The events of recent weeks have led to comparisons with the 1970s when the country saw nationwide strikes that resulted in millions of lost working days (Office for National Statistics, ONS). But is this an accurate parallel to draw?

Current disputes draw on comparable problems – high prices and stagnant wages – to the strikes in the 1970s and similar groups of workers are involved. False narratives of the 1970s, articulated by current critics of trade unions, distort understanding of the present problems. Unions then and now are wrongly portrayed as greedily advancing selfish pay claims that cause inflation.

The current disputes

The current industrial action mainly involves trade union members employed in delivering public services. They work for councils and publicly owned bodies, for example, in healthcare. Others are in private companies that provide services that are not open to market competition, such as the railways.

These workers operate within the ‘foundational economy’, which is responsible for maintaining the vital infrastructure and operational elements of everyday life. Without their work, the economic and social wheels of the country grind to a halt.

The gender, ethnic and age diversity of these workers varies from some existing stereotypes of strikers as relatively privileged older, white men. This socially diverse profile is reinforced when we consider that most employees in the foundational economy were identified as key workers during the pandemic. The recognition of these jobs has perhaps strengthened expectations of future reward that have not been fulfilled.

The immediate cause of the current disputes is the rising cost of living, particularly related to increasing food and energy prices. The doubling of domestic gas and electricity prices since the start of 2022 was accompanied by an increase in petrol prices of over 25% from January to late June. Further price escalation is almost certain. Inflation in the UK, at 9.1%, is at its highest rate for 40 years. Analysis of household expenditure estimates by the National Institute of Economic and Social Research (NIESR) indicates that household bills now exceed income in 60% of UK homes.

As a result, it can be argued that strikes in pursuit of wage claims are not the drivers of inflation, as some UK government ministers have claimed. But rather that they are a collective response to the broken relationship between employment and economic security.

In-work poverty – defined as when an individual’s income, after housing costs, is less than 60% of the national average – has grown incrementally since the 1980s. In the UK, this already affected one in eight workers before the recent cost of living crisis emerged (Joseph Rowntree Foundation, 2022). The New Labour government tried to alleviate this with tax credits and other wage subsidies after 1997. The Conservative-led coalition government scaled these back radically from 2010, while reducing support for low-income family housing costs.

The Institute for Public Policy Research (IPPR), reporting in May 2021, saw these two factors as driving the general increase of in-work poverty. Double-earner households, one full-time and the other part-time, were twice as likely to be in poverty in 2019/20 (12%) than in 1996/97 (6%) (IPPR, 2021). This is likely to have contributed to the rapid escalation of food bank usage by wage-earning households reported in the press.

Two important structural forces shape this in-work poverty. First, the loss of around four million jobs in manufacturing, metals and mining, which resulted from the anti-inflationary policies adopted by Margaret Thatcher’s Conservative government after its election in 1979.

Second, trade unions were politically marginalised. Thatcher’s governments and their Conservative successors made it progressively easier for employers to ‘derecognise’ unions. Trade union density – the portion of the workforce represented by unions – fell from around 50% in 1979 to around 30% in 1997. In 2021, the figure stood at around 23%, although in the public sector, it remained at around 50% of workers. The strikers in 2022, drawn from this unionised minority, are operating from a position of weakness rather than strength. They have limited alternatives when seeking to have their voices heard. The government’s reluctance to support workers has been further underlined by the apparent abandonment of the Conservative Party’s 2019 commitment to produce an employment bill that would protect workplace rights lost as a result of Brexit.

Disputes in the 1970s

Strike activity measured in working days lost was higher in the UK in the 1970s than in any other decade in the period after the Second World War (Office for National Statistics, ONS). In 1972, the first of two peak years, 23.9 million working days were lost. This was mainly driven by a seven-weeks long national strike of 280,000 coal miners, followed by a further three-weeks long strike in 1974, which contributed to the electoral defeat of Edward Heath’s Conservative government.

This established the narrative of privileged male trade unionists exerting illegitimate political influence through relentless industrial action. Most coal was bound for electricity generation in power stations, so the miners were central protagonists in the UK’s foundational economy of the 1970s.

Strikers in the second half of the decade were likewise mainly drawn from this segment, with national strikes of healthcare and council workers, firefighters, dockers and lorry drivers, among others. Strikes of manufacturing workers tended, by comparison, to be either localised or short-lived.

Foundational economy strikers in the 1970s, as in the 2020s, were diverse in ethnic, gender and generational terms. Union density among women workers rose from 31% in 1970 to 40% in 1980. Workers of African and South Asian heritage were prominent in strike movements in manufacturing industry, notably the famous campaign for union recognition among photo-processing employees at Grunwick in London in 1976-77, and with healthcare, council services and transport, especially during what became known as the winter of discontent of 1978-79.

The winter of discontent dominates political memories of the 1970s. 1979 was the second and largest peak year of days lost to strikes in that decade, at 29.5 million. Only around half of these days, about 15 million, were actually lost in the pay bargaining year of 1978/79. The other half were in the following pay bargaining year of 1979/80 when 31 million days were lost, driven by a national strike in the steel industry. This is an important detail. Many reflections on the winter of discontent consciously or unwittingly double its economic significance by repeating the error that it cost around 30 million lost working days.

Strikes in the 1970s were mainly shaped, as in the 2020s, by economic insecurities that stimulated workforce demands for increased wages. Coal miners in the 1970s were seeking to arrest a declining relative position. In the 1960s, the workforce had been cut by more than half, as the UK accelerated towards a mixed-fuel economy.

The national coal strikes of 1972 and 1974 were prefigured by lengthy and large unofficial work stoppages in 1969 and 1970. The sudden fuel shock of 1973-74, when oil prices quadrupled, strengthened the bargaining position of miners, but also intensified inflationary pressures that were already rising rapidly. The peak rate of inflation approached 25% in 1975, compared with 9.1% today.

It was the Labour government’s attempt to control inflation after 1975 that underpinned many of the strikes that followed. Wage rises were controlled by annual fixed percentage increases. Total cash increases therefore grew more slowly for lower-paid workers. They viewed the downward squeeze on their wages as unjust, especially when set against less restrictive measures on dividends and profits.

The Labour government was, of course, sympathetic to unions. It strengthened statutory provision against workplace inequalities of gender and ethnicity, and established the Health and Safety Executive. It also attempted to transform authority in workplaces with an agenda for industrial democracy. This would have included worker-directors in companies with more than 1,000 employees.

Business opposition blocked this, in league with the Conservative Party and the anti-union national press. Strikes therefore remained the only meaningful expression of workers’ voice in the 1970s, as in the 2020s, a signal of collective weakness rather than strength.

Conclusion

Strikes are expensive expressions of workforce voice and acts of last resort. This discussion of current and historic strikes shows that they tend to be a sign of weakness, arising where workers are not being listened to, as much as they are a sign of strength.

The current strikes are clustered in the unionised parts of the workforce. Those involved are occupationally diverse and of varied ethnic, gender and generational backgrounds. They are mainly providing vital services and can be understood as operating within what is termed the foundational economy.

Critics of these striking workers seek to misrepresent and delegitimise them through mobilising a stereotyped view of the past, focusing on the 1970s, the peak decade of industrial action in post-Second World War Britain.

But the 1970s to which these critics return did not exist much beyond the front pages of anti-trade union newspapers. Then, as now, strikers were diverse in their background, attempting to protect precarious living standards in a period of rising economic insecurity.

Where can I find out more?

• No longer managing: the rise of working poverty and fixing Britain’s broken social settlement: Report by Clare McNeil, Henry Parkes, Kayleigh Garthwaite and Ruth Patrick for the Institute for Public Policy Research.
• Government's solutions don't go far enough:  TUC article by Suha Abdul.
• Mick Lynch media mania – the appeal of workers’ power: article by Ewan Gibbs.

Who are experts on this question?

• Jim Phillips
• Alan Manning
• Alex Bryson

Author: Jim Phillips

Picture by atlantic-kid on iStock

The post Industrial action: is the UK going back to the 1970s? appeared first on Economics Observatory.

In reality, this may be an underestimate because it does not reflect the large increase – since 2019 – in workers who occasionally work from home. Further, the proportion of workers who are doing their jobs from home is not evenly distributed between sectors or regions of the UK.

Will the transition to home working be permanent?

The pandemic has led to important and seemingly permanent structural changes in how we work. So far, the expected reversal of the massive Covid-19-induced increase in remote working is only partial, and few expect a full return to pre-pandemic office working in the long run.

The UK is not alone in this shift. In the United States, for example, roughly half of paid work hours were done from home between April and December 2020, compared with 5% before the pandemic (Becker Friedman Institute, 2021).

Employers in the United States plan for workers to supply 20.5% of full working days from home after the pandemic ends. Most workers welcome the option to work remotely one or more days per week, according to the Survey of Working Arrangements and Attitudes (SWAA; see Barrero et al, 2021).

There is now substantial evidence to suggest that the increase in remote working – and the corresponding decline in working at the office – will be a permanent shift (De Fraja et al, 2022a; Bloom et al, 2022).

In the UK, recent estimates based on employers’ plans indicate that remote working will be 20 percentage points higher in the foreseeable future than it was in 2019 (De Fraja et al, 2022b). This is roughly in line with the change shown in data from the UK quarterly LFS, and similar to figures for the United States.

A key determinant of whether or not an individual works remotely is the nature of their job (Dingel and Neiman, 2020a; Adams-Prassl, 2020; Dingel and Neiman, 2020b). Job characteristics are also important in determining which occupations will see the largest permanent increases in remote working (De Fraja et al, 2022b).

The biggest growth in remote working tends to be in occupations that already had relatively high rates before the pandemic (see Figure 1). This is important for the regional implications of working remotely in the UK. Specifically, differences in occupational composition across regions lead to variation in the permanent change in working from home.

In 2019, Greater London had 6.7% of workers in health and caring occupations, but 20% in corporate management and business or media, compared with 12.5% and 8.9% respectively in Tees Valley (ONS, 2019).

