Workers (Economic Affairs Committee Report) - Motion to Take Note

Part of the debate – in the House of Lords am 11:46 am ar 8 Chwefror 2024.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Lord Bridges of Headley Lord Bridges of Headley Chair, Economic Affairs Committee, Chair, Economic Affairs Committee 11:46, 8 Chwefror 2024

My Lords, I am delighted to open the debate. Behind its innocuous title, the subject matter we are dealing with is enormous: the overall state of our labour force, the impact of immigration on an ageing population, and what that means for growth, inflation and debt—I could go on.

Let me start by taking a step back. Before Covid struck, labour participation was a major driver of growth, repeatedly outperforming forecasts and partially offsetting falling productivity growth. From July 2011 to February 2020, the level of inactivity fell by 1.2 million to just under 8.4 million, and the inactivity rate fell by about 3% to 20%, their lowest levels on record. During Covid, that trend reversed. As in other countries, inactivity rose by almost 650,000 between February 2020 and its peak in July 2022. Some sectors saw acute labour shortages. As the impact of Covid passed, while inactivity fell elsewhere, here it remained high, having an impact on growth, inflation, monetary policy and the public finances.

In the autumn of 2022, the Economic Affairs Committee therefore posed a simple question: where have all our workers gone? I thank the Committee’s members—many of whom are here—our clerk, our policy adviser and our excellent adviser, Robert Joyce, for their input and hard work. We asked that question partly because no one seemed to know the answer, which was both odd, given the mountain of data that exists today, and extremely worrying, given that this data is critical to decisions made by the Treasury and the Bank of England.

The uncertainty around the data meant that a number of our conclusions carried caveats. That is just as well, because, since our report was published, the credibility of the Labour Force Survey has been shot, thanks in part to challenges in conducting household surveys and in measuring populations during Covid. In October, the ONS stopped its monthly publication of the key job market data altogether. On Monday, the ONS published reweighted figures, with a new classification—“official statistics in development”—which I think is Whitehall-speak for “We’re not entirely sure what is happening”. The document says: “The reweighted estimates suggest”, and we should note that word,

“that over the last five months, though the employment rate has remained broadly flat, the unemployment rate may”— note that too—

“have fallen, offset by an increase in the rate of economic inactivity; however, some uncertainty remains in these estimates”.

Furthermore, publication of the so-called Transformed Labour Force Survey is being delayed by six months to September. It therefore seems we can be certain only about the data’s uncertainty, making the credibility of the national statistics a subject for debate in and of itself, for how are the Treasury and the Bank to make critical decisions based on dodgy statistics?

With that Big Ben-sized caveat about the data in mind, I turn to our report. It found that between 2020 and late 2022, the UK’s workforce had been squeezed by four factors:

“retirement among those aged 50-64; increasing sickness; changes in the structure of migration; and the impact of an ageing UK population … an increase in the numbers in age groups which have lower participation rates”.

We concluded:

“The reduction in labour supply has been driven by an increase in economic inactivity, in particular amongst 50-64-year-olds”.

The causes appeared complex. The biggest contributor to this rise in inactivity had been an increase in the number of people leaving work and considering themselves retired rather than leaving work primarily due to worsening health. Although the population was getting sicker, much of the rise in sickness-related inactivity was among people who had already been out of work rather than people who were employed becoming inactive due to sickness.

I have asked our experts whether these findings, especially those about retirement, are now invalid given what we now know about the data. I was told that they are still valid, mainly because the longitudinal version of the LFS—the one that follows the same people from one quarter to the next—is less likely to be vulnerable to the statistical issues that have dogged the rest of the LFS, especially as regards response rates.

Alongside this trend, changes to the structure of migration also had an impact on specific sectors seeking workers for lower-paid roles. Many EU workers who did these jobs left the UK. Counterbalancing their departure was the arrival of non-EU workers granted visas under the new immigration scheme, which prioritises skilled workers. This contributed to a mismatch within the labour force, accentuating labour shortages in these sectors.

Finally, our report draw attention to the impact of the ageing UK population. Before the pandemic, ageing was driving down labour supply, but this effect was masked by other trends towards higher participation. The key difference since the pandemic has been that the ageing effect was reinforced rather than offset by those other factors.

