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UK lagging behind in labour supply recovery

  • It remains a mixed picture when it comes to how well the labour force is recovering in the wake of the pandemic. The recent improvement in some countries supports our view that much of the pandemic-related drop may be reversed eventually. But this could yet take a while. And for now, the UK’s labour force is still falling, adding to reasons to think that interest rates there have much further to rise.
  • We explained before why the labour force fell in most major developed economies at the start of the pandemic. (See here.) Since then, countries fall broadly into two categories – those whose labour force began to recover quickly, and those where the recovery has been much slower. (See Charts 1 and 2.)
  • A reasonable recovery has continued in the first group of Canada, Australia, Spain and France, with the labour force above its pre-pandemic level in all those countries. Admittedly, in Canada and Australia it is still below where it would have been had it kept growing at pre-pandemic rates. (See Chart 3.) This is especially the case in Australia, where the longer-lasting COVID-related travel restrictions meant that net migration was still negative at the end of last year. However, the rebound in net migration in Canada, where restrictions were eased earlier, is encouraging. (See Chart 4.) Indeed, net migration there is now above pre-pandemic levels, indicating some “catch-up” immigration.
  • The second group has generally seen a slower recovery, with the labour force still below pre-pandemic levels. Nonetheless, there are encouraging signs that the labour force in the past few months has been picking up in Germany and Italy, while upward revisions earlier this year have improved the picture in the US. This supports our view that an initially sluggish recovery in the labour force doesn’t preclude an eventual recovery, given the time it might take for some of the temporary factors that are suppressing it, such as virus fears, to be reversed.
  • The exceptions to this encouraging picture are Japan and the UK, where the labour force has recently been falling. Japan was unusual in escaping an initial drop in its labour supply, but weak population growth has been a drag recently. In the UK, not only is the working-age population flatlining (largely due to weaker migration), but the participation rate (the share of the working age population that is in or looking for work) is still, if anything, trending down. It is now at its lowest level since 2011. (See Chart 5.)
  • The rise in inactivity in the UK over the past few months primarily reflects a rise in the number of long-term sick. (See Chart 6.) The latter could reflect long COVID, though it is unclear why that would be affecting the UK more than other countries.
  • We are still optimistic that, even in the UK, at least part of the drop in the labour supply since the pandemic will be reversed eventually. (See here.) For example, the experience of the global financial crisis suggests that at least some of the rise in long-term sickness will be temporary. And there are already signs that the rise in student inactivity during the pandemic is reversing. However, we wouldn’t be surprised if this took another year or two, meaning the recent tightness of the labour market, and consequent upward pressure on wage growth, is unlikely to ease soon.

Chart 1: Labour Force (Dec. 2019=100)

Chart 2: Labour Force (Dec. 2019=100)

Sources: Refinitiv, Eurostat, Capital Economics

Chart 3: % Change in Labour Force

Chart 4: Net Migration Per Quarter (000s)

Chart 5: UK Participation Rate of 16+ Population

Chart 6: Net Change in UK Inactivity By Reason Since February 2020 (16-64 Years, 000s)

Sources: Refinitiv, Capital Economics, YouGov


Vicky Redwood, Senior Economic Adviser, victoria.redwood@capitaleconomics.com

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