Because health and care workers have much lower rates of remote working than business and management workers, these labour force composition differences may drive persistent disparities in remote working. This has potentially profound implications for local economies.

Figure 1: Remote working before and after the pandemic by occupation

Source: De Fraja et al, 2022a

How and why does remote working differ across the UK?

Data from the quarterly LFS show substantial regional variation in the proportion of employees who reported normally working from home in the first half of 2022 (see Figure 2).

In London and the South East, around 30-34% reported normally working from home. Comparably, in the North East and Yorkshire and the Humber, this was below 20%. Notice that in 2019, we did not see the same pattern: remote working rates in London were comparable to those in the North of England.

Figure 2: Normally working from home, 2019 compared with 2022

Source: Quarterly LFS, January-June

Note: Values indicate the percentage of respondents who report ‘normally working from home in their main job’.

This regional variation is also reflected in employers’ plans, as reported in the SWAA. For example, in the South West, employers expect a reduction of up to 44% in the amount of work performed at the office, compared with 36% in the West Midlands (see Figure 3).

Figure 3: Expected reduction in work done on business premises by region

Source: SWAA

Note: The sample includes workers who are able to work from home (as revealed by having done so at some point during the pandemic). From the January 2021 to June 2022 SWAA waves, we obtain employer plans for remote working post-Covid-19. We estimate that the reduction in person days on business premises as the average percentage of full working days from home planned is minus 4.7% (the pre-Covid-19 working from home average based on Understanding Society survey estimates).

Urban areas in England and Wales are expected to see the largest changes in remote working from pre-pandemic levels. Rural areas are likely to see much more modest changes (see Figure 4).

Figure 4: The employer-planned change in remote working for England and Wales

Source: De Fraja et al, 2022a

Note: Values indicate the percentage of work that will be done from home, according to responses to the SWAA question ‘After Covid-19, in 2022 and later, how often is your employer planning for you to work full days at home?’

What are the implications of remote working for regional economies and policy?

The shift to remote working will benefit millions of workers in England and Wales. The average UK employee views working from home two to three days a week as equivalent to a 6% pay raise (Mizen et al, 2021). But the aggregate shift to remote working will affect the economy in several other ways.

Locally consumed services

The change means that many workers are spending more time in the residential neighbourhoods in which they live, and less time in the city centres where they work (De Fraja et al, 2021).

This shift in the geography of where work is done will have consequences for locally consumed services, such as cafes, hairdressers and retail shops. It is estimated that working from home will reallocate £3 billion in retail and hospitality spending from city centres to residential neighbourhoods in England and Wales (De Fraja et al, 2022a). Local authorities in central London will be hit hardest by this change.

Other work finds that, on average, a neighbourhood that experiences a 20% decrease in commuter traffic, due to remote working, will experience a 7% reduction in spending on locally consumed services (De Fraja et al, 2022b). This is in line with recent reports of restaurant closures in city centres and business districts.

There are also reasons to think that the outlets that are forced to close in city centres will not be replaced by corresponding new outlets in the areas where people live and work remotely. These areas, where demand for locally consumed services has increased, are beset by constraints on supply affecting their profitability (De Fraja et al, 2021).

Some constraints could be removed by legislation and active policy, including altering transport routes and easing planning restrictions. Others, such as the population density of the area and the availability of suitable accommodation, cannot be relaxed in the medium term.

Commuting and public transport

Having reduced commuting substantially during the pandemic, working adults in the UK now say that they would prefer to commute just two to three days a week. Further, only one in seven expect to return to commuting five days a week.

These changes imply a substantial reduction in costs and time spent travelling to work. Workers responding to the SWAA spent, in 2019, on average 29 minutes commuting and spent £5.50 per day on travel and parking costs. Over 60% commuted by private vehicle and 34% by public transport (Mizen et al, 2021).

In March and April 2021, the average commuter was travelling four days a week, compared with five before the pandemic, when 10% were not commuting at all. This figure had hardly changed a year later.

When asked about their preferences, working adults in the UK showed a preference for commuting less than they had before the pandemic, favouring just two to three days a week.

Any such reduction in commuting brings other benefits, in terms of faster and cheaper commutes for everyone, including the workers who are unable to work remotely. Traffic management regulations and, in the longer term, infrastructure planning will need to take these changes into account to maximise the positive effects of these externalities.

Housing markets

There is a growing body of evidence about the consequences of increased remote working for housing markets. By reducing the need for daily commuting, a rise in remote working weakens the link between where workers live and where they work.

Empirical evidence supports this idea, finding that the housing market premium paid for living close to the city centre has declined in many large US cities (Gupta, 2021). This has also been seen in Greater London (Gokan et al, 2022).

These findings are consistent with the predictions of theoretical analysis that working from home may reverse trends towards gentrification observed in the last two decades (Althoff et al, 2022; Brueckner et al, 2021; Delventhal et al, 2021).

The consequences for housing markets within the UK could also reach well beyond London. Needing to commute two days per week rather than five makes moving to larger and more affordable housing in smaller cities, villages and rural locations more of an option. Evidence of greater housing price increases in recent years for less productive local authorities in England and Wales is consistent with this behaviour (Gokan et al, 2022).

How might remote working affect the levelling-up agenda?

There is a dearth of research on the effects of these changes and differences between regions on inequalities across the UK, apart from recent use of transactions data (Levelling Up Live 2021). As a result, we can only speculate on the implications for the levelling-up agenda.

Differences in remote working may directly affect regional productivity. Research suggests that adoption of remote working has a small positive effect on firm performance (Harker Martin and MacDonnell, 2012; Bloom et al, 2015). Self-reported evidence suggests a 7% improvement in productivity relative to expectations, but workers claim to be 4% more efficient in the office (SWAA).

These effects are small compared with the differences in productivity between industries. As a result, the largest impact on regional productivity is still likely to be industrial composition by region.

But if firms in relatively productive industries relocate to below-average productivity regions and those workers also work remotely 20% more than five years ago, we might expect productivity to rise in those places and fall elsewhere.

The weakening link between where workers live and work also has the potential to affect the levelling-up agenda by reallocating high-skilled workers from the South of England – where property is relatively expensive – to regions further north – where property is relatively affordable (Brueckner et al, 2021; Gokan et al, 2022).

This reallocation will lead to high-productivity workers continuing to work in high-productivity parts of the country but living in lower-productivity areas.

What further evidence is needed?

The ONS has published data for regional labour productivity at the ITL1 level (for example, East Midlands, Greater London, and Yorkshire and the Humber) in 2020 (ONS, 2020). It is beginning to make regional capital data available at the same disaggregated level and intends to make multi-factor productivity (MFP) estimates – which account for capital inputs as well as labour inputs – available as part of its 2021-23 plan. When these data are available, the ONS should be able to estimate disaggregated/regional total factor productivity (TFP) – a measure of growth in output in excess of growth in inputs (labour and capital).

The ONS has good quality data on housing at the local authority level, allowing an analysis of the impact of remote work on housing. It also has data on commuting from the census. But evidence on remote working patterns is more limited, except through analysis of job vacancy data, the Opinion and Lifestyle Survey and data from the Annual Population Survey. Importantly, none of this is published at the regional level.

Where can I find out more?

• Working from home survey: The Survey of Working Arrangements and Attitudes collects information on current and future working from home from a representative sample of workers in each country. It is led by Jose Maria Barrero, Nicholas Bloom and Steven Davis for the United States, and by Paul Mizen and Nicholas Bloom for its UK counterpart.
• Homeworking in the UK – regional patterns: Using data from the UK LFS, Owain Nolan, James Probert, Nick Chapman, Chris Hendry and Addie Knight document regional patterns in working from home across the UK from January 2019 to March 2022.
• Remote working and the new geography of local service spending: Gianni De Fraja, Jesse Matheson, Paul Mizen, James Rockey and Shivani Taneja estimate the effect that the increase in remote working will have on spending on locally consumed services across England and Wales. They estimate that a neighbourhood experiencing a 20% decline in commuter traffic is expected to experience a 7% decrease in local service spending.
• How the rise in teleworking will reshape labor markets and cities: Toshitaka Gokan, Sergei Kichko, Jesse Matheson and Jacques-Francois Thisse show that teleworking will lead to a movement of skilled workers from high- to low-productivity cities. They find that empirical evidence from housing prices in England is consistent with this behaviour.

Who are experts on this question?

• Brent Nieman, The University of Chicago Booth School of Business
• Jesse Matheson, University of Sheffield
• Paul Mizen, University of Nottingham
• Nicholas Bloom, Stanford University
• Jonathan Dingel, The University of Chicago Booth School of Business
• Henry Overman, London School of Economics and Political Science
• Gianni De Fraja, University of Nottingham
• James Rockey, University of Birmingham

Authors: Gianni De Fraja, Jesse Matheson, Paul Mizen, and James Rockey

Picture by JSX80 on iStock

The post What does remote working mean for regional economies in the UK? appeared first on Economics Observatory.

In the UK, data on ten indicators (referred to as ‘domains’) on the wellbeing of the nation are collected to form the ‘Measure of National Wellbeing’ framework. These factors are those that the public report as mattering most, namely: personal wellbeing, relationships, health, what we do, where we live, personal finance, economy, education and skills, governance and environment.

New data released by the Office for National Statistics (ONS) provide an update on personal and collective wellbeing in the UK. This is the first data release since 2010 and therefore the first to include the effects of the Covid-19 pandemic. Some of the data cover more recent months than others.

What has happened to people’s personal finances and how has this affected their wellbeing?

How well individuals and households are managing financially is important for their wellbeing, as this influences life satisfaction, happiness and anxiety levels. Looking at average income is therefore a useful measure of personal and national wellbeing.

Inflation-adjusted median household disposable income in the UK was £31,385 in the financial year from April 2020 to March 2021. This is both a short- and long-term increase from previous years (see Figure 1).

Figure 1: Median equivalised UK household disposable income (in 2020 to 2021 prices)

Source: ONS

Looking at subjective measures of financial wellbeing also suggests an improvement in personal finances. In 2019/20, 44.5% of adults reported that they were satisfied with their household income, up from 42.8% in 2014/15. But at the same time, 7% of adults reported that they found it quite or very difficult to manage financially in 2019/20.  

