What do new UK labour market data reveal about the post-Covid-19 recovery?

Headline measures of employment and unemployment were changed only slightly by the end of the job furlough scheme and the emergence of the Omicron variant. The trend for economic inactivity is more striking, with older people increasingly leaving the workforce.

The latest figures for December 2021 to February 2022 show that unemployment fell to 3.8% while employment was flat at 75.5% (Office for National Statistics, ONS, 2022). Compared with the period from December to February 2020 (the last pre-pandemic data from two years ago), the unemployment rate is now marginally lower, while employment remains a percentage point worse than it was then (see Figure 1).

Figure 1: UK employment and unemployment rates

Panel A: Employment

Panel B: Unemployment

Source: ONS Labour Force Survey

It might sound paradoxical to a non-economist, but these measures are not two sides of the same coin. People are only classified as unemployed if they have looked for work in the last month and are available to start a job within the next two weeks.

Falling unemployment with no equivalent increase in employment suggests that more people are leaving the labour force. Indeed, the quarterly decline in unemployment is matched by an uptick in the inactivity rate of 0.2 percentage points. Inactivity means not looking for a job or being able to start work shortly – for example, students, retired people and those looking after family – so it represents a diverse group of people.

Since the onset of Covid-19 in the UK, inactivity has been increasing, reversing the general downward trend in the previous 50 years. In the early stages of the pandemic, it was driven by 16-24 year olds becoming inactive. But since May 2021, 50-64 year olds have made up an increasing share of the total.

A potential reason for this shift in the inactivity mix is that the number of people economically inactive because they are students has been declining, while the number of people who are long-term sick has increased. 1.5 million people had symptoms of long Covid in January 2022, and this may have forced them to withdraw from the labour force. It has also been suggested that higher numbers of older people are choosing to retire early or take time out of their jobs, further changing the rate and composition of inactivity.

Figure 2: Economic inactivity

Panel A: Inactivity rate

Panel B: Inactivity composition

Source: ONS Labour Force Survey

What about those still in work?

We might expect the effect of Covid-19, and particularly the wave of Omicron infections in the winter, to show up in the amount of time that people spend at work. But over the latest three-month period, hours worked continued to climb from the low in April 2020. The increase of 18.8 million hours means that the average person now works 32 hours per week.

But there remains a shortfall of 14.6 million hours compared with pre-pandemic levels (caused by lower employment). This is the equivalent of everybody in employment today working just under half an hour less than two years ago.

Figure 3: Total hours worked (January 2007 to February 2022)

Source: ONS Labour Force Survey

What about pay and vacancies?

Regular pay (which excludes bonuses) grew by 4% over the quarter, to £556 per week, continuing a gradual increase over the last two decades. But with soaring energy prices feeding into rising UK inflation this year, real regular pay growth was negative (at -1%) – the lowest level since May 2014.

With inflation likely to continue rising over the coming month, the cost of living crisis is putting immense pressure on UK households. Public sector wages in particular are struggling to keep pace with surging prices, meaning that teachers, nurses and people working in the emergency services may see their spending power shrink.

Vacancies continued to rise, however, and hit their highest ever level, at nearly 1.3 million. This is up nearly half a million since before Covid-19. The longer-term effects of the pandemic seem to be playing a role in the latest data, with human health and social work the largest area of increase between January and March 2022.

There are now 4.2 vacancies per 100 jobs overall, but the growth in vacancy numbers is starting to slow down. A ‘tight’ labour market is leading to higher wages but the fact that real pay growth remains negative is another sign of challenges ahead. If inflation rises to 8%, as some analysts are predicting, the cost of living squeeze is going to get tougher to bear, as low wage increases are outweighed by rising prices of essential goods.