It has now been a year since our report was published; events have moved on. I will turn to the lie of the land now, and especially what we learned from Monday’s ONS bulletin, so as to frame this debate. Officials now estimate that the adult population is 750,000 larger than previously thought. That is a city the size of Sheffield which has suddenly emerged. That alone I find astounding. More worrying still is how this has contributed to inactivity, which has risen to 9.25 million, 414,000 more than previously estimated and back to near its Covid peak. While inactivity in the UK is still below that of the other EU countries and below 2010 levels, the fact that more than one in five 16 to 64 year-olds are economically inactive poses an enormous challenge for our society and our economy.

The largest reason for this is what I and our report touched on: long-term sickness. Monday’s bulletin revised this figure up to 2.8 million people: 200,000 more than previously forecast. We bandy figures around but let us just pause here. On my estimates, 2.8 million people is roughly equivalent to the populations of Stoke-on-Trent, Middlesbrough, Coventry, Cardiff, Bournemouth and Edinburgh combined. It is an astoundingly large figure. These people are typically older; they are suffering from poor mental health—I very much look forward to the noble Lord, Lord Layard, talking about this—or other specified conditions, and it is worth noting that the rapid rise among 16 to 24 year-olds appears driven by mental health; they are relatively low skilled; and previously they worked in lower-paid jobs. As our report found, the vast majority who are inactive for health reasons have been inactive since before the pandemic. Roughly 1.5 million have been out of work for three years or more, and half a million have never had a job.

The OBR’s fiscal risk report, which also came out after our report, cited three factors that may be causing this: a slowdown, and in some cases partial reversal, in the rate of improvement in many health conditions that predated the pandemic; the impact of the pandemic on the health of the working-age population; and

“the degree of ongoing assessment, conditionality, and return-to-work support for those on health-related benefits versus other out-of-work benefits”.

It is worth noting that the OBR says that the

“numbers on incapacity benefits have increased sharply over the past three years”,

and that:

“The expansion of conditionality and rising rates of sanctioning in the non-incapacity parts of the means-tested, working-age welfare system may have made applying for (largely unconditional and often-more-generous) incapacity benefits more attractive”.

We must stress “may”, and remember that this is only one factor. Longer NHS waiting lists and the strikes may also have contributed to inactivity due to long-term sickness rising, although it is worth noting that the OBR states that halving the waiting lists would reduce inactivity only by 25,000.

All this underlines a core point in our report. We need to understand much more about the causes of this trend and what can be done, to help these people not just to become healthy but to find a job. This is key, because the OBR said that these numbers

“remain on an upward trajectory”.

No one here wants to see ever-growing swathes of our communities trapped in a terrible, vicious cycle of ill health and inactivity. Nor can we afford this to happen. Inactivity puts pressure on welfare spending: 80% of those inactive receive incapacity benefits. It results in lost revenue: £9 billion this year. It pushes up health spending: each person who becomes inactive due to ill health costs the NHS between £900 and £1,800 a year. Consequently, inactivity due to ill health adds to borrowing: almost £16 billion since the pandemic. According to the OBR, if the working-age population falls for another year and remains there, and half a million more people are out of work for health reasons, that could add £21 billion to borrowing by 2027-28, which is more than we will spend on policing in England and Wales this year.

This is happening against the backdrop of two other trends. The first is migration. We know that net migration hit a record high of 740,000 in 2022 and is forecast under latest estimates to average 315,000 a year in the long run. The second trend, coming back to our report, is our ageing population. The demographic shift, as we said, comes through quite abruptly right now, and will put yet further pressure on our public finances, accentuating the need for growth to pay for this.

This highlights another question we need to ask ourselves. Is it right that growth is to be powered in part by immigration of 315,000 a year while hundreds of thousands of people are off sick and too ill to work? Are we doing enough to help them get back into the workforce?

Therefore, coming back to our report and what we ask the Government to do, I will be most grateful if my noble friend the Minister can shed light on three things. The first, as I have alluded to, is the ONS. It is absolutely critical that it addresses the failings of the statistics. I would like him to tell the House what the ONS is doing to ensure that our statistics, and those core statistics, are fit for purpose. Secondly, as our report asks, what is being done to encourage older people back into work? We made a series of proposals here, including those looking at pensions and other things, but also suggested practical measures. I will be grateful if he can highlight that. Thirdly, the most worrying thing for me is the rise in long-term sickness. What is being done specifically to address inactivity in that group and help that group also find work?

Inactivity combined with an ageing population, low growth, low productivity and high levels of debt makes for a dangerous cocktail. If we do not have a fit, dynamic workforce, how will we get the growth that we so badly need? We urgently need to understand the reasons behind the rise in activity and we need to do much more to address it.