Crucially, these figures cover a period prior to rising inflation and the cost of living crisis. Indeed, they don’t fully include the pandemic either – a time when many individuals experienced drops in income due, for example, to being furloughed.

Current increases to households’ costs – particularly energy bills – are becoming a major source of concern and are expected to have a significant effect on people’s attitudes and financial wellbeing in the immediate future.

What has happened to wider economic indicators?  

The country’s economic position affects people’s income and wealth, the state’s ability to provide public services, job creation and living standards. It is therefore an important contextual factor for measuring national wellbeing.

The pandemic brought large parts of the economy to a halt, with the government responding by increasing social support spending (for example, through the furlough scheme).

This had a significant effect on the UK’s economic wellbeing, increasing public sector net debt to 97.3% of gross domestic product (GDP) by the end of 2021. It is estimated that once this ratio exceeds 77%, it starts to affect economic growth negatively (Caner et al, 2010).

Net national disposable income per capita was also hit by the pandemic, dropping to £24,625 in 2020 (see Figure 2). This recovered to £27,023 in 2021, but it remains below the pre-pandemic level of £28,125 in 2019.

Figure 2: Real net national disposable income per capita, seasonally adjusted, UK

Source: ONS

The economic slowdown caused by Covid-19 reduced inflation to below 1% at the end of 2020 (ONS, 2022). Since then, it has continued to grow past the initial economic recovery, with the consumer prices index including owner occupiers' housing costs (CPIH) reaching 8.8% in July 2022.

It is expected to increase further, causing concern about the rising cost of living. This is likely to have a substantial effect on national wellbeing over the coming months.

What about education and skills?

Gaining an education and/or new skills can improve people’s socio-economic outcomes, which in turn contribute to better personal and national wellbeing.

The estimated value of human capital – the total net present value of working age adults’ projected lifetime earnings – has been increasing in the short and long term in the UK, reaching £23.8 trillion in 2020. This can be explained by an increase in the number of people of working age with at least an undergraduate degree or equivalent in recent years.

The proportion of people of working age with no qualifications has also been falling, more than halving to 6.8% in the third quarter of 2021, compared with 15.6% in the third quarter of 2002 (see Figure 3).

Figure 3: Percentage of adults aged 16 to 64 years with no qualifications, UK

Source: ONS

What about other factors related to wellbeing?

Personal wellbeing is central to understanding national wellbeing. It is measured by asking people questions about how satisfied they are with their lives, whether they feel that the things that they do are worthwhile, and their happiness and anxiety levels from the previous day.

In the first quarter of 2022, these measures remained below their pre-pandemic levels, representing a long-run deterioration in personal wellbeing. But there has been some short-term improvement compared with the first quarter of 2021 (during the UK’s third national lockdown).

People’s relationships also affect their happiness and quality of life. The latest data (from June to July 2022) show that people appear to feel well connected, with a high proportion of adults feeling that they can trust most people and can rely on people in their life if they have a serious problem (both of which are measures of social capital). These high levels of social capital support a well-functioning society, which can enhance national wellbeing.

Participation in both work and leisure activities also influences people’s wellbeing, lifestyles and relationships. Following the pandemic, unemployment in the UK rose to above 5%, but it has since fallen. It stood at 3.8% in March to May 2022 – a 48-year low.

People’s ability to enjoy leisure activities was also disrupted by the pandemic, but the proportion of people who accessed the natural environment rose during the first months of lockdown and it has stayed at this new higher level.

The pandemic halted the world economy and led to months of lockdown and social distancing rules in the UK.  This negatively affected numerous measures of personal and collective wellbeing, which have since started to recover following the lifting of the final Covid-19 restrictions in July 2021. But, the current cost of living crisis, uncertainty about the coming winter months and the possibility of an impending recession are expected to have a sizeable negative effect on wellbeing in the immediate future.

Where can I find out more?

• The full data release for the quality of life in the UK from August 2022 is available here.
• Previous data for 2019 with international comparisons are available here.
• Wellbeing Research Centre – University of Oxford.
• World Wellbeing Movement.

Who are experts on this question?

• Richard Layard
• Jan-Emmanuel De Neve
• Maria Cotofan

Author: Marco Vaitilingam

The post What do new wellbeing data reveal about the quality of life in the UK? appeared first on Economics Observatory.

In recent months, various politicians in the UK have been celebrating what they see as the healthy state of the post-pandemic labour market. At 3.6%, the unemployment rate is currently at its lowest level since May 1974. And in June this year, the total number of workforce jobs rose by 290,000 on the quarter, going past its pre-pandemic level to a record 35.8 million.

But the reality is more complex. Economists have been quick to push back against the narrative that the labour market has recovered with high employment rates alone. For example, other labour market data from the Office for National Statistics (ONS) show that in May to July 2022, the economic inactivity rate – the share of people not working and not actively seeking work – increased by 0.4 percentage points on the quarter to 21.7%.

The important distinction here is that when people who are out of work stop looking for a job, they are no longer counted as ‘unemployed’ and are instead listed in the data as ‘economically inactive’. These data indicate that while the UK’s unemployment rate is low, there is a large number of people not working. What’s more, with prices rising – particularly for food and energy – many people in work are struggling to make ends meet.

With all this in mind, this week on the Observatory we looked at a number of challenges facing the UK labour market.

Late to work

On Tuesday, we posted an article by Jonathan Cribb, Bee Boileau and Laurence O’Brien (Institute for Fiscal Studies, IFS) on how employment of older workers has changed since the pandemic.

They note that since the 1990s, more and more people in their 50s and 60s have stayed in work. Indeed, the share of these age groups in paid employment increased from around 46% in 1994 to about 61% just before the Covid-19 crisis. This shift was driven mainly by women aged 60-65, whose employment rate increased by 25 percentage points.

But this trend is changing. On one side, there were large increases in employment rates among 65 year olds between 2018 and 2021 (due to the most recent rise in the UK’s state pension age). In contrast, employment rates of those in their 50s and 60s (a larger group) have fallen by around 1.2 percentage points since March 2020 – partially reversing the pattern seen since the 1990s. This change has been driven by increasing rates of economic inactivity and is not the result of rising unemployment rates for this age group. Specifically, there were over a quarter of a million more economically inactive people in their 50s and 60s between October 2021 and March 2022 compared with October 2019 to March 2020 (immediately before the pandemic).

Figure 1: Number of people aged 50-69 moving from employment to inactivity (and vice versa) and from unemployment to inactivity (and vice versa) within three months, by half-year

Source: Boileau and Cribb, 2022

Note: The vertical line indicates the final data point unaffected by the Covid-19 pandemic.

Figure 1 shows the trend more clearly. The rates at which people in their 50s and 60s are moving directly from employment into economic inactivity (top dark blue line) are higher than at any point since 2006 (just before the global financial crisis of 2007-09).

The IFS team find that these movements explain two-thirds of the overall increase in economic inactivity during this period. In short, since the pandemic, more and more people in their 50s and 60s have been quitting their jobs work and not looking for new ones.

Feeling insecure

A further recent trend in the UK labour market has been the rise of the gig economy (see here for a piece on how Covid-19 affected the gig economy, and here for a study on Uber drivers’ employment status). Another new article this week, by Rebecca Florisson (Lancaster University), asks whether work is becoming less secure.

According to The Work Foundation, ‘insecure work’ is characterised as a job where a worker is not guaranteed future hours or future work; has unpredictable pay or very low pay; or has low, or no, access to employment rights, protections and entitlements (such as sick pay or maternity leave).

Rebecca highlights that in 2021, over six million UK workers experienced ‘severely’ insecure work. Longer-term evidence shows that in the past two decades, at least one in five workers will have experienced severely insecure work in any given year (see Figure 2).

Figure 2: Change in the proportion of the UK workforce experiencing severely insecure work, 2000-21

Source: Work Foundation analysis of the Office for National Statistics (ONS) Labour Force Survey data, April-June 2000-2021

Note: The first pink shaded area highlights the global financial crisis. The second shaded pink area highlights the Covid-19 crisis.

Research shows that there are other knock-on effects. For example, workers in insecure jobs are at greater risk of job loss. They may also face increased negative health, wellbeing and employment outcomes. Studies show that this is particularly problematic for women, disabled workers and people from minority ethnic backgrounds.

Rebecca stresses that in the absence of any clear plan from government to reform the safety nets that insecure workers often fall through (such as statutory sick pay), nor to change the current classification of employment status, policy should focus on enforcing and protecting people’s existing rights.

Working remotely… or not even remotely working?

Many thought that the surge in working from home seen during Covid-19 would change people’s professional lives forever, for better or for worse.

On the negative side, the image of this new world of work was one of empty offices, deserted lunchtime cafes and an atomised workforce. With each employee hidden away in bedrooms, at kitchen tables or in converted garden sheds, urban centres would be left eerily quiet, a forgotten relic of an outdated system.

But on the plus side, free from the pains of commuting and office life, post-Covid-19 workers would be happier, healthier and more productive, able to enjoy more leisure time while businesses’ running costs quickly plummeted as commercial property rents nosedived.

But what does the evidence show has happened with remote working, what has it meant for productivity and is it here to stay?

One concern about the shift to remote working relates to the effects on productivity. This was examined in a new piece this week by Cristian Escudero and Mark Kleinman (King’s College London).

They are quick to establish that assessing the effects of working from home is not easy, as the change in working patterns has occurred alongside other negative effects associated with the pandemic (such as lower investment, an erosion of human capital and a decline in global trade and supply chains).

What is clear is that many employees were not provided with the necessary support or infrastructure for remote work, nor did many have the skills required. Similarly, productivity may have gone down due to increased distractions and communication costs.

But on the other hand, in this new way of working, greater job autonomy and self-leadership could have led to higher individual productivity. Further, some of the time saved from not commuting may now be being devoted to work-related activities, boosting output per worker.

Survey data indicate that almost half of the respondents felt their efficiency while working from home was about the same as working on company premises, while nearly 40% said their efficiency at home is higher (see Figure 3).

