UK experiencing biggest contraction in labour force since 1980s

• UK is one of the only countries in the developed world to have seen employment fall post-pandemic: slipping from having the eighth highest employment rate in the world to fifteenth – had we maintained our position, the economy would be £25 billion a year larger and the public finances £16 billion a year better off

• New analysis shows that this is being driven by fewer people entering work rather than more people leaving it – with virtually all (90%) of the growth in ‘economic inactivity’ due to more people off work for at least four years or who have never worked at all; so helping more people get back to work is key to turning this around

• The Commission has conducted the largest review of employment support in at least a generation and makes detailed proposals to raise participation in the labour force and boost productivity: by reforming employment support to guarantee support for those who need it; ending the ‘compliance culture’ in jobcentres; and creating new Labour Market Partnerships to meet local priorities and join up delivery

A major new report on Wednesday 18 September will set out the scale of the challenges facing the UK labour market, alongside detailed proposals to reform our approach to employment support.

The report is the final output from the Commission on the Future of Employment Support, launched in November 2022 by the Institute for Employment Studies and abrdn Financial Fairness Trust.  Over the last two years, it has conducted the largest consultation and evidence-gathering on our system of employment support in at least a generation: hearing directly from more than three hundred people and organisations including service users, employers, policy makers and experts across the UK and internationally.

The case for change

The Commission report sets out that the UK labour force is contracting at its fastest rate since the late 1980s, with the share of people (aged 16 and over) either in work or looking for work falling by 1.5 percentage points since the eve of the Covid-19 pandemic – equivalent to around 800,000 fewer people in the labour force. This is more than twice the contraction seen after the 2008/9 recession.

This ‘participation crisis’ is in stark contrast to the rest of the developed world, where employment is growing strongly and often setting new records – up by on average 1.3 percentage points across the OECD group of developed nations. The UK is almost unique in seeing its employment rate fall over the last five years, leading to the UK slipping from having the eighth highest employment in the developed world to fifteenth.

The economic and fiscal costs of this failure are significant: with modelling by IES estimating that had the UK maintained its relative position internationally then the economy would be £25 billion a year larger and the public finances £16 billion per year better off.

New analysis for the Commission also finds that virtually all of the change in the number of people outside the labour force (so-called ‘economically inactive’) is explained by those who last worked before the Covid-19 pandemic or have never worked – accounting foraround 90% of the growth in economic inactivity. It is not being driven by an increase in the number of people who left work during or since the pandemic. This is also true of those off work with long-term health conditions, where three quarters (74%) of the growth is due to those who left work before Covid-19 or have never worked. This shows that reforming employment support – how we help people out of work to get into work, and help those in low paid work to progress – has a key part to play in addressing the challenges that we face.

Proposals for reform

The Commission report proposes the most significant reforms to our approach to employment support in a generation, since the creation of Jobcentre Plus in 2001. The report makes recommendations in four main areas, calling for:

• A three-strand approach to the new Jobs and Careers Service – making the service universal and more accessible through: online delivery through a new digital employment service; on the high street through a new network of employment, skills and careers centres; and on the doorstep by integrating employment support within wider public, community and voluntary services including health services

• Ending the ‘compliance culture’ in jobcentres by reforming the sanctions system – guaranteeing access to support for people who are disadvantaged in the labour market, and setting clear service standards for employers

• New Labour Market Partnerships within local areas – to enable partners to develop local plans with agreed objectives (as proposed by the new government), as well as to then join up services and drive improves outcomes

• Clear objectives to be set for the coming Parliament – to make significant progress towards the government’s goal of an 80% employment rate, tackle poverty at work and reduce inequalities in the labour market

These proposals address a range of challenges identified through our evidence gathering – and have been developed through extensive co-design and consultation over the last year, drawing on what has worked in the UK and overseas. They are also backed up by public polling conducted by YouGov and analysed by IES, which found that:

• 70% of people out of work (excluding pensioners and students) and 76% of people in low paid work (earning less than £25,000 a year) said that they would be more likely to access support that was available to anyone that wanted it

• Nearly two thirds (62%) of disabled people said that they would be more likely to access support that was available on a voluntary basis

• Four fifths of those aged 50-64 (79%) and of disabled people (78%) stated that they would be more likely to access support if it were available close to home

Commenting on the report, Mubin Haq, Commissioner and Chief Executive of abrdn Financial Fairness Trust, said:

“The UK desperately needs economic growth and one of the critical ways to deliver that is increasing the number of people in work. However, our system isn’t working with the UK’s employment service the least well used in Europe. Our approach to supporting people into jobs is too short-term and draconanian, failing too many employers and those locked out of the labour market. That’s a huge loss to our economy, to our public finances and a missed opportunity to raise living standards. We now have a chance to reset and refresh our employment support services.”

Tony Wilson, Director at the Institute for Employment Studies, added:

“There’s been a lot of analysis and talk over the last few years of what is going wrong in the labour market, but we’ve now got a once-in-a-generation opportunity to try to put things right. The proposals in this report set out how we can do that, and help drive stronger economic growth, better public finances and a fairer and more inclusive economy.”

Read full report