‘Labour shortages will get worse’

Labour shortages in the UK are likely to get worse, according to new analysis which shows that employment growth in the UK is set to slow dramatically in the coming years as a result of an ageing population, lower birth rates and lower labour market migration since the EU referendum.

The result is likely to be more focus on getting those who are deemed economically inactive back to work, including mums and those who have dropped out due to health reasons. The Department for Work and Pensions yesterday announced the start of new benefit rules for mothers of children aged two and under, for instance. And a consultation on occupational health was published last week. It could also mean employers offering incentives, such as greater flexible working, to attract a wider talent pool.

The new analysis by the Institute for Employment Studies and abrdn Financial Fairness Trust uses official population projections to forecast employment growth for different age groups through to 2040. It finds that employment will grow by less than half the rate we have been used to in the two decades before the pandemic. Between 2000 and 2020, employment grew by on average 300 thousand a year. It forecasts that between 2020 and 2040 this will fall to around 120 thousand. Over 20 years, it says, this means that there will be 3.4 million fewer people in work than if the trends of the last 20 years had continued.

The Institute for Employment Studies says labour and skills shortages have been a constant feature have contributed to persistently high inflation and that their analysis shows this is “far from a post-Covid blip”. It states: “This means that governments will no longer be able to rely on strong employment growth to support higher economic growth and lower inflation – instead we will need to do far more both to raise participation in work and to be more productive in work.”

The analysis is being published as part of the interim report from the Commission on the Future of Employment Support, which is being hosted by the Institute for Employment Studies in partnership with the abrdn Financial Fairness Trust. It sets out the need for major reform to employment support. It finds in particular that the UK system:

• Is too narrow in its focus
• Overly emphasises entry to ‘any job’ rather than the right job
• Prioritises the quantity of jobsearch rather than its quality
• Offers very little to employers beyond vacancy gathering and advertising
• Is locked in a cycle of short-term funding, contracts and initiatives

Tony Wilson, lead report author and Director at the Institute for Employment Studies, says: “This analysis shows that we just can’t rely on ever-stronger employment growth to deliver future economic growth. We need a new approach, that can help more people to get into work and to be more productive in work and that can work far better with employers, industry and wider partners. If we don’t do this then we risk getting stuck in the rut we’re in now, of labour shortages, skills gaps, stagnant growth and high inflation.”

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