Figure 3: Efficiency of working from home versus working on business premises

Source: Barrero et al, 2021

Note: Responses to the question ‘how does your efficiency working from home during the Covid-19 pandemic compare to your efficiency working on business premises before the pandemic?’

Cristian and Mark conclude their piece by arguing that policy-makers should be sceptical of general claims being made about the impact of remote working on productivity, either in a negative or positive direction. Overall, research indicates that it may be necessary for employees to return to the workplace to regain pre-pandemic economic performance.

But they also stress that employee preferences and wellbeing should not be overlooked and should be considered carefully by policy-makers. To increase worker productivity in the UK, speaking with – and listening to – workers is a starting point.

Difficult times lie ahead for the country. Keeping workers on side – be that older employees, people working within the gig economy or those pushing for a remote/hybrid lifestyle – will be vital.

Observatory news

Meanwhile, this morning’s ‘fiscal event’ in Parliament will generate numerous takes over the coming days. We plan to post pieces related to many of the big issues – energy costs, inflation, taxes, bankers’ bonuses, growth and so on – drawing, as ever, on top quality, independent economic analysis and research evidence. Do submit any questions to which you would particularly like to see answers.

In case you missed the announcement earlier this week, the Festival of Economics will be returning to Bristol on Monday 14 to Thursday 17 November. We’re delighted to announce a packed programme of talks and events, details of which can be found here. Tickets are on sale now.

Author: Charlie Meyrick

Picture by Tirachard on iStock

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But this development has raised questions about the effects on workers’ productivity. A review of recent evidence indicates that policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either negatively or positively.

Some quantitative studies indicate that the pandemic has had a negative effect on labour productivity. But at the same time, more qualitative studies provide important insights that are relevant to public and private decision-makers.

Indeed, productivity is a complex variable to determine, and different studies have applied varying approaches to capture the impact of Covid-19 on labour productivity. Recent studies have used three main approaches, which appear to give different results. These are based on: accounting data; systems for monitoring the activities and hours worked by employees; and self-assessment by workers.

While the first two approaches show a mainly negative relationship between working from home and labour productivity, the self-assessment approach reports mixed results.

Specifically, although some research seems to imply that a return to the workplace is necessary to recover economic performance, the preferences and perceptions of employees seem to suggest that working from home at least some of the time (‘hybrid working’) may become a permanent option.

This implies that employers will have to adapt to this situation by supporting its implementation, agreeing on a strategic position on hybrid working with respect to the specific organisational context, and facilitating it through training, provision of appropriate equipment and so on.

How might the pandemic have affected productivity?

In economic terms, the pandemic has led to a fall in investment, an erosion of human capital due to unemployment and a decline in global trade and supply chains. In addition, it could also be associated with a constraint on the ability of economies to raise incomes in the long run and a reduction in productivity (World Bank, 2021).

In the short term, the negative effects of the pandemic are most evident when considering the depletion of the labour force (people made redundant, becoming sick and/or on furlough), the tightening of financial conditions and the disruption of supply chains (World Bank, 2021).

Similarly, the measures to contain Covid-19 have increased firms’ intermediate costs, pushed down value-added relative to sales – that is, reduced the difference between the selling price of a product or service and its cost of production – and reduced productivity (Bloom et al, 2021a).

There are other effects that are less clear. The pandemic forced many firms to adopt working from home. At least initially, many employees were not provided with the necessary support or infrastructure for remote work, nor did many have the skills required.

As a result, productivity may have gone down due to increased distractions and communication costs. These include the time spent on coordination activities and meetings both within and outside companies, which has meant a reduction in the number of uninterrupted hours when working from home (Gibbs et al, 2021).

On the other hand, in this new way of working, greater job autonomy and self-leadership could have led to higher individual productivity (Galanti et al, 2021).

The adoption of working from home has also meant that at least a fraction of the time saved in commuting is devoted to work-related activities, which may increase productivity (Barrero et al, 2021). In addition, the closure of less productive firms due to the pandemic tends to increase average productivity in the short run (Bloom et al, 2021a).

Many of these mechanisms that can explain productivity changes in the short term may also apply further down the road. A prolongation of the pandemic would continue to have supply-side effects, mainly in terms of labour depletion (that is, people made redundant, sick and/or on furlough) and supply chain disruptions.

In addition, social isolation, family-work conflicts and longer working hours can affect workers’ wellbeing and their mental and physical health. This is likely to have a negative impact on their long-term productivity at work.

Similarly, it is likely that the time that senior managers have had to devote directly to the pandemic has in part been taken away from other long-term productivity-enhancing activities (Bloom et al, 2021a). Further, the effect of lower investment in research and development (R&D) and innovation during the pandemic is likely to affect productivity in the long run.

Nevertheless, while the adoption of working from home may have had negative effects on productivity in the short term, these can, in principle, be mitigated and even reversed in the long term. Indeed, there is scope for improving the management of remote working, and labour productivity can be increased by enhancing managerial support (Farooq and Sultana, 2021).

What do recent empirical studies say about the impact of Covid-19 on productivity?

Research in this area has focused on analysing the effects of the pandemic on productivity in specific economies, sectors and firms, mainly considering the effects of home working. This is due to the specific objectives of each study, the availability of relevant information and the complexity of measuring productivity in practical terms.

Although measurements in this context are diverse, three main practical assessment methodologies can be identified in recent studies.

First, there are studies that examine labour productivity on the basis of mass accounting or numerical information from statistical databases. For example, using data from the Decision Market Panel of the Bank of England, one study finds that the pandemic would have reduced total factor productivity – that is, productivity including changes in capital as well as labour inputs – in the UK private sector by up to 4%, estimating a 1% reduction in the medium term (Bloom et al, 2021a).

The study also suggests that the increase in intermediate costs associated with the pandemic would influence the reduction in ‘within-firm’ productivity, that is, how productive individual firms are. This is notwithstanding the compensating effect coming from the contraction of less productive sectors (and firms), which is known as the ‘between-firms’ effect (see Figure 1).

There is evidence of a negative relationship between Covid-19 and productivity in another study, which estimates that the pandemic reduced labour productivity by 4.9% in Latin America and by 3.5% in the 24 countries included in the sample, considering direct and indirect sector-level effects on the economy (Ahumada et al, 2022).

Figure 1. Contributions to the impact of Covid-19 on productivity

Panel A: Labour productivity per hour

Panel B: Total Factor Productivity (TFP)

Source: Bloom et al, 2021a

Second, other studies determine labour productivity on the basis of employee activity monitoring systems. One, which uses employee activity tracking systems in Asian information technology (IT) service companies, observes a reduction in labour productivity by 8-19% due to the pandemic (Gibbs et al, 2021). This is explained by the fact that employees worked longer but less productively, as output remained about the same (see Figure 2).

Another study, using a dataset of the daily activities of developers in one of China’s largest IT companies, finds varied results depending on the different comparison metrics used (Bao et al, 2021). The researchers observe that working from home has both positive and negative effects on overall project productivity depending on the metrics evaluated and the characteristics of each project.

Figure 2: Average outcome by month

Panel A: Input – Time worked per working day

Panel B: Output –tasks completed relative to target

Panel C: Productivity

Source: Gibbs et al, 2021

Note: the vertical line (month 0) indicates the switch to working from home.

Third, there are a large number of studies that analyse labour productivity from a self-assessment point of view. In other words, they address the workers’ own perceptions of their performance.

Only one study fully supports the negative relationship between working from home and labour productivity during the pandemic, particularly considering the possible influence of a less supervised work environment (Farooq and Sultana, 2021).

The results of other research show mixed or positive incidences. For example, one study observes that difficulties in reconciling family and work and social isolation negatively affect work productivity, while autonomy is positively related to work productivity (Galanti et al, 2021).

Another finds negative impacts in terms of decreased work motivation, distraction and multi-tasking, as well as positive effects related to work-life balance, flexibility and time savings (Mustajab et al, 2020).

Other work shows that factors related to working from home – such as having a comfortable workplace, making one’s own decisions about how to schedule work, combining work with household chores or avoiding commuting – can have a positive effect on job satisfaction and a negative impact on job performance, with positive and negative effects on productivity, respectively (Ramos and Prasetyo, 2020).

Other studies find no significant changes overall in workers’ perceptions of productivity before and during the pandemic. But this does vary by sector, occupation, worker characteristics and work context.

For example, one study observes that workers in industries and occupations that are less suitable for home working, such as those related to food, report a decline in productivity. This was also observed among low-income earners, the self-employed and women, particularly those with children (Etheridge et al, 2020).

Another study finds that women, older and high-income workers were likely to report increased productivity (Awada et al, 2021). Other research finds that self-reported productivity was higher while working from home despite self-reported negative effects on physical health, such as a significant increase in back pain and weight gain related to decreased physical activity and increased consumption of junk food (Guler et al, 2021).

Evidence also indicates that home working will boost productivity in the post-pandemic economy by 0.8-1% as conventionally measured, or by 3.6-4.6%, on a wider definition of productivity that includes reduced commuting time (Barrero et al, 2021).

In the data used by the latter large-scale survey, 45% of the respondents answered that their efficiency when working from home was about the same as working on company premises, while 39.7% answered that their efficiency at home is higher (see Figure 3).

Figure 3: Efficiency of working from home versus working on business premises

Source: Barrero et al, 2021

Note: Responses to the question ‘how does your efficiency working from home during the Covid-19 pandemic compare to your efficiency working on business premises before the pandemic?’

Overall, in studies that could be called more ‘objective’ – that is, those that use mostly accounting data in measuring the productivity of the corresponding economies, sectors or firms – it appears that Covid-19 has negatively affected productivity.

But when the monitoring of workers’ activities and workers’ perceptions of their performance are taken into account, the results are more diverse. They depend on the context and characteristics associated not only with the work, but also the workplace and workers themselves.

In addition to the studies mentioned above, a recent investigation of 1,612 engineers, marketing and finance employees at a large technology firm based in Shanghai used a randomised control trial (RCT) methodology in which half the group were arbitrarily assigned to being able to work from home for two days per week, while the other half worked full time in the office (Bloom et al, 2022).

