Donald Houston discusses research undertaken with colleagues at the ONS on economic inactivity in the UK. This blog is part of a series looking at the UK Labour Market. See also: - Why are the Over-50s Leaving the Workforce?- Labour Market Flows and Future Participation Flows - What Are the Current Challenges in the UK Labour Market and How Can They Be Addressed? - Over 50s in the labour market - International Migration and the UK Labour Market: Changes and Challenges - How do Fertility Rates and Childcare Costs Play out in the UK Labour Market? - Changing Labour Market Participation of People Ages 50 years and over
There has been some debate about why the UK’s economic inactivity rate fell further and started to recover later than in other developed nations since the Coronavirus pandemic. Economic inactivity refers to people not in employment who are not seeking work and/or are unavailable to start work. The economically inactive are outside the workforce and therefore cannot fill vacancies or contribute to spare capacity or potential supply growth in the economy, crucial factors considered by the Bank of England’s Monetary Policy Committee in setting interest rates.
Shortages and Policy
As labour shortages are thought to be constraining economic growth and contributing to wage rises and the cost of living crisis, recent government policy announcements have sought to encourage more people to remain in or return to the workforce. Most notably, the Spring Budget in March 2023 announced the extension of free childcare places to children between the ages of 9 months and 3 years, and extensions to tax relief for pension savings to discourage retirement.
Although these policies may indeed help increase labour supply in the long run and have wider social benefits (albeit in socially unequal ways), it is really a case of the right policies for the wrong reasons. The Chancellor designed a raft of measures aimed to combat the relatively recent increase in economic inactivity since the pandemic.
‘Looking after family and home’
‘Looking after family and home’ is one of the categories of economic inactivity that actually fell, rather than rose, throughout the pandemic, standing some 166,000 lower in the first quarter of 2023 (at 1.66 million) than in the first quarter of 2020 (when it was 1.83 million) according to figures from the Office for National Statistics. At the same time, retirement among the population of working age (16-64 years) had already fallen back to below pre-pandemic levels by the end of 2022.
Parents of young children and the retired are thus precisely the two groups not driving the increase, yet feature most strongly in the policy changes announced in the 2023 Spring Budget. A cynical interpretation might be that policy changes are backing almost inevitable ‘success’ by going with the grain of existing trends.
Furthermore, the prospects of enticing those who have already started drawing a pension to return to work seem limited, given that only 2.1% of retired people aged 16 to 64 years say they want a job (22,000 out of just over one million – ONS). In contrast, 23.0% of the long-term sick and 23.4% of those looking after family and home say they want a job.
What accounts for the large increase in economic inactivity since the pandemic?
Although retirement and students played important roles in driving up economic inactivity in the early part of the pandemic, the emerging longer-term picture is of a marked deterioration in the health of the working-age population driving up economic inactivity. The number of people who are economically inactive due to long-term sickness or disability rose by 423,000 between the first quarter of 2020 and the first quarter of 2023 to stand at 2.56 million (ONS). But that’s not the half of it (okay, technically speaking it’s two-thirds of it, as explained below).
It’s the pandemic, stupid
We’ve just been through a pandemic that has killed over 225,000 in the UK, putting a huge strain on an already stretched National Health Service (NHS) with waiting times for elective treatment rising further. As of 5th March 2023, an estimated 1.9 million (2.9% of the population) were reporting Long COVID lasting four weeks or more (ONS). Using longitudinal data that tracks people over time, as of March 2022, an estimated 80,000 people had left employment in the UK due to Long COVID (Reuschke and Houston, 2022). As such, it would be surprising if an increase in health problems didn’t bring or keep people out of the workforce.
Office for National Statistics
Analysis I led while on secondment to the Office for National Statistics earlier in 2023 indicates that the percentage of people aged 16 to 64 years who report a long-lasting health condition that limits either the kind or amount of work they can do rose from 16.4% to 18.1% between 2019 and 2022 (ONS).
Only around two out of every three economically inactive persons aged 16 to 64 years with a work-limiting health condition say that long-term sickness or disability is the main reason for their inactivity (although they may say it is a contributory reason). Many respondents state other factors as the main reason for their economic inactivity. For example, 13.1% say they are looking after family or home, and 6.8% describe themselves as retired. Therefore, the analysis used data on self-reported health conditions, rather than the reason for inactivity, in order to capture the full impact of health on economic inactivity.
