Who wants to work? Silly question, particularly if you are reading this on a hot Friday afternoon, or waiting for a train - but it’s one to which economists and psychologists have recently been giving a lot of attention. 

That’s not only because of strikes but also because of demographic and behavioural changes - including what the psychologist Dr Anthony Klotz has christened “the Great Resignation” following the COVID pandemic.  So what’s the problem?

You don’t need to go to an airport to discover the acute labour problems that the UK is suffering in 2022.  When recorded vacancies of 1.3 million exceeded recorded unemployment this spring, for the first time on record, a wide range of industries and services, notably the NHS, were reporting desperate staff shortages.  And meanwhile pay offers way below the current rate of inflation are provoking a rash of threatened and actual strikes.  Look at it from whatever angle you like, something in the labour market simply doesn’t add up.

It’s not, of course, only happening in the UK.  Many rich economies are reporting a scrabble for workers in those industries which still rely heavily on human labour or interactions.  Job vacancies were at a record high in the US in March, and unemployment has dropped even in European economies with structurally high rates, such as Italy and France. Only in Spain and Greece does the jobless rate remain stubbornly in double figures.  Comfortable assumptions that a tightening in the labour market was just the post COVID-rebound, and would soon subside, have proved as optimistic as similar assumptions that price inflation was a blip. And that is bringing both fear of a price-wage spiral and industrial unrest in many countries.

Hence, also, the focus on “economic inactivity” - the proportion of the adult population that isn’t part of the national output-grinder (i.e., in paid work, or trying to get there).  Hence, also, the shivers of alarm at the thought that more potential workers may have decided to drop out, when, after a year or so of pandemic, the economic activity rate declined.  But that story is worth unpicking, both statistically and behaviourally, because it’s more complex than it sounds.

Not so long ago, in rich economies most of the female half of the working-age population were “economically inactive”.  However, women’s “activity” is now only 5-10 percentage points short of men’s.  Total activity rates, therefore, have been going steadily up - until COVID. 

That was important, because another economic-demographic statistic was meanwhile worsening.    That’s the “dependency ratio”: the population balance between age groups deemed too young or too old to contribute to economic activity, and the middle group who can (for which the World Bank uses statistical age boundaries of 15 and 65 years).

Rich economies have been through the development phase when the dependency ratio improves, as birth rates fall and with them the number of child dependants. This effect, known as the “first demographic dividend”, dwindles when those missing babies aren’t there to boost the workforce as young adults, and the dependency ratio rises again.  In Germany, for example, the number of “dependants” per 100 15-64-year-olds rose from 43 in 1987 to 55 in 2020, while in Britain the figure had already risen to 57. 

Populations in the rich world are both ageing and shrinking. “Natural” population growth has been negative in the European Union since 2012, meaning deaths exceeded births. In Germany, Spain and above all Italy - as, farther afield, in Japan - the birth rate per 1,000 population has fallen well into single figures, with the US, UK and France not much higher.  In Germany, by 2020 some 22 per cent of the population was 65 and over, with France and the UK not far behind.  In Italy, median age has risen from 40 to 47 in a mere 20 years.

If all these elderly people down tools and expect the young to pay for them, population ageing triggers a vicious economic spiral of high taxes, low incentives and slow-to-negative growth.  But this is the stage at which economists hope for (or rather, urge governments to engineer) the “second demographic dividend.”  If people prepare for longer retirements by increasing savings, this supports investment and boosts productivity, helping to recharge economic growth again.  And if people stay in work for longer, the crude dependency measures overstate the problem, anyway.

That’s of course what’s been happening, at least to some extent, in countries which have raised retirement ages.  In the UK, later retirement has been most marked amongst women, whose state pension age started rising from 60 in 2010, to equalise with men at 65 by 2018 (and by 2028 will be 67 for both sexes). It’s also why President Macron is so anxious to raise the French state pension age, still only 62.  But this is another reason why recent figures have caused alarm, since they have appeared to reverse this longer-working trend.