Among other findings, this study found no impact in the group that were working from home or in any individual sub-group in terms of performance reviews or promotions. Lines of code written by the home working group – one measure of employee productivity for IT engineers – rose by 8% (as measured over the whole working week) compared with the control group. Employees' self-assessment of their productivity while working from home was also positive, with an average post-experiment assessed impact of 1.8%.

What are the implications of the results of the impact of Covid-19 on productivity?

The pandemic is a unique crisis that has affected both the supply and demand for goods and services. It has created a context in which incentives for product innovation and quality improvement are reduced, technological progress is held back and productivity is reduced (World Bank, 2021).

Consequently, a pro-active approach from both the public and private sectors is needed to boost productivity growth. Policy-makers will need to facilitate investment in physical and human capital. Firms will need to revitalise their capabilities to drive technology adoption and innovation.

Economic shocks caused by the pandemic may lead to structural changes that can improve productivity in certain sectors. The option to work from home could increase and may positively affect labour productivity due to the re-optimisation of labour arrangements (Barrero et al, 2021).

Additionally, the various measures taken by firms to deal with the productivity consequences of the pandemic, such as investment in home equipment to facilitate working from home, have not only mitigated the decline in output but also significantly changed work dynamics (Eberly et al, 2021; Bloom et al, 2021b).

The shift to home working seems to have affected not only labour productivity but also workers’ wellbeing, especially in the context of work-life balance.

One study observes that individuals working from home due to the pandemic reported lower stress, higher efficiency and better quality in their work. But the same study also finds self-reported weight gain and increases in lower back pain, both of which may have longer-term health implications (Guler et al, 2021).

Workers’ perceptions of home working are still subjective and depend on multiple factors, such as the complexity of the work performed, the need for interaction (or not) with other colleagues to complete certain tasks, the awareness of being observed and evaluated, and, even more importantly, family and workspace conditions at home.

Indeed, there is currently no consensus in economic research on the productivity effects of working from home, as it can be very unequal across people and locations (Behrens et al, 2021; Barrero et al, 2021).

Undoubtedly, policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either in a negative or positive direction. The quantitative studies reviewed here mostly support the notion of a negative effect on labour productivity, indicating a necessary return to the workplace to regain pre-pandemic economic performance.

Yet those studies of a more qualitative nature provide important insights – on employee preferences and wellbeing – that should be considered by relevant public and private decision-makers.

Where can I find out more?

• London’s workforce during the pandemic: Report by the Policy Institute at King’s College London and King’s Business School.
• The WFH revolution: how new ways of working are changing London: King’s Business School and Policy Institute at King’s.
• Nick Bloom describes findings of why working from home will stick: National Bureau of Economic Research.
• Julia Hobsbawm ‘The Nowhere Office’.
• WFH Research.

Who are experts on this question?

• Nick Bloom, Stanford University
• Philip Bunn, Bank of England
• Steven Davis, The University of Chicago
• José María Barrero, Instituto Tecnológico Autónomo de México

Authors: Cristian Escudero and Mark Kleinman

Picture by monkeybusinessimages on iStock

The post The shift to working from home: how has it affected productivity? appeared first on Economics Observatory.

In the last few years, the picture has become less clear. On the one hand, there were large increases in employment rates among 65 year olds between 2018 and 2021. This was due to the most recent rise in the UK’s state pension age (Cribb et al, 2022). But among the larger group of people in their 50s and 60s, employment rates have fallen by around 1.2 percentage points since the start of the pandemic, partially reversing a decades-long trend (Boileau and Cribb, 2022).

What effect did the most recent increase in the state pension age have on 65 year olds?

The UK government has been increasing the earliest age at which people can claim a state pension known as ‘the state pension age’. This is partly in response to pressures on the sustainability of the system brought on by rising life expectancy and an ageing population, as well as to ensure the fairness of the system across different generations as life expectancy increases.

Most recently, the state pension age for men and women rose from 65 to 66 between December 2018 and October 2020. Understanding the effects of this is important because the state pension age is already legislated to rise further, starting with an increase to age 67 between 2026 and 2028.

The change from 65 to 66 has had a clear effect on the employment of 65 year olds, as Figure 1 shows (Cribb et al, 2022). Before the end of 2018, the employment rates of 65, 66 and 67 year olds evolved similarly, rising gradually over time. But since the state pension age rose above 65 at the end of 2018, the employment rate of 65 year olds has grown sharply from 29% to 39%. At the same time, the employment rates of 66 and 67 year olds have continued on their previous trajectory.

Figure 1: Employment rates of people aged 65, 66 and 67 over time

Source: Authors’ calculations using the Labour Force Survey.
Note: The vertical line shows the last quarter in which all 65 year olds were over the state pension age (2018 Q3).

Overall, the rise in the state pension age from 65 to 66 led an extra 8% of 65 year olds (55,000 people) staying in paid work. The increases in employment for men and women have been of similar size.

But the employment effects of the reform were not the same for all groups. In the most deprived fifth of the country, women’s employment rate at age 65 rose by 13 percentage points and men’s by 10 percentage points. In contrast, in the most prosperous areas, women’s and men’s employment rates at age 65 rose by just 4 and 5 percentage points respectively. This suggests that many of those living in poorer areas are unable to retire without the income provided by the state pension.

While the higher state pension age did cause a significant increase in employment among 65 year olds, it is important to highlight that the vast majority (over 90%) of individuals in this age group did not change whether they were in paid work because of the change. Some individuals will have retired before 65, while others would have worked past 65 regardless of the rise in the state pension age.

But one group of particular concern is the 65 year olds who would like to work because of the increase in the state pension age but are unable to. There are 30,000 individuals in this group, affected either because they cannot find employment, or because they have health problems that are preventing them from working.

Since only a minority of 65 year olds offset the loss in state pension income with extra employment income, household incomes among this age group fell by an average of £108 per week due to the reform (Cribb and O’Brien, 2022).

A large increase in poverty came along with this: almost 100,000 more 65 year olds were in income poverty as a result. The counterpart to lower household incomes – and higher poverty rates – was a boost to the government’s finances of around £5 billion per year.

What has happened to the employment rates of people in their 50s and 60s since the onset of the pandemic?

Despite the increased state pension age encouraging 65 year olds to delay retirement, there has recently been greater concern about an exodus of older workers from the labour market. This stands in contrast to the longer-run trend of higher employment at older ages seen over the past few decades.

Since the pandemic, employment rates among people in their 50s and 60s have declined. This has been driven by increasing rates of economic inactivity, which refers to the state of neither being in paid work nor searching for work. Put another way, it is not a result of rising rates of unemployment for this group.

Those in their 50s and 60s stand out as a group in their experience of increased economic inactivity. There were 270,000 more economically inactive people in their 50s and 60s between October 2021 and March 2022, compared with the period from October 2019 to March 2020, immediately before the pandemic (Boileau and Cribb, 2022).

The proportional increase in inactivity among this group has been significantly larger than for most other age groups. The Institute for Employment Studies (IES) estimated in May 2022 that the fall in the number of over-50s in the workforce accounted for 58% of the gap between contemporary labour force participation and what we might have expected before 2020 (IES, 2022).

The rates at which those in their 50s and 60s are moving directly from employment into economic inactivity are higher than at any point since at least 2006, a period of time that includes the global financial crisis of 2007-09 (see Figure 2). These movements directly out of employment explain two-thirds of the net increase in economic inactivity during this period.

Figure 2: Number of people aged 50-69 moving from employment to inactivity (and vice versa) and from unemployment to inactivity (and vice versa) within three months, by half-year

Source: Boileau and Cribb, 2022.

Note: The vertical line indicates the final data point unaffected by the Covid-19 pandemic.

Within older age groups, who is moving from employment into economic inactivity?

On many dimensions, the rate of movement into inactivity among older workers has been relatively broad-based, with little variation between groups. For example, there was minimal difference between men and women, between professional and non-professional occupations, or between those with and without degrees.

Yet there are three specific groups that have left employment at greater rates than others. Self-employed workers were more likely to leave work and move into inactivity than employees, and they did so earlier. This trend peaked in 2020. Part-time workers also moved out of employment at a faster rate than full-time workers. And the increase in the rate of movement into inactivity was more marked for those in their 60s compared with those in their 50s, especially in 2021.

It is striking that these three groups stand out: they are all groups that are, in some sense, close to retirement. Part-time work at older ages plays an important role in transitions into retirement for some older workers (Crawford et al, 2021). Self-employed workers have lower earnings than employees (Cribb et al, 2019), and more control over their working lives. And those in their 60s are closer to – or at – their state pension age, so they can count on more imminent financial support from the state to move into retirement.

What has driven the fall in employment for 50-69 year olds?

Weak labour demand for particular occupations or skills during the pandemic does not seem to have driven the fall in employment for those in their 50s and 60s. There were no strong differences in rates of leaving work between those in occupations that have seen relatively high or low growth in vacancies over the last two years.

Redundancies and dismissals did play some role in increasing movements into inactivity in 2020 compared with before the pandemic. They drove over a third of the increase in older individuals leaving the labour force in 2020, compared to the years immediately before the pandemic. But redundancies were much less important in 2021, as the economy recovered.

Health reasons were also not a central driver of these trends. Only 5% of the growth in movements out of work into economic inactivity between 2017-19 and 2021 was a result of people saying that they left their last job for health reasons. Movements directly into long-term sickness or disability from employment remained similar to their pre-pandemic levels in 2020 and 2021. The increases in movements from employment to inactivity were also similar for those with and without a longstanding health condition.

Instead, early retirement has been key to these changes in employment. More than half of the growth in people leaving work and moving into inactivity during the pandemic was driven by people saying that they had retired from their previous job. Retirement was both the most frequently given reason and the reason that saw the largest increase between 2019 and 2021 (Office for National Statistics, ONS, 2022).

What might happen to employment rates of older workers in the future?

It is difficult to say how employment will evolve in the future, and much will depend on how long-lasting are the increased inactivity rates from the pandemic.

