James Meadway labours
over no illusions
about economic inactivity

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Something strange has happened to the labour market since the pandemic. The number of people who are now “economically inactive” – not in work but not seeking work either – has risen by 565,000 since 2020, meaning nearly a fifth of the population is now economically inactive.

This rise has started to provoke official handwringing, with a new report from the House of Lords Economic Affairs Committee adding to the chorus. Labour shortages in key parts of the economy are reported, from hospitality to agriculture.

The eminent Lords offer some explanations for what’s happened. It’s popular to attribute the worker shortage to Brexit, but the figures don’t quite hold up. Whilst the UK is down 171,000 EU-born workers since mid-2019, we have 186,000 more non-EU workers employed here. The differences are in the kinds of work people are doing – EU workers were more likely to be employed in agriculture, hospitality, or care work than the non-EU workers now employed here, and these are all sectors where shortages are reported.

More to the point, similar impacts after the pandemic have been seen across the developed world, including the US. The effect in Europe has been less pronounced, but Covid appears to have slowed the long-term trend towards more labour force participation by older workers, according to European Central Bank research. Whatever is going on, it can’t be just about Brexit.

Instead, a combination of increased long-term sickness, with 2.2 million people estimated to be suffering from long Covid, and a rising number of over-50s choosing to drop out of the labour market are responsible. The Lords Economic Affairs Committee reports that the majority of over-50s who have left the labour market recently say they have no intention of returning. But why should they? Why should we be insisting they do?

The discussion is being framed as if we are facing some terrible economic problem because of a rise in inactivity. The part of the rise that is due to long-term sickness is obviously a social problem and a serious, personal concern for the many people affected.

But that’s a public health issue. Once we start thinking about someone suffering from long-term sickness as an “economic” problem, we start to forget the care that might be needed to look after them. We should think about how we can build a world-class NHS and public health system that can properly care for the sick, rather than fretting about how those who are ill can be pushed and cajoled back into work.

And if there are specific shortages in parts of the economy – the NHS, say, where we need another 47,000 nurses, or care, where we need another 165,000 care workers –there is a simple solution: give them a proper incentive to stay – and that means cash, rather than claps.

But where older people have chosen to leave the labour market, and can support themselves, this a perfectly valid decision – and, arguably, something to be celebrated. Why should we expect people to work all their lives if they don’t want to?

Every older worker choosing not to work is making life easier for those still in employment. It means less competition for the jobs that are available, and therefore more competition among employers to hire them. It means wages and salaries getting pushed up, and better terms and conditions.

It’s good, not bad, if the UK’s miserably low wages are forced up because of a lack of workers. It’s good, not bad, if that means the share of the economic pie going to workers is bigger than it used to be. It’s good, not bad, if it’s easier for workers to join unions and organise because labour markets are tight. We need to shift the workplace balance of power back in favour of those who work, after decades of it being pulled away from them, and if the labour shortage is helping that happen – good.

It can even be good for employers. Although an individual boss might want to keep the wages and salaries they pay low, higher pay tends to benefit employers in general, because it means a bigger market with more, richer consumers to sell things to. Janet Yellen, US Treasury Secretary, describes this high-wage, rich-consumer economy as a “high pressure” economy. For at least a decade in Britain, we’ve had the exact opposite: a slack, low wage, low demand, “low pressure” economy.

What should concern us is that, over the last three months, a number of these over 50s have come back to work. The best explanation for this is miserable: prices have risen so much, many can’t afford not to work. We are grimly likely, over the next few months, to arrive at the worst possible economic outcome of a recession, with rising unemployment combined with still historically high inflation. The danger is that these over-50s choosing economic activity get used as a “reserve army of labour”: driven back into the labour market and competing directly against those already at work to hold down wages.

James Meadway is an economist and director of the Progressive Economy Forum, an independent thinktank (progressiveeconomyforum.com)

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