Why experts fear that 500,000 people leaving the job market could trigger stagflation in the UK

The UK is facing a chronic shortage of workers after approximate half a million people have quit the labour market during the Covid-19 pandemic or left the country after Brexit, according to official figures.

Almost 500,000 people have disappeared from the UK’s workforce since the pandemic began, data published by the Office for National Statistics (ONS) show.

Analysts also found that there are around 460,000 more people “economically inactive” – meaning that they are neither in work, nor looking for a job – in the same period.

The ONS said that this increase was driven by “those aged 50 to 64” in recent years, and over the last three months by people who were “looking after family or home, students, or temporarily sick”.

Darren Morgan, the director of economic statistics at the ONS, said there were “around half a million more people” who have “completely disengaged from the labour market” since the pandemic began.

He added there was a rise in the number of people leaving unemployment to take up jobs and many people who had quit the labour market had returned to seek work, but it fell short of the number needed by employers.

It has led some to brand the exodus of workers a “participation crisis”, such as Emily Andrews, deputy director for work at the Centre for Aging Better.

“There are 246,000 fewer people aged 50-64 participating in the workforce than there were at the start of the pandemic,” she explained.

“This means there could be up to a quarter of a million older workers out of employment earlier than they had planned, potentially impacting their retirement plans, while companies are missing out on the positive impact older workers can bring.”

There are many factors behind this shortfall: the first, as cited by the ONS, is an increase in people who are reporting long-term illness. Figures show an increase in the number of people reporting that they were spending their time looking after their family or their home.

Another is that people are reassessing where their lives are heading after the pandemic, with people more likely to take early retirement.

There is also the “accidental savers” phenomenon, where household savings grew passively as outgoings were largely cut during the pandemic. That has given “some with a substantial cash buffer to bankroll a career break or retire early”, says Myron Jobson, senior personal finance analyst at interactive investor.

Another key factor is Brexit. An exodus of workers in key industries such as fruit picking, HGV driving and hospitality has been ongoing since before the pandemic.

The results of this exodus are starting to be felt. ONS figures show that this has already eaten into the amount of labour performed in the last quarter: between January and March 2022, there were an average of 1.04 billion actual hours worked on a weekly basis – but this total is 10.7 million hours below pre-pandemic levels.

The fewer hours that are worked, the smaller the UK’s economic output, and so the smaller its gross domestic product (GDP).

The news raises the prospect of the economy entering a period of “stagflation”, likely to result in rising unemployment levels. This, combined with lesser consumer spending power, could lead to a prolonged period of economic decline: a combination of there being less money to spend, and the value of that money being in decline.

Suren Thiru, head of economics at the British Chambers of Commerce head of economics, said it portrayed a “perilous hiring crunch” for UK businesses.

“With rising economic inactivity confirming that the UK workforce is shrinking, labour shortages are likely to persistently drag on UK growth by stifling firms’ ability to operate at full capacity,” he added.

The worry is that the labour market tends to lag behind the rest of the economy, and signs that the UK workforce are under strain have arrived as a cost of living crisis and inflation have started to bite.

Another fear is that private sector pay and a trend to pay employees bonuses rather than raise their pay, in a bid to avoid inflating salaries, will continue to rise without more viable staff.

“We need to be doing far more to boost labour supply, which would support economic growth, raise household incomes and help contain inflation,” says Tony Wilson, director of the Institute for Employment Studies. Cuts to employment support could not have come at a worse time, he argues.

There are widespread fears that this will get worse. Without critical support for those seeking work and urgent action to replace those who have left it for good, the economic crisis ahead will deepen far more quickly.