In general, retirement tends to be a persistent condition, with only 5-10% of people who retire in the UK returning to paid work (Kanabar, 2013). Around six in ten older adults who became inactive during the pandemic, who were surveyed by the ONS, reported that they would not consider returning to work in the future (ONS, 2022). But high inflation and rising energy bills could potentially mean that more return to work out of financial need, especially if retirement has been taken significantly earlier than planned.

Looking further into the future, there are reasons to believe that the long-running trend of higher employment rates among older workers will return. Each successive generation approaching retirement has more labour market attachment than the generation before it, particularly for women, which would be expected to increase employment rates at these ages. In addition, the upcoming increase in the state pension age to 67 between 2026 and 2028 will also push up employment rates among 66 year olds.

Where can I find out more?

• Labour market effects of the increase in the state pension age from 65 to 66: Institute for Fiscal Studies (IFS) report summary by Jonathan Cribb, Carl Emmerson and Laurence O’Brien.
• Recent and future patterns of work around state pension age: IFS report by Jonathan Cribb and Carl Emmerson.
• The rise in economic inactivity among people in their 50s and 60s: IFS report by Bee Boileau and Jonathan Cribb.
• Movements out of work for those aged over 50 years since the start of the coronavirus pandemic: Office for National Statistics (ONS) report.
• Labour Market Statistics, May 2022: Institute for Employment Studies (IES) report.
• State pension age increases and the circumstances of older women: Chapter in ‘The Dynamics of Ageing: Evidence from the English Longitudinal Study of Ageing 2002-16’ by Neil Amin-Smith and Rowena Crawford.

Who are experts on this question?

• Bee Boileau, IFS
• Jonathan Cribb, IFS
• Carl Emmerson, IFS
• Ricky Kanabar, University of Bath
• Laurence O’Brien, IFS and University College London
• Andrew Scott, London Business School

Authors: Bee Boileau, Jonathan Cribb and Laurence O'Brien

Picture by Jacob Lund on iStock

The post How has employment of older workers changed since the pandemic? appeared first on Economics Observatory.

NHS England defines unpaid carers as those who look after someone who cannot cope without their support due to illness, frailty, disability, a mental health problem or an addiction.

Unpaid caring roles often go beyond personal care – such as help with washing, dressing and eating – and include other essential forms of support. This might involve helping to manage finances, shopping for essentials, mobility assistance, ordering medication and emotional support (Carers Trust, 2021).

Nearly 60% of unpaid carers live in a household where someone is disabled; a similar proportion of unpaid carers are women.

Around 8-10% of the UK’s population provide or receive unpaid care, although estimates differ depending on the definition in survey questions. This share has remained relatively stable for 15 years.

But in absolute terms, demand for care is rising, as the UK’s population is getting older and the prevalence of working age disability has increased. In 2019/20, 1.9 million requests for social care support were made in England, over 5% more than in 2015/16.

Care costs have risen, demand has increased, and local authority funding for social care in real terms was only 0.4% higher in 2019/20 than it was in 2010/11. These trends are likely to continue, so we might expect the number of unpaid caregivers and recipients to increase.

The support needs of those who receive unpaid care, and the commitment made by those that provide it, can often strain family finances. Recent analysis finds that people in these households are less likely to be in employment and more likely to fall below the poverty line compared with the rest of the population.

This means that, on average, households where an individual provides or receives unpaid care came into the cost of living crisis with less financial resilience to the pressure being placed on household budgets.

But even within this group, the impact of high inflation will not be uniform. Those receiving care come from a range of socio-economic backgrounds and have different requirements in terms of their care.

What is missed by headline inflation figures?

While prices are rising across the economy, it is primarily energy and transport costs that are pushing up inflation. These costs are rising faster than any other type of goods or services. The consumer prices index including owner-occupiers' housing costs (CPIH) rose by 8.8% in the year to July 2022, and 40% of this rate was driven by transport, electricity, gas and other fuels.

This means that households that spend a greater share of their income on energy and transport will be at the sharp end of the cost of living crisis. Evidence tells us that this will include many households where someone provides or receives unpaid care.

We know that disability often has a direct impact on energy usage, with many care recipients needing to consume more energy at home because of their impairment or condition. This comes on top of other cost burdens that can fall on individuals with support needs, such as specialist equipment or adaptations to the home.

Unpaid carers themselves also face an additional burden on household finances. For example, they may incur higher transport costs due to providing care.

This means that, in general, the composition of these households’ spending will leave them facing a higher rate of inflation than the headline figure suggests. But the extent to which this is the case will depend on individual circumstances.

What about work?

Some people might respond to the rising cost of living by taking on extra hours to increase their earnings. There is ample opportunity for this. The number of job vacancies in the UK economy is over 60% higher than it was in the months preceding the Covid-19 pandemic.

But households where unpaid care is a factor are limited in their ability to work. This applies to both carers and care recipients. A key barrier is the time spent providing or receiving care. Evidence indicates that the higher the care commitment, the greater the impact on earnings.

For example, a study by the New Policy Institute finds that the poverty rate for unpaid carers rises significantly where more than 20 hours of care are provided per week (35% for 20-49 hours per week; 38% for over 50 hours per week; compared with 14% for 0-4 hours per week).

There are many other barriers to employment for care recipients. These depend on their health condition, but they can include inaccessible workplaces, a lack of support or reasonable adjustments from employers, and bias in the hiring process.

These barriers are evident in labour market outcomes. The latest data show a disability employment gap in the UK of 28%. For carers, the employment gap is 10%. In the UK; more carers exit the workforce than elsewhere in Europe; and those who do are unlikely to return.

An important factor is not just access to the labour market in general, but also limits on the type of jobs available. Support needs can often be unpredictable, meaning that unpaid carers and care recipients require flexible working arrangements, which are not available in every workplace.

The impact of unpaid care on labour market access is less pronounced for those above working age. Pensioners’ incomes are more secure, as private and state pensions tend to be the main source of income for these households. This explains why unpaid care does not lead to higher poverty rates in pensioner households. The effect of the cost of living crisis is therefore likely to be similar to the pensioner population in general.

What role can policy play?

Limited access to the labour market can leave unpaid carers and care recipients more reliant on income from social security (national insurance in the UK), especially where the hours of care provided are high.

An important factor here is whether the unpaid carer and the care recipient live together. This is for two reasons. First, support needs in these households tend to be higher, which restricts the ability to work. One study finds that when unpaid care exceeds 20 hours per week, three-quarters of carers live with the care recipient. Second, these households lose two incomes: those of the unpaid carer and the care recipient.

Any decisions taken on social security in response to the cost of living crisis will therefore be significant to these households.

What benefits are available for unpaid carers and care recipients?

Unpaid carers on low incomes might be eligible for means-tested benefits, such as universal credit. The carer’s allowance is also available to some, although this offers relatively little protection (only £67.50 per week). Income from the state pension is deducted from carer’s allowance. In Scotland, an additional supplement of £491.40 per year is available.

Unpaid carers who provide fewer than 35 hours of care per week or earn more than £132 per week after tax and national insurance cannot claim carer’s allowance.

Those who receive unpaid care might be eligible for the personal independence payment (PIP), or one of the older benefits that this has replaced. Eligibility depends on how support needs affect a person’s daily living and mobility. Payments range from £61.85 to £156.90 per week and are intended to account for the additional living costs associated with disability.

For low-income households, universal credit has a ‘limited capability for work related activity’ element, which provides up to £354.28 per month. There is also a ‘carer’s element’ of up to £168.81 per month.

The attendance allowance and pension credit are the equivalent benefits for pensioners who need help or supervision with personal care or living safely in their home.

What has happened to these benefits during the cost of living crisis?

Benefits are usually increased in line with the consumer price index (CPI) inflation level from the previous September. This means that in April 2022, benefits were uprated by 3.1%. Inflation has since reached 10.1%.

This means that the impact of the cost of living crisis is a significant real-terms cut to the value of financial support provided to many households where unpaid care is a factor. This is especially acute for those with higher support needs and where the carer and care recipient live together.

In response, the government announced a series of flat-rate payments to benefit recipients in May 2022. They have offered £650 for means-tested benefits, £150 for non-means tested disability benefits and £300 for pensioners who claim the winter fuel allowance.

These measures will offset 93% of the energy price rise for the poorest households, which might overlap with some unpaid carers and care recipients.

But no specific consideration has been made for unpaid carers’ vulnerability to rising energy and transport costs. Indeed, the carer’s allowance is not a qualifying benefit for any additional support in response to the cost of living crisis.

What about mental health and wellbeing?

Unpaid care often results in a deterioration of health outcomes for carers. One study finds that unpaid carers who provide high levels of care are more than twice as likely to suffer from poor health than non-carers.

Other research finds a strong relationship between mental ill health and the intensity of a carer’s commitment.

Public health protections during the pandemic saw the withdrawal of many care packages and the closure of support services, such as day centres for people with learning disabilities. This resulted in unpaid carers’ roles intensifying, leading to exhaustion and burnout among many. The added burden of stress that is associated with deteriorating household finances is of particular concern for this group during the cost of living crisis.

What further evidence do we need?

The cost of living crisis has been prominent in the news this year, partly because economic statistics around inflation and pay are published regularly. These statistics are disaggregated. This means we can see, for example, the inflation rate for particular types of goods or how wages are changing for men and women.

Economic surveys that ask specifically if a member of a household provides unpaid care are published less regularly. In particular, the annual Family Resources Survey tells us a lot about household finances and includes questions on unpaid care.

When more up-to-date versions of these surveys are published, we will know more detail about how the cost of living crisis has affected those who provide or receive unpaid care.

Conclusion

While evidence is still emerging, we can draw on information about household finances before the cost of living crisis to assess its likely effects. Households where someone provides or receives unpaid care are, in general, likely to consume more energy at home. As energy prices are rising significantly, this implies that these households will be disproportionately affected.

Working age households are likely to be more reliant on social security income and limited in how they can respond to real-terms falls in earnings by working more hours because of their care commitments. This means that the extent to which government support offsets a household’s rising energy bills is of particular importance for unpaid carers and care recipients.

