Calls for a new economic model to get Britain working

Labour market shortages, wage stagnation, poor growth and health problems have provided a cocktail of problems for employers and employees, according to a new report.

Mental Health - a women holding her head


The UK is one of just six of the 38 OECD countries whose employment rate has not recovered since Covid, with ill-health and economic inactivity being a major problem, a Resolution Foundation discussion heard yesterday. So what does that mean for employers and employees?

First, the think tank said that we need to understand the wider context. The discussion heard that the longer term background, despite rising employment before Covid, is years of wage stagnation during the austerity years – with average wages being only £16 a week more than in 2010 in real terms, according to the think tank’s new report, Job done?

If UK employees’ wages had risen at the same rate as they have in Germany and the US over that period they would be £3,600 better off on average, says the report. Nevertheless, the gap between minimum wage earners and others has closed as the minimum wage has been boosted. The Foundation says that, while wages have picked up since the cost of living crisis, the UK, hit by crisis after crisis from the financial crash to Brexit to Covid, is suffering from chronic labour shortages which are holding employers back.

The Office for Budget Responsibility has forecast a flatlining economy over the next months. Will the main parties’ manifestos make a difference?  The Foundation’s senior economist Hannah Slaughter said that the Conservatives’ approach is more about cutting health and disability benefits, keeping the minimum wage tracking average earnings and not making any significant labour reforms, while Labour has pledged to support those with mental health issues back to work, may raise the minimum wage significantly and has promised many labour reforms, such as increased sick pay, compensation for shift cancellations and several day one rights. She said there may be unintended consequences and risks related to reforms, particularly with the day one rights if there is no probationary period, that employers might choose to lower their hiring rates. The reforms will need to be carefully implemented, she stated. The think tank published a report last week on disability and long-term sickness which highlighted the dangers of taking a punitive approach. 

Debt and the cost of living crisis

The TUC was more critical of the UK’s labour market record over the last 14 years. Nicola Smith, Head of Rights, International, Social and Economics at the TUC, said its survey found four in 10 people felt worse off at the start of this year, despite the widely reported cost of living pay rises. Debt levels remain high and real wages are still below the 2008 level, she added, blaming poor growth rates, poor responses to the Covid and Ukraine crises, the increase in insecure work [4.1 million people are estimated to be in very insecure work in the UK] and the NHS problems.

She called for a rethink about what good labour market performance might look like and a questioning of assumptions about the role of a ‘flexible labour market’ which relies on insecure work. She said the TUC’s polling showed most people on zero hours contracts do not like the kind of flexibility it offers and that they face more problems around their caring responsibilities than people on secure contracts.

Labour shortages

Louise Hellem, Chief Economist at the Confederation of British Industry, said labour shortages are a huge issue for employers. Its survey shows 70% of businesses have been impacted by labour shortages over the last year, with 38% of these unable to respond to new business opportunities as a result and 12% having to turn down customers due to a lack of staff. More than half of employers say employment costs are a threat to their competitiveness.

Hellem said employers face two main challenges: despite shortages easing in the last six months, vacancies are still historically high and things could get worse, with economic inactivity adding to the problems. By 2040 it is estimated that 1.4m more people will be retiring each year than those who are joining the labour force. She called for a new economic model and increased investment for growth as well as the removal of barriers to employment, such as childcare, support around technology needs and skills investment. She added that Labour’s proposed day one rights could make employers more risk averse unless there are probationary periods.

Alan Manning, Professor of Economics at LSE, called for a greater focus on quality of work and highlighted the shift of risk from employers to individuals over the last years , for instance, in relation to sickness, which he said increases stress on employees. Better quality work could lessen the mental health issues that are leading to many dropping out of the workforce, he added. Calling for a revision of the rights around unfair dismissal – shortening the two-year wait for eligibility, he said this should be balanced by the provision of probationary periods on day one rights.

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