Levelling up: Has Covid-19 reduced the regional employment gap?

Payroll data suggest that differences in employment across UK regions have reversed during Covid-19, with employment rising above pre-pandemic levels in some regions, with London falling behind. In contrast, traditional employment measures suggest all regions are yet to recover.

The latest labour market data for the UK were released by the Office for National Statistics (ONS) last week. The ONS headline focused on ‘payroll employment’, measured by the number of employees registered for pay as you earn (PAYE) tax each month.

What does the evidence say?

According to the data, the number of employees in the North East, North West, East Midlands and Northern Ireland has risen above pre-pandemic levels (see Figure 1). This coincides with the re-opening of shops and restaurants – areas of the economy hit hard by lockdown measures. But employment in London is still 3.2% below pre-pandemic levels (see Figure 1). With the exception of the East Midlands, the regions seeing employment recovery have long been a subject of policy discussion. Their employment rates are 2-5 percentage points lower than the employment rate in London. But the new data suggest the employment gap might be closing.

Figure 1: Payrolled employees, percentage change since February 2020, June 2021

Source: ONS

Another popular indicator of the state of the labour market, which avoids the complication of seasonal trends, is its change in employees from the same time a year ago – known as ‘annual employment growth’. Before Covid-19, payroll data shows annual employment growth in these regions either falling behind or just skimming the UK average. Figure 2 shows a striking reversal of this trend since the pandemic hit. Annual employment growth in these regions is now outpacing the UK average. Meanwhile, London, which has historically driven the UK’s employment growth, is the only region in the UK showing negative annual employment growth (see Figure 2).

Figure 2: Payrolled employees, percentage change since February 2020, June 2021

North East

Source: ONS

North West

Source: ONS

East Midlands

Source: ONS

Northern Ireland

Source: ONS

London

Source: ONS

London’s poor performance could reflect the uneven impact of travel restrictions on certain jobs and workers concentrated in the capital. One example of this is tourism-related jobs: since travel restrictions were announced in March 2020, the number of employees working in this industry has fallen by almost one-quarter. This affects London disproportionately, with the city accounting for 54% of the UK’s inbound spending.

Covid-19, together with Brexit, has also taken a heavy toll on immigration, which has fallen 87% since March 2020. Again, this affects London particularly badly, due to the relatively high portion of migrants making up London’s population (37%, compared with 14% for the UK as a whole).

How reliable is the evidence?

Payroll data has limitations. For example, it does not include self-employed workers. It may therefore be unable to capture the full impact of the pandemic. For instance, the number of workers joining self-employment hit a two-decade record low in the fourth quarter of 2020 and shows little sign of recovery. To account for this, we can look at the more conventional measures of labour market activity from the ONS Labour Force Survey (LFS). The LFS surveys households on their employment status, allowing them to identify as self-employed.

Looking at the LFS data, these regional patterns are different. When we compare the LFS employment figures (March-May 2021) to the pre-pandemic (February 2020) data, employment in every region has fallen, not just in London (see Figure 3). The headline of employment recovery may therefore be overly optimistic.

Figure 3: Total in employment, percentage change since February 2020, March-May 2021

Source: ONS

What’s next for the UK?

Not only is employment recovery more modest than it seems, but the UK will face a new challenge in September as the Government’s furlough and self-employed schemes end. These policies have supported more than one-third of the working population. While they likely saved many viable jobs, they also may have propped up jobs with no future in a post-Covid world – known as ‘zombie’ jobs. Policy to get people back into work over the coming months is therefore crucial. The government has introduced the ‘Kickstart’ scheme which subsidises employers to hire young unemployed workers, and the ‘Restart’ scheme, which offers skills training to those in long-term unemployment. Whether these schemes can prevent an unemployment crisis is yet to be seen.