Early retirement is the biggest driver of rising economic inactivity and labour shortages in the UK, according to a House of Lords committee.
Since the pandemic began, economic inactivity – those not in work, nor looking for a job – has increased by 565,000 people, according to the Office for National Statistics.
The Lords economic affairs committee says rising inactivity poses serious challenges to the UK economy, as labour shortages exacerbate inflation, damage growth and reduces the revenue available to finance public services.
The committee’s Where have all the workers gone? report, published following an inquiry into what has caused a reduction in the UK’s labour supply, finds that there are four drivers of labour shortages: early retirement; increasing sickness; changes in the structure of migration; and the ageing UK population.
The report recommends that the government carries out further work to establish the drivers of economic inactivity, including the potential link between pensions and inactivity and the impact of the furlough scheme.
Labour supply issues
Lord Bridges of Headley, chair of the House of Lords economic affairs committee, said: “Why have so many workers left the workforce, after years of declining inactivity? Earlier retirement seems to be the biggest reason. Those who are already economically inactive are becoming sicker, meaning they’re less likely to return to work. So, while other factors were previously masking the impact of an ageing population on the size of the workforce, they are now reinforcing it.
“Taken together these findings are, like mid-winter, bleak. The rise in economic inactivity makes it harder to control inflation; damages growth, and puts pressure on already stretched public finances. That’s why it’s critical the government does more to understand the causes of increased inactivity, and whether this trend is likely to persist.”
The report finds there has been an increase in inactivity aong 50-64 year olds, mainly due to earlier retirement rather than increasing long-term sickness among this cohort.
Much of the sickness-related inactivity is among people who were already out of the workforce, rather than people leaving their job because of their health.
The report says: “It is unclear why earlier retirement has risen. Covid-19 pandemic, including the furlough scheme and increased redundancies, could have prompted some people to consider earlier retirement. Other possible explanations include increased savings during the pandemic and the UK’s pensions flexibilities, which could have enabled earlier retirement.
Looking ahead, the majority of those over 50 who have left the workforce since the Covid-19 pandemic state that they neither want nor expect to return to work.”
Other drivers of labour shortages in the UK include:
- changes to the structure of migration after Brexit, which has had a particular impact on lower-paid sectors such as agriculture, hospitality and care. The report says that the prioritisation of skilled workers under the UK’s new immigration system has contributed to a “mismatch” within the labour force and has accentuated labour shortages in some sectors
- an ageing population, which has resulted in a reduction in the proportion of the population seeking work.
If these changes to labour supply persist, the report suggests that some employers will have to adapt by replacing labour through automation, or changing workers’ terms and conditions. It recommends that the government looks into which changes are likely to materialise and whether there should be a policy response.