Why are so many people leaving the workforce amid a UK cost of living crisis?

Something odd is going on in Britain’s jobs market. Even as unemployment hovers close to its lowest level since the mid-1970s and businesses across the country struggle to recruit enough staff to fill roles, growing numbers are quitting the workforce altogether.

The rise of economic inactivity – when working-age adults are neither in a job nor looking for one – is one of the biggest challenges facing the economy as the country grapples with the twin threats of rampant inflation and weaker economic growth. Both are influenced by the loss of more than 600,000 “missing workers” since the Covid pandemic.

The number of people leaving work to unemployment in the most recent official figures from the Office for National Statistics was below a quarter of a million for the first time on record, according to experts at the Institute for Employment Studies. More than twice as many people left work to economic inactivity, meaning they are not only not working, they are not looking for a job either.

More than 9 million people between the ages of 16 and 64 are now outside the labour market altogether, a group made up of students, those with long-term health conditions, early retirees and carers for young children or elderly relatives.

No other advanced economy has failed to return employment back to its pre-pandemic level, with the UK an international outlier. It’s a trend that has leading economists puzzled. It’s a puzzle because, in principle, as higher wages are offered – alongside the worst hit to living standards since the middle of the last century – that should bring more people back into the labour market.

Put simply, if people are not working, how are they managing to cope with the cost of living emergency?

In search of some answers the government has kicked off an inquiry, while economists the world over are examining the question. Business leaders fear Rishi Sunak has, so far, failed to grasp the severity of the situation.

Economists see a mixture of reasons behind the trend, with positive and negative factors taking people out of the jobs market. Many would happily work if their circumstances allowed. For others, work is a four-letter word they would rather forget.

One of the main drivers identified by economists is Britain’s faltering public services. Lengthy NHS waiting lists, inadequate support for those with health conditions and disabilities, as well as long Covid, are often cited. The lack of affordable childcare and support for elderly relatives, or intransigence from employers refusing to offer flexible work, are other frequent complaints.

It is this group that has risen most since the coronavirus pandemic to record levels, with more than 2.5 million working-age adults now long-term sick. For the first time since the Industrial Revolution, health gains helping to grow the size of the workforce have gone into reverse, according to the former Bank of England chief economist Andy Haldane. Part of this is down to the steady erosion of public services after 12 years of Conservative government. It’s a trend that has exposed as fantasy the Tory dogma that slashing back the state is always positive for the economy.

Lack of affordable childcare is one reason why people are leaving the workforce. Photograph: Dominic Lipinski/PA

At the other end, the boom in early retirement could suggest a growing number of over-50s feel financially secure enough to quit work. After years of rapid house price growth, for those lucky enough to have paid down a mortgage, quitting the rat race makes perfect sense.

Surveys from the ONS show most 50- to 65-year-olds who have left work since the pandemic own their homes outright and are more likely to be debt free. Places where economic inactivity has risen most are typically more affluent. The UK’s biggest leap since the end of 2019 has been in Chichester in West Sussex, followed by parts of Devon and Surrey. However, rises have also been large in places such as Preston and Mansfield – areas with similarly ageing but less affluent populations.

A reassessment of our working lives may have taken place since the shock of the Covid pandemic. The ONS said those closer to 50 are more likely to consider returning to work from their early retirement. However, there is a preference for more flexible hours, good pay and the ability to work from home.

Some commentators suggest welfare has played a role, with the Spectator highlighting that more than 5.2 million people receive out-of-work benefits. The clear suggestion is that a life on the dole has become preferable to work, and that slashing benefits or limiting eligibility could fix the UK’s worker shortage.

However, the figure neglects that about 3.3 million of these claimants were either on incapacity benefits or had “no work requirement” under the universal credit regime. This means they are exempt from having to find work because of disabilities, caring responsibilities, or they are above the state pension age.

It is also based on the assumption that less than £400 a month for a single adult over 25 is somehow enough to keep millions from work out of choice. The figure is close to 10% of the average wage, making it one of the least generous out-of-work benefits among rich countries.

Even after the government announced it would raise benefits by the rate of inflation from April – an increase of more than 10% – the basic rate will still remain at its lowest in real terms for 40 years. This “barely clears destitution levels for some adults”, according to the Joseph Rowntree Foundation, a charity working to solve UK poverty.

What is clear is that the absence of workers is a big problem for the UK. In the decade up to the Covid pandemic, the economy benefited from rising workforce participation underpinning growth, at a time when productivity gains flatlined. Now, without growth in the workforce, or sufficient improvements in productivity, Britain is stuck in a low-growth cycle.

To escape this, employers will need to do more to entice people back to work – through higher pay and flexible and better working conditions. The government must also play a role, with more investment in training, employment support, and to improve public services so people can be supported to work. Failure to act will condemn the country to its current growth trap.

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