And this is where you need to be careful about what “the Great Resignation” actually means.  Dr Anthony Klotz used the phrase to refer to the sharp increase in workers voluntarily leaving their jobs: some 48 million, in the USA, in 2021.  But this phenomenon is concentrated amongst young(ish) workers, in particular Millennials and Generation Z.  In the UK, however, the chief worry is about over-50s dropping out of the labour force, opting for earlier retirement - a very different phenomenon.

Either way, the “what” matters a lot less than the “why”.  It’s obvious that COVID has caused people to think harder about their work-life balance, commuting load and working from home.  Meanwhile a heating-up of labour markets everywhere, but particularly in the US and UK, has enabled some people to be more picky.  But not everybody.  Some terribly over-excited stuff has been written about surveys suggesting 41 per cent of workers are thinking of changing their job, but who doesn’t tick that box on a bad day?  

Equally, since the spike in redundancies that followed the onset of COVID was concentrated amongst older workers, it’s not surprising that a tick-up in retirements in this age group followed.  It’s far from certain that some of the younger retirees won’t drift back in time, and meanwhile the overall activity rate amongst the over-50s is, in the UK at least, still significantly higher than it was a decade ago.

Yes: there is still devil in the detail.  In the UK there is a worrying concentration of earlier retirement amongst some professional groups already in short supply, such as doctors (especially GPs) and teachers.  Checking that, however, needs not labour market policies but micro-attention to carrot and stick: policies to ease workloads and remove perverse incentives in pension schemes.  There’s also a pick-up in the number of people retiring due to long-term sickness - though again, it is far from clear how much of this, both physical and mental, is in some way COVID-related, and may be reversible.

But what is much clearer - well, blindingly obvious - is that the balance between demand and supply in labour markets has altered dramatically, and in almost every rich economy.  In the US, the ratio of job seekers to job openings dropped from a peak of 6.5:1 in 2009 to 0.5:1 this spring; in the UK, the number of vacancies has trebled over the same period, and in the past two years alone has jumped 60% in health and social work, 80% in manufacturing and 90% in hospitality.  And reversing the UK’s version of “the Great Resignation” isn’t going to solve that. 

A much bigger demographic factor is at work. Migration - the influx of younger populations - has acted as a powerful disinflationary factor in rich economies over the past thirty years. Free movement of labour in the European Union has acted as an enormous pressure valve in its labour markets. Now politics has turned against this solution in a number of rich economies, most evidently in the UK, the search for an alternative path is going to be long and painful.

Since the spring, we’ve had the first chill hint of recession, with some first signs that the labour market in the US may be cooling.   The continental scale of the US economy makes for easier internal adjustment, but a hard landing is now generally expected.  In the UK, monetary policy is less hawkish, with the authorities relying more on trying to talk inflation down. There have already been two monthly falls in output and a small rise in the jobless total in May.  But that’s nothing like enough to fill its recruitment gaps, while the wages battle has only just begun.

The UK Government’s tune has changed from urging employers to correct labour shortages by raising pay to telling them to “hold firm” against pay strikes.  That’s less contradictory than it sounds. The unions are making a basic economic mistake if they try to protect both pay and numbers. It’s understandable, because they want as many members as possible, while their members want more money to cope with inflation. But employers can only pay more if they get more productivity – i.e., do the same or better with fewer people.  And that’s the way an ageing country deliberating setting up more barriers to immigration from its neighbours has to go. 

The trouble, of course, is the productivity route to curing the labour market crisis, much vaunted by government, is a great deal easier to achieve in some sectors than others.  Nobody cares if their fridge is made by a robot, but they do care if there are fewer nurses in the hospitals. Pay for these human service providers has to be raised in line with the productivity-gainers in other sectors, or the staff shortages in essential services will get even worse. And while yes, many UK industries can mechanise faster than they have been doing, change is expensive for some, socially disruptive for others and life-threatening for a third group, requiring confident and above all consistent policy responses.

It’s very far from clear that those who, knowingly or unknowingly, voted for this upheaval will be the beneficiaries. How long it will take to re-establish non-inflationary growth, how deep the preceding recession will need to be, and how different the shape of the economy will be afterwards, is still for the UK to worry about and others facing their own conundrums to watch and maybe learn. But right now, labour market equilibrium still looks a long way off.

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman