Time for policy on the inactive labour market? By Jamie O'Halloran and Matt Whittaker Unprecedented moments in history have a habit of prompting record statistics. So it is with the Covid-19 pandemic and the UK labour market. By the end of 2021, employee numbers (as measured by the ONS’s timely but seemingly flawed experimental payroll data) were up 620,000 on pre-pandemic levels, reaching a new high of 29.5 million. Vacancies likewise surged, hitting a record 1.25m. And redundancies dropped to a new low of 2.8 per 1,000 employees. Yet step back from the economic rollercoaster and the damage done by the last two years becomes more apparent. Economic output remains a little down on pre-pandemic levels, meaning we are considerably worse off than we would have been in the absence of the interruption. And, as Figure 1 shows, overall employment remains some 600,000 down on the levels prevailing at the start of 2020. Looking across the entire economy, we continued to work 3.2% fewer hours each week in the three months to November 2021 than we did in the three months to February 2020. Figure 1: Total employment remains well down on pre-pandemic levels.Change in the number of people in work since the three months ending February 2020: UK (seasonally adjusted). Sources: PBE analysis of ONS, Labour market statistics Squaring the circle of subdued employment amid record vacancies rests with an exploration of the increase we’ve seen in economic inactivity. The number of people of working age who are neither working nor actively looking for work rose by 411,000 (or 4.9%) over the same period covered in Figure 1, equating to around two-thirds of the 600,000 shortfall in total employment relative to pre-pandemic levels. This rise in economic inactivity has been spread across most age and gender groups, as Figure 2 shows. It sets out the contribution made to the overall 411,000 increase in inactivity by different demographic groups. Rates have increased in most groups, with young men (16-24) and older men and women (50-64) making the largest contributions. Shifts in participation among women aged 25-49 have pulled in the other direction, but have provided only a very modest offset to the overall trend. Figure 2: Increased economic inactivity over the course of the pandemic has been driven by younger men and older men and women.Contributions to the overall change in economic inactivity reported among 16–64-year-olds between the three months ending February 2020 and three months ending November 2021: UK (seasonally adjusted). Notes: Economic inactivity relates to those who are not in employment who have not been seeking work within the last four weeks and/or are unable to start work within the next two weeks. Results are derived via a shift-share decomposition analysis that shows the contribution of each gender and age group to the overall 1 percentage point increase in the inactivity rate recorded over this period. The 'demographic change' bar shows the contribution associated with compositional changes across the sex and age groups. The other bars show the contributions associated with participation rate changes 'within' each of the groups. Sources: PBE analysis of ONS, Labour market statistics While economic activity has been falling across many different demographic groups, it has not necessarily been doing so for the same reasons – or over the same timeframe. Figure 3 offers some clues to what’s been going on, by splitting the overall change in inactivity by reason given. It shows that the net increase in inactivity actually occurred over the course of the first 14 months of the pandemic and was driven by a combination of a rise in the number of students (likely explaining the contribution of younger age groups shown in Figure 2) and a sharp increase in ‘other’ reasons (most likely relating to the restrictions and constraints imposed by Covid-19). The ‘pull’ provided by these two factors was partially offset by the ‘push’ associated with a drop in the number of people inactive due to looking after their family or home (helping to explain the negative contribution to inactivity made by women aged 25-49). Such factors appear clearly cyclical, and we might expect them to unwind as the economy and jobs market move into recovery. Indeed, that does appear to have happened, with each of these three drivers shrinking back over the second half of 2021. Yet the overall level of inactivity has held up – and has in fact been increasing in recent months – contributing to the paradox of a labour market that is simultaneously tight and subdued. Figure 3: The continued recent elevation of economic inactivity has been driven by rising long-term sickness.Change in the number of economically inactive 16–64-year-olds since the three months ending February 2020, by reason: UK (seasonally adjusted). Notes: Discouraged workers are those who are not looking for work because they believe no jobs are available. Other reasons include people who (i) are waiting the results of a job application, (ii) have not yet started looking for work, (iii) do not need or want employment, (iv) have given an uncategorised reason for being economically inactive, or (v) have not given a reason for being economically inactive. Sources: PBE analysis of ONS, Labour market statistics Worryingly, what sits behind this trend may well be more structural in nature: namely a sharp rise in the number of people reporting long-term sickness. The number of people citing this as the primary cause of their economic inactivity rose by 189,000 (8.9%) between April and November 2021. As Figure 4 shows, long-term sickness had been a growing cause of economic inactivity for a number of years ahead of the pandemic. The recent jump would therefore appear to mark the continuation of a longer trend. And it means that long-term sickness now accounts for 26% of all inactivity – the largest single reason cited and heading back towards shares last recorded at the turn of the century. Figure 4: Long-term sickness is cited by more than one in four of the economically inactive as the reason for their inactivity.Proportion of economically inactive 16–64-year-olds who cite long-term sickness as the reason for their inactivity: UK (seasonally adjusted). Sources: PBE analysis of ONS, Labour market statistics Tackling the persistence of today’s economic inactivity and the contribution being made to this by rising long-term sickness, in particular, should now be a priority for policymakers keen to complete the country’s jobs recovery and ease the pressure being felt by employers. But what sits behind the rise in long-term sickness among the working-age? While we don’t have definitive data for the inactive group, we can look for clues by using data on long-term sickness among those who are active. Figure 5 presents the results and highlights very clearly the leading role being played by problems with depression and mental illness. Relative to the period immediately before the pandemic, the number of economically active people reporting having any form of illness or health condition lasting longer than 12 months had increased by 6.5% (610,300) in the 12 months to September 2021. Over the same period, those citing problems with depression, learning difficulties and mental illness jumped by a huge 24% (568,300). While such conditions have long been increasing at a rapid rate among the economically active, they appeared to accelerate still further from the start of the pandemic. As a result, the proportion of economically active adults reporting having a problem with depression or mental illness lasting longer than 12 months reached a new high of 8.7% in the 12 months to September 2021 – up from 6.9 per cent immediately ahead of the onset of the Covid crisis. Figure 5: Problems with depression and mental illness have increased more rapidly among the economically active than any other condition over the course of the pandemic.Indices of illnesses or health conditions lasting longer than 12 months reported by economically active adults: UK, 12 months to December 2019 = 100. Notes: Categories are not mutually exclusive so do not sum to the total change in those reporting an illness or health condition. 'Depression, mental illness' = Depression, bad nerves, severe or specific learning problems, mental illness, phobias, panics or other nervous disorders; 'Chest, heart, digestion' = Chest or breathing problems, heart, blood pressure or circulation problems, stomach, liver, kidney or digestive problems, diabetes; 'Speech, skin, progressive illnesses' = Speech impediment, severe disfigurement, skin conditions, allergies, epilepsy, progressive illnesses not included elsewhere, other health problems or disabilities; 'Arms, legs, back, neck etc' = Problems or disabilities connected with arms, legs, hands, feet, back or neck. Sources: PBE analysis of ONS, Annual Population Survey obtained via NOMIS The recent health experience of the inactive working-age population may of course not directly match these trends. But the coincidence of an acceleration in longer-term difficulties with mental health problems among the economically active and a strong increase in the number of economically inactive who cite longer-term sickness as the cause mean that we might reasonably speculate that similar trends are at play here. At the very least, there is a strong case for exploring all of this in more detail. A surge in mental health difficulties that pre-dates the pandemic and appears to have worsened in recent months warrants attention. But it is also likely to be serving as a barrier to recovery in the jobs market, and therefore in relation to the economy more widely. It's a challenge which thousands of charities and social sector organisations up and down the country have long been attempting to wrestle with. As political attention increasingly shifts towards securing our economic recovery from the pandemic it’s vital that policy makers plug into this knowledge, experience and network. Failing to do so risks prompting the wrong sorts of record numbers sooner rather than later.