While individual circumstances will vary, few in this group will be better off than they were this time last year.

Where can I find out more?

• Unpaid carers changing the systems that trap them in poverty: Article from the Joseph Rowntree Foundation.
• ‘Seismic’ impact of the cost of living crisis on disabled people: Report from the Welsh Parliament.
• From disability to destitution: Report by Tom Clark and Peter Matejic for the Joseph Rowntree Foundation.
• The high cost of unpaid care by young people: health and economic impacts of providing unpaid care: BMC public health report.

Who are experts on this question?

• Nicola Brimblecombe
• Linda Pickard
• Emma Congreve
• Martin Knapp
• Tom Clark

Author: Robert Watts

Picture by Chinnapong on iStock

The post How is the cost of living crisis affecting unpaid care? appeared first on Economics Observatory.

The rise, alongside the general increase in prices across the economy, has prompted government ministers to consider what can be done to help families facing a cost of living crisis.

In reality, when talking about the cost of childcare, there’s no ‘one-size-fits-all’. Some families face extraordinarily high bills, which eat up a large share of their income.

But in England, the majority of families with pre-school aged children don’t have any childcare costs at all, either because they are not using formal childcare or because they are benefitting from government or employer support.

Teasing out which families are struggling with childcare costs is an essential first step in developing policy options that can help those most affected.

Use of childcare

Families use many different arrangements to look after their young children. We can group these into formal arrangements – such as nurseries, childminders or playgroups – and informal ones, including care from grandparents and other family and friends.

Across the European Union, just over a third of children aged two and under are in some kind of formal care, and another quarter are in informal care only. Just under half of children are looked after exclusively by their parents. But formal childcare use can be much higher – for example, two-thirds of young children in Denmark and the Netherlands are in formal care.

As children get older, their families are more likely to use formal care – in England, data from 2019 suggest that a third of one-year-olds were in formal care, rising to almost 60% of two-year-olds and 85% of three- and four-year-olds. Families also vary quite a bit in how many hours of formal childcare they use.

Childcare costs

These different patterns of use contribute to large differences in costs. Choices about whether to use formal childcare, what type of setting to pick and how many hours to pay for are the principal drivers of families’ weekly childcare bills.

But childcare spending is also affected by factors that are less directly within families’ control. The existence and extent of government involvement in the early years market – through providing settings, regulating prices or subsidising families’ childcare directly – has a huge impact on choices and costs.

Children’s ages are also an important driver: prices for younger children are usually much higher, partly due to tighter staff-to-child ratios in younger age groups.

This is borne out in data from England. Among all families, the median amount spent by households on childcare, irrespective of the child’s age, is £0 per week. In other words, more than half of all families with children under school age paid nothing out-of-pocket towards the cost of childcare in 2019. This is either because the child did not attend a formal provider or because the family used government or work-based support to pay for the care.

Among families using formal childcare, the median weekly spend for a one-year-old was £90, falling to £45 per week for those with a two-year-old. This reduces to less than £5 per week for families with a child aged three or four.

These variations across ages reflect differences in government support as well as in prices and hours. In England, all families with a child aged three to four are eligible for 15 hours of free childcare per week – and families where all parents are in work get 30 hours free each week.

As a result, parents of children in this age group tend to pay less for formal care on average. Around two-thirds of these families did not exceed their childcare entitlements and so didn’t have to pay fees out-of-pocket during term-time.

Families with the highest weekly childcare costs also tend to be those with higher incomes. These families are more likely to have both parents working full-time and therefore use more hours of formal childcare per week.

They also tend to be more willing to pay higher childcare prices. But among families using formal childcare for their one- to two-year-olds, high childcare costs are common even for those on lower and middle incomes.

Figure 1: Mean and median weekly cost of formal childcare in England by age group, 2019

Source: Institute for Fiscal Studies (IFS), 2022
Note: The median family with a child aged one, two, or three to four (left panel) does not pay anything out of pocket for formal childcare.

What can be done to ease childcare costs?

The cost of living crisis has drawn more attention to the high cost of childcare that some families face. In response, the UK government has set out proposals aimed at reducing parents’ costs by reforming the childcare market in England.

These include relaxing staff-to-child ratios for two-year-olds from one staff member per four children to one to five, and a series of changes aimed at supporting more people to become childminders.

Childcare ratios for two-year-olds in England are currently tighter than in most European countries. These legal limits also tend to bind, particularly at younger ages, where around four in five providers are operating at the legal limit.

But comparing ratios internationally can be difficult since countries have different requirements for the training and qualifications of their staff. Even within the UK, Scotland has slightly looser ratios for two-year-olds – one to five, as the UK government is now proposing – but also a somewhat different qualification framework.

Whether any change would affect parents’ costs depends on whether settings will relax their limits, whether they will be able to do this without significantly increasing wages (at a time when recruitment is difficult) and whether any cost savings would feed through into lower prices for parents.

A survey of childcare providers, carried out by the Early Years Alliance, found that 87% of providers reported that they were ‘opposed to the principle of relaxing ratios’ and just 2% believed the changes would result in lower fees for parents.

Another option for the UK government to ease the impact of childcare costs is to increase knowledge and take-up of support that is already available. Awareness and take-up of the universal part-time entitlement for three- to four-year-olds is very high already. But around 60% of families entitled to a 30-hour place, and 65% of entitled two-year-olds, take up less than their full offer.

Programmes outside the free entitlement fare even worse. In 2019, only 40% of pre-school parents reported being aware of the tax-free childcare programme that provides a 20% childcare subsidy and is the main source of support for working families with children aged between one and two.

Working families on low incomes can get generous childcare subsidies through the benefits system, but recent statistics suggest that only a quarter of eligible families with pre-school aged children received anything at all through this programme.

Figure 2: Awareness of the main programmes of government support for childcare in England, 2019

Source: IFS, 2022
Note: For two-year-old entitlement, the figure shows the share of parents of two-year-olds aware of the programme (rather than the share of all parents of a zero- to four-year-old). Identification of eligible families is detailed in the original report.

Are childcare costs an issue?

A child’s first few years of life can be an expensive time for families, particularly in countries where there is relatively little public funding for childcare. Prices in England are high by international standards, although government support reduces them for some families – especially those with three- and four-year-olds.

But those with younger children often face a double hit from higher prices and less access to government support. This is probably part of the reason that they are less likely to use (much) formal childcare.

As a short-term solution to the cost of living crisis, increased public funding for childcare may not be the answer. Most people do not have pre-school aged children and most families that do have young children pay nothing for childcare.

But in the longer term, high childcare costs can shape families’ decisions and make it more difficult for parents (mainly mothers) to return to work. International evidence from countries including Canada, Germany and Spain suggests that providing more affordable childcare can significantly boost mothers’ labour supply. This is especially the case in places where few mothers work or where childcare availability is low.

On the other hand, childcare policies do not always affect labour supply. For example, an expansion of subsidised childcare in Norway had little impact on work decisions.

In the UK, the best available evidence suggests that full-time care for four- and five-year-olds modestly boosts mothers’ labour supply, but the part-time universal free entitlement had no effect. There is little evidence for the impact of childcare subsidies on mothers with younger children.

And there are reasons to support childcare that stretch beyond families’ costs and their work decisions. High-quality early years provision can support children’s development and close early inequalities – although the short, structured days in this sort of provision can be less helpful for parents seeking to work.

The childcare system supports children and their parents through a critical period, with consequences for child development and parents’ working patterns as well as family budgets.

While the childcare system is unlikely to be the source of significant short-term wins to address wider cost of living pressures, longer-term policies that recognise these multiple aims can help the sector to deliver better outcomes for all families.

Where can I find out more?

• The changing cost of childcare: Institute for Fiscal Studies report by Christine Farquharson and Harriet Olorenshaw.
• How can we fix the childcare system? IFS Zooms In podcast with Christine Farquharson and Neil Leitch.
• What is childcare for? BBC Radio 4 podcast with Charlotte McDonald.
• Can universal preschool increase the labour supply of mothers? Review by Sarah Cattan.
• The role of early childhood education and care in shaping life changes: part of a series on ‘the changing face of early childhood in Britain’ by Carey Oppenheim and Nathan Archer.
• Childcare and early years survey of parents 2019: Department for Education
• Coram family and childcare survey 2022.

Who are experts on this question?

• Christine Farquharson (Institute for Fiscal Studies)
• Jo Blanden (University of Surrey)
• Carey Oppenheim (Nuffield Foundation)
• Kitty Stewart (LSE)
• Sarah Cattan (Institute for Fiscal Studies)

Authors: Harriet Olorenshaw and Christine Farquharson

Photo by Halfpoint from iStock

The post Rising costs of childcare: which families are struggling most? appeared first on Economics Observatory.

But as the cost of living is going up, workers’ wages, especially those on the minimum wage, are being squeezed. In real terms – in other words, adjusted for inflation – pay excluding bonuses dropped by 2.8% in March to May 2022 compared with the previous year, according to new data from the Office for National Statistics (ONS). This was a record decline.

Why do countries have minimum wages?

Two reasons: economics and politics. On the economic side, a minimum wage can help to prevent the exploitation of vulnerable workers by unscrupulous employers. It can also help to reduce wage inequality and poverty.

A minimum wage cannot be used to eliminate poverty on its own. It is an hourly wage and many people are in poverty because they work few or no hours. Whether a household is in poverty also depends on the number of people in the household and how much they earn. Nevertheless, it is a useful part of the policy toolkit to address poverty.

Politics also matters. The minimum wage is popular with the public, and so political parties tend to support it. For example, a September 2021 opinion poll found that two-thirds of people in the UK supported a policy of ‘the minimum wage rising gradually over the next few years to £15 an hour’. Even though the minimum wage is often thought of as a ‘left-wing’ policy, majorities of Conservative voters also support rises in it.

Many people think there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families.

Are there downsides to the minimum wage?

The main concern that economists have is that there may be job losses if the minimum wage is set at too high a level. Firms will only employ workers if they think that the value of what they produce is greater than what the worker costs. If the minimum wage makes labour too expensive, there will be fewer jobs.

But how high can the minimum wage go before we start to see job losses? Economists disagree on the answer to this question. Thirty years ago, most economists would have said that any level of the minimum wage inevitably costs jobs as they believed that it is a basic principle of economics that the demand for labour always falls as wages rise.

Today, many – though not all – economists think that this view is over-simplistic and that appropriate levels of the minimum wage need not cause job losses. What changed minds was partly the research of two economists in the United States: David Card and Alan Krueger.

They argued that the empirical evidence linking the minimum wage to job losses was weak. The influence of this work was one of the reasons that Card was a co-recipient of the 2021 Nobel Prize in economics. But there has also been a change in how many economists view labour markets.

The view that the minimum wage has to cost jobs is rooted in the view that the labour market is well-approximated by what, in economists’ jargon, is called ‘perfect competition’. In a perfectly competitive market, jobs are freely available so competition among employers for workers is intense and this drives wages up until they are equal to productivity. So any attempt to legislate higher wages makes some workers unprofitable.

In the hypothetical world of perfect competition, losing a job is no big deal because finding an identical job is no harder than discovering that the local Sainsbury’s is out of milk and going to Tesco instead. But that is not most people’s experience of labour markets.

The reality is that competition for workers is not as strong as many economists would have you believe. An employer who cuts wages will find that most employees are unhappy, but that few will just walk out the door.

It therefore follows that it makes economic sense for employers to pay workers less than the marginal worker adds to revenues. Now a minimum wage will not necessarily price the marginal worker out of his or her job, although most economists think this could happen if the minimum wage is too high.

What is the appropriate level of the minimum wage?

Even once we have decided to have a minimum wage, we need to decide on its level and what, if any variation, it should have.

The UK has taken a largely empirical approach to this question. Recommendations about the level of the minimum wage in the UK are made by the independent Low Pay Commission (LPC) and the recommendations are mostly, though not always, accepted by the government.

The LPC spends a lot of its time considering whether there is evidence that current levels of minimum wages cause job losses and, to date, they have found very little evidence that they have. As a result, the minimum wage has increased over time.

This is not just in nominal terms – the adult rate today is £9.50 per hour compared with £3.60 when it was introduced in 1999. This is almost 2.5 times as high. Figure 1 shows how it has changed over time.

In reality, this is a meaningless comparison; both prices and average wages have a risen a lot in the past 20 years. But the real value of the minimum wage – its purchasing power or the amount of goods and services that can be bought with it – has also increased as it has risen at a faster rate than prices over the past two decades.

But in July 2022, the rise in the minimum wage was lower than the rate of inflation. The real value of the minimum wage today is 1.5 times the level it was in 1999. And its real value has risen faster than average earnings, which have grown by only 25% over the same period.

Figure 1: Wage progression, 2000-2022

Source: Low Pay Commission report, 2021

This means that the minimum wage has risen as a percentage of average earnings from to 42% in 1999 to close to 60% today. Since 2016, the government has given the LPC a target for the minimum wage of two-thirds of average earnings by 2024, taking economic conditions into account. To date, we are on track for this. If we meet the target, the UK will have one of the highest minimum wages in the world as a percentage of average earnings.

Others want to go further and faster. In Autumn 2021, there was a debate over whether a £15 minimum wage was feasible. If introduced now, this would be very close to median hourly earnings, affecting 50% of workers. The minimum wage is the main reason that wage inequality at the bottom end of the distribution is lower now than it has been for over 40 years (the top of the distribution is another story).

What is the difference between a minimum wage and a living wage?

When first introduced, the UK’s minimum wage was called the National Minimum Wage. Since 2016, the adult minimum wage has been called the National Living Wage. What is in the name change from ‘minimum’ to ‘living’ wage?

There are two main traditional differences between minimum and living wages. First, there is the way in which they are computed. The idea behind the living wage is a simple one: to determine the wage rate necessary to ‘ensure that households earn enough to reach a minimum acceptable living standard as defined by the public’.

Currently the living wage computed by the Resolution Foundation for 2020/21 is £11.05 inside London and £9.90 outside (reflecting differences in the cost of living). The living wage need not be the same as the highest minimum wage that does not cause job losses. This is because market economies do not, on their own, guarantee that all people will be able to find an employer prepared to pay them a wage that gives them the opportunity to earn a decent standard of living for them and their family.

The second difference between the minimum wage and the living wage is that while employers are legally obliged to pay the minimum wage, the living wage is intended as a voluntary minimum wage for employers who feel able to pay their workers more. Currently in the UK, 9,000 employers are formally accredited as living wage employers, covering over 300,000 workers. A voluntary living wage can raise wages for workers who do not directly benefit from the lower minimum wage.

But the difference between minimum wages and living wages was blurred by George Osborne’s 2016 decision to call the main adult minimum wage a living wage even though this living wage was neither voluntary nor based on an assessment of the income needed to live.

As a result, what was the living wage is now known as the real living wage. It is confusing, but testament to the view that minimum and living wages, once very controversial, are here to stay and everyone wants to claim some of the credit.

Where can I find out more?

• A minimum income standard for the United Kingdom in 2021: Report from the Joseph Rowntree Foundation
• National minimum wage and national living wage rates: Details from GOV.UK
• Low pay Britain: Resolution Foundation report by Nye Cominetti and Hannah Slaughter
• What is the optimal minimum wage? Blog from the LSE Business Review
• Designing a minimum wage to reduce poverty and wage inequality: Article by Alan Manning
• Low Pay Commission report, 2021

Who are experts on this question?

• Alan Manning
• Jonathan Wadsworth
• Steve Machin

Author: Alan Manning

Photo by Andrii Lysenko from iStock

The post Minimum wages and living wages: what happens in times of inflation? appeared first on Economics Observatory.

Unemployment rates

The headline UK data indicate a tight labour market with low numbers of people unemployed and high numbers of vacancies. The unemployment rate sits at 3.8% for the period between March and May 2022, down 1.1 percentage points from the previous year. Similarly, there is around one unemployed person for every vacancy that exists at the moment, compared with 1.9 this time last year.

While we do not have a regional breakdown of data on vacancies, we can see what is happening to unemployment across regions of the UK.

Most regions now have lower unemployment rates than they did in the immediate pre-pandemic period (see Figure 1). Unemployment rates were generally around historic lows at that time (see Figure 2).

Figure 1: Change in the regional unemployment rate (16+) between January-March 2020 and April-June 2022 (latest data)

Source: Office for National Statistics (ONS)

Figure 2: Regional unemployment rates (16+), post 1992 high/low, January-March 2020 and April-June 2022 (latest data)

Source: ONS

Economic inactivity

The headline measure of economic inactivity covers a broad range of situations in which people of working age (16-64) are unable to be economically active. These include some we might think of as ‘good’ reasons for economic inactivity, including being a student, as well as more worrying reasons, such as long-term ill health.

Given the impact of the pandemic on the health of the UK population, there has been a significant amount of attention paid to economic inactivity over the past year, as public health restrictions have all but ended. An additional trend that seemed to emerge during the pandemic has been a rise in retirement, which is another reason why people of working age might be economically inactive.

Figure 3: Change in economic inactivity among people aged 16 to 64 by reason, April 2021 to March 2022 compared to April 2019 to March 2020

Source: ONS

Most regions have more people who are economically inactive now than in the year prior to the pandemic (the white squares in Figure 3 indicate the overall change by region in Figure 3).

In most regions, the key drivers of more people being economically inactive are ill health, retirement and because they are students. At the same time, the number of individuals who are economically inactive because they are looking after family or the home is generally declining.

Earnings

Undoubtedly, the big story in the labour market remains wage growth lagging well behind inflation, which means that many households face a cost of living crisis.

New data also show that inflation has hit 10.1%, while this week’s labour market data highlight that over the past year, average total pay growth was 5.1%. Pay growth was higher for those working in the private sector – at 5.9% – while public sector pay grew by only 1.8%.

The headline monthly measure of earnings does not come with a regional breakdown, but there is a relatively new data source – known as the ‘pay as you earn real time information’ dataset – that does provide this.

The measure is designated as an ‘experimental statistic’, as it is still in the development phase, and so should be used with more caution than ‘national statistics’ publications.

What do these data show?

While median pay growth for the UK as a whole in these data is slightly higher (at 6.6%) than the headline measure (which is only 5.1%), there is variation across regions (see Figure 4). The biggest increase in median pay over the past year has been in the South West and the lowest in Northern Ireland, at 7.6% and 4.7% respectively.

Just as there is variation across regions, there are also differences within regions. Both the East Midlands and Yorkshire and the Humber have a difference of 1.7 percentage points between the areas with the fastest and slowest pay growth.

Median pay in North Yorkshire grew by 8.2% over the past year, but only by 6.6% in West Yorkshire. Meanwhile, in the East Midlands, median pay in Derbyshire and Nottinghamshire grew by 7% over the past year compared with only 5.4% in Lincolnshire.

A number of factors are driving these differences, including the types of businesses and the nature of work in these areas.

Figure 4: Annual growth in median pay of payroll employees by region ITL1 and ITL2

Source: ONS

The coming months will be very difficult for households across the UK, with inflation forecast by the Bank of England to rise above 13%, and wage growth struggling to keep pace.

Figure 5: Consumer price index (CPI), percentage change

Source: ONS

What these new data highlight is the diversity of economic experience across different parts of the UK over the past couple of years. It is this that should provide the starting point for analysis as we head into exceptionally challenging economic times.

Where can I find out more?

• Labour market in the regions of the UK: This publication from the Office for National Statistics provides a comprehensive overview of all the available data.
• The labour market is making history for the wrong reasons: Resolution Foundation article by Nye Cominetti and Hannah Slaughter.
• Long Covid and the labour market: Report by the Institute for Fiscal Studies.

Who are experts on this question?

• Stuart McIntyre
• Jonathan Wadsworth
• Stephen Machin

Author: Stuart McIntyre

The post The UK’s regional labour markets: what do the latest data reveal? appeared first on Economics Observatory.