Only around half of people with a lasting health condition (that is, the condition has or is expected to last over 12 months) say their health limits either the kind or amount of work they can or could do. Therefore, the analysis I undertook while at ONS only included work-limiting health conditions, which allowed a focus specifically on the impact of health conditions on the labour market.
Between 2019 and 2022, the economic inactivity rate among the population aged 16 to 64 years rose by just under half (0.45) a percentage point, from 21.23% to 21.68% (these figures are based on the Annual Population Survey, which smooths quarterly trends and therefore differs from headline labour market data).
The ONS analysis went on the decompose this 0.45 percentage point increase in inactivity into the effects of changes to health, the age structure of the population and structural and behavioural changes in the labour market. The decomposition analysis reveals that the sharp rise in the prevalence of work-limiting health conditions was the largest contributing factor to the rise in the economic inactivity rate over the period 2019 to 2022.
The decomposition analysis reveals that the rise in work-limiting health conditions overall would have raised economic inactivity by an estimated 0.63 percentage points (138% of the actual rise) if the probability of being economically inactive by age and health status had remained at 2019 values. The rise in the prevalence of “other health problems or disabilities” is estimated to produce a rise in economic inactivity of 0.49 percentage points (107% of the total rise in inactivity).
This “other health problems or disabilities” category includes post-viral syndromes and is likely to capture many Long COVID cases. Smaller portions of the rise in inactivity were attributed to mental health problems (0.14 percentage points, representing 31% of the total rise in inactivity) and cardiovascular and digestive problems (0.06 percentage points, representing 13% of the total rise in inactivity). Changes in the prevalence of musculoskeletal problems were estimated to have brought inactivity down slightly (by 0.06 percentage points, or negative 13% of the total rise in inactivity).
Economic inactivity is around three times higher among people with a work-limiting health condition than among those without: 48.2% compared with 15.9% in 2019, and 48.4% compared with 15.8% in 2022. Although the economic inactivity rate has not increased by much for either group, the sharp increase in the prevalence of work-limiting health conditions in the population, coupled with this group’s substantially higher inactivity rate, has served to increase the overall inactivity rate among the population as a whole.
Changes in age structure are estimated to have contributed 0.29 percentage points (63% of the actual rise) to the rise in economic inactivity. The tail of the baby boomer cohort moving into their early 60s, an age group with a high level of economic inactivity, and exiting the labour market due to retirement is expected to continue to bring down the size of the workforce until 2026, other things being equal (ONS).
Structural and behavioural changes in the labour market are estimated to have brought inactivity down by 0.46 percentage points (negative 101% of the actual rise), leading to a lower rise than expected from changes in health and age alone. The downward effect of structural and behavioural changes is consistent with the pre-coronavirus (COVID-19) pandemic downward trend in inactivity continuing, which may have been enhanced since the pandemic by labour shortages and cost of living pressures acting to keep people in the workforce. This underlying downward trend, however, has been more than offset by the larger effects of rising work-limiting health conditions and changes to the age structure of the population.
Tackle the root cause – put more money into the NHS
There is a strong link between the observed deterioration in health among the population aged 16 to 64 years and a rise in economic inactivity since the coronavirus pandemic between 2019 and 2022. The impact of health on economic inactivity has not been driven by a marked increase in the inactivity rate of people with work-limiting health problems. Rather, there are simply many more people with work-limiting health problems, a group that already had a much higher economic inactivity rate than those without a work-limiting health problem.
There are fewer people out of the workforce looking after family and home or retired now than before the pandemic. Therefore, at least from a labour supply point of view, the Chancellor in designing his 2023 Spring Budget may have been better advised to put money into the National Health Service (NHS) to bring waiting list downs and develop effective therapies for Long COVID before tinkering with retirement tax incentives and boosting childcare places, however laudable and long overdue the latter may be.
Changes in age structure between 2019 and 2022 have also increased the economic inactivity rate, even after taking into account the effect of worsening health among older people. Finally, structural and behavioural changes in the labour market have brought inactivity down (for example, the rising cost of living and plentiful job vacancies), leading to a lower rise than expected from changes in health and age alone. We thus do also need policies to support economic activity in order to avoid current labour shortages getting hard-baked into the labour market – but a fundamental pre-requisite is a healthy population.
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WMREDI or the University of Birmingham.