s should have timely access to occupational health services to ensure that health issues such as musculoskeletal problems, anxiety or depression don’t become chronic, debilitating conditions later in life.  

Not enough employers provide access to occupational health with small and medium-sized enterprises (SMEs) a particular blind spot. To address this, the CIPD believes the government should develop and introduce a preventative and targeted occupational health support and advice service to ensure workers get early access to advice and support. This should take account of lessons learned from the short-lived Fit for Work service, which was abolished before it had a chance to bed down and for sufficient employers to be aware that it existed.  

The new service should be promoted and run through the Growth Hubs’ business support services in England and equivalent networks in the rest of the UK. Another critical change to public policy is reform of Statutory Sick Pay (SSP). This should include raising the level of SSP to be closer to the National Minimum Wage/National Living Wage and allowing for phased returns to work.

Renewed focus on good, flexible work

When asked ‘do you want to work?’, the only point of reference is the world of work as it currently is. So, there should be a focus on improving job quality to aid retention and limit the number of inactive people who do not want to work. The CIPD report Understanding older workers shows that older workers are more likely to work part-time, from home and be self-employed, suggesting a preference for flexibility. This may in part be due to the need to manage long-term health conditions, the likelihood of which increases with age. More than half of workers have a long-term health condition by the age of 60. This highlights the need for changes to public policy that can influence the business environment and encourage more organisations to improve flexibility and job quality.

Policy makers should place greater emphasis on creating a more progressive labour market enforcement system that can help drive up people management and employment standards, as well as working with the nations and regions to improve the quality of locally delivered business support services. The Flexible Working Taskforce can also play a role in promoting a wider range of flexible working practices.

Immigration, a quick fix?

Recent research suggests that “the end of the free movement has led to a shortfall of around 330,000 workers in Britain”. The average UK worker’s total hours are 31 per week, while for EU nationals this is 32.8 per week. This means each EU national works 6% more hours than their UK counterpart and therefore pound for pound represent an even bigger loss of labour supply.** The CBI has recently called for a more liberal immigration regime to ease shortages. The Migration Advisory Committee could be asked to resume its work updating the shortage occupation list, which was put on hold by the Home Office.  

** From an upcoming CIPD report looking at employer attitudes to immigration. The figures used the Labour Force Survey Oct–Dec 2022. 

Technology

One way organisations can alleviate labour shortages is to become less reliant on labour. However, the UK lags behind its international competitors in key areas of automation according to the 2019 Business, Energy and Industrial Strategy Committee inquiry into automation and the future of work. It found that the UK’s low automation adoption is part of its lagging productivity, especially for SMEs, which it concludes is ‘preventing a much-needed rise in economic growth, wages and living standards’. 

One might expect that finance was the main barrier to organisations investing more in AI and automation – for example, the cost of upfront capital investment, or low rates of return – but the CIPD report People and machines: from hype to reality suggested differently.  

Our findings indicate that the main reasons are a lack of customer or user pressure (33%) and poor awareness of the technologies available and their utility (30%). Financial reasons – perceived low return on investment (14%) and lack of financial capital (10%) – are notably less common. This implies that many employers may first need to be convinced of the value of AI and automation, even if customer habits and requirements begin to change.  

These findings are also striking because the reasons for lack of investment are often not strategic in nature, and it seems that many employers are neither innovating nor leading customer behaviour. Many organisations are not taking risks in the application of technology, for example in pursuit of competitive advantage. Too many business leaders, particularly in small firms, will not be aware of the type of often quite basic forms of technology that can potentially improve performance. Overcoming this ‘demand side’ gap is a key challenge for policy makers.  

Our People and Machines report also highlights that even where organisations do invest in new technology, key people issues are often not sufficiently considered, which means the benefits may not be optimised.  

The government acknowledges the importance of broadening the adoption of technology and the role of improving management capability in enabling this in its Plan for Growth and UK Innovation Strategy.  

However, existing proposals to achieve this through the £520m Help to Grow Management and Help to Grow Digital schemes, as well as via the existing business support infrastructure, fall short. For example, while the Help to Grow Management scheme will potentially help up to 30,000 business leaders of SMEs over three years, this represents a small fraction of the almost 1.4 million SMEs employing people in the UK. There are also major questions over the design of these schemes and their accessibility and attractiveness to time-pressed owner managers.

Wider business support provided via the Growth Hubs in England is also currently inadequate for the scale of the challenge, being highly fragmented and lacking capability building capacity.

The CIPD believes this must change if the UK is to see wider adoption of the technology and people management and development practices required to boost workplace productivity and help address skill and labour shortages.

Conclusion

The UK government’s review of labour market inactivity has sparked a widespread debate about the causes of inactivity which has particularly focused on the disproportionate number of workers aged over 50 who have left the labour market. However, there should be a broader consideration of how to tackle inactivity, given the multiple labour market challenges. The UK’s ageing workforce, the impact of technology on jobs, changes to skills policy and to immigration rules and patterns will all continue to significantly affect labour market supply and quality.  

Young people have the highest rates of unemployment and high levels of ‘inactive - but would like to work’. There are more 16–24-years olds who are unemployed or inactive and who want to work (844,355) than there are people aged between 50 and 64 in these categories (777,217). The focus on the over 50s may have come at the detriment of this other vital source of labour supply. 

The UK needs a long-term strategy on maximising labour market participation across the working age population. The key changes to public policy are summarised below.  

Help younger people into work 

  • Increase investment in careers advice and guidance in schools. 
  • Reform the Apprenticeship Levy into a training and skills levy. This would release more funding for apprenticeships for young people and increase flexibility for employers to train their existing workforce through other forms of training and development.  

Support workers’ health and wellbeing 

  • Develop and introduce a preventative and targeted occupational health support and advice service taking account of lessons learned from the Fit for Work service. 
  • Reform Statutory Sick Pay  

Improve job quality and availability of flexible working 

  • Improve labour market enforcement system by introducing a well-resourced single enforcement body with a greater focus on supporting employer compliance and driving up employment standards 
  • Use Flexible Working Taskforce to boost the provision and uptake of flexible working, supported by a well-resourced communications campaign. 

Refine immigration policy  

  • Ask the Migration Advisory Committee to resume its review of the Shortage Occupations List, widening it to cover key jobs and sectors with critical skills shortages. 

Boost adoption of technology 

  • Review the scale and quality of publicly funded business support services for AI and automation and the infrastructure through which they are delivered. 

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