19 April 2023

How much is Britain really working?

The latest headline employment figure disguises worrying trends in the British economy.

Illustration by Otto Dettmer / Ikon Images

For the past year, economists have been watching employment data with trepidation. Along with the dreaded inverted yield curve, a sharp rise in unemployment is the herald of recession. In the US there’s a rule, named after the economist Claudia Sahm: if unemployment rises by half a per cent in three months, the economy is very likely in recession.

We should be relieved, then, to read in the newly published labour market figures from the Office for National Statistics (ONS) that the headline figure on unemployment in the UK only inched upwards, from 3.7 per cent to 3.8 per cent, in the three months from December to February. But the headline figure masks more concerning data.

For one thing, “full employment” (a job for everyone who wants one) might sound utopian but it can come at a cost. In the first three months of 2022, for the first time on record, there were more job vacancies in the UK than jobseekers. As we’ve seen, this is a serious inflationary pressure, because if the supply of labour is restricted then it generally becomes more expensive, and that cost drives up the prices of goods and services.

In fact, some economists see “full” employment as the real indicator of recession. Antonio Fatas, professor of economics at the European business school Insead, has studied this relationship. He found that during each of the last five economic cycles unemployment keeps falling, and “reaches its lowest point around 12-18 months before the recession starts”. There is no summer of full employment; the labour market reaches its hottest point and begins to cool off, slowly at first, then into Sahm Rule territory. “It seems as if reaching a low level of unemployment is always followed by a recession,” Fatas writes.

The UK labour market reached its hottest point nearly a year ago, and while the headline unemployment figure is mostly unchanged, there are stats beneath the surface that are more indicative. Alison McGovern, a shadow minister for work and pensions, said that within the 21 per cent of the country classed as “economically inactive” (not working), there are around 1.8 million who would like to have a job but aren’t applying because they can’t see how to get one (“discouraged workers”, in ONS parlance), or who would like to work but can’t because of other factors – such as their health or their caring responsibilities – prevent them from getting one.

The number of hours worked, too, gives a more nuanced picture of the extent to which Britain is really working: despite a very low unemployment rate, total hours worked haven’t recovered to pre-pandemic levels. “The big question is why the ill-health problems around Covid seem to have hit us worse, and that bounceback that we would have expected after Covid hasn’t really been there,” said McGovern.

The headline figure also disguises the deep geographical inequalities in the UK. “In Blackpool, we think unemployment is about twice the national average,” said McGovern, “and the gap has widened over the past ten years. And to me, the really problematic bit of the labour market is that it’s a massive postcode lottery – that your chances and opportunities, particularly around pay and progression, are so heavily dependent on where you live.”

Xiaowei Xu, senior research economist at the Institute for Fiscal Studies, thinks it’s hard to draw concrete conclusions while the economic impact of the pandemic is still being unwound. After a “huge boom in jobs, coupled with people leaving the workforce” things appear to be returning to normal: there are signs that people who took early retirement have been pushed back into work by the cost of living, for example, and that increasing numbers of people who were economically inactive are looking for jobs. Pre-pandemic trends, such as the decline in hours worked by men on low incomes, appear to be re-establishing themselves.

All the same, Xu agrees that “the direction of travel is clear”: the labour market is cooling. Activity has fallen, while planned redundancies (companies announcing that they plan to make job cuts) have ticked up, so has the proportion of unemployed people who are newly unemployed – which could indicate that even as people seek jobs more actively, others are being laid off.

What happens next is up for debate. If unemployment rises sharply then there will be a sudden outbreak of News, but as McGovern pointed out, the real issue is that for large numbers of people, it has risen already: “We’ve got a real problem. But if you only look at the headline unemployment figure, you can’t see it.”