There’s much talk about labour shortages. These, however, are largely localised. The aggregate labour market is still one of excess supply.
The shortages are largely confined to three sectors: lorry driving, where there are 90,000 fewer drivers than needed; care workers where there might be a shortage of 190,000 by the year-end; and hospitality businesses where the Office for National Statistics (ONS) estimates that there are 117,000 vacancies – 30 per cent more than there were on average before the pandemic. This gives us a total of just under 400,000.
Which is small compared with the level of joblessness. There are 1.6m people officially unemployed and a further 1.8m people outside the workforce who want a job. That’s a total of 3.4m or 8.2 per cent of the working-age population – 200,000 more than at the pre-pandemic low point. This means that even if the three sectors where there are shortages were to recruit within the UK, we’d still be left with 3m unemployed – over 7 per cent of the working-age population.
And unemployment is not the only indicator of the state of the labour market. There are also 3m people in work who would like to work more hours. Yes, this is fewer than there were before the pandemic – but more than there were in 2006-07.
For over 6m people, therefore, the labour market is not offering them as much work as they want. The big picture is still that of a shortage of jobs, not a shortage of workers.
A big indicator of this fact is what’s happening to wages. Granted, overall average weekly earnings have risen by a hefty 8.7 per cent in the past 12 months. But this reflects the fact that wages a year ago were temporarily low because people were working fewer hours because of the pandemic. If we look at wage growth so far this year we see a very different picture. Average earnings in the private sector have risen at an annualised rate of less than 2 per cent so far this year. That’s less than the rise in prices and compares with annualised growth of 3.2 per cent in the two years before the pandemic. These numbers are consistent with mass unemployment, not widespread labour shortages.
What we’re seeing, then, is a mismatch between the patterns of supply and demand, which means that shortages in some areas co-exist with excess supply in others. The solution to this is bog-standard elementary economics – a rise in the relative wages of those jobs where there are shortages to attract more applicants.
Whether this would raise inflation is a semantic issue. Yes, it might raise wages and prices in the affected sectors, but this would be a one-off change rather than an ongoing persistent rise. And it might not even require a big rise in wages. One reason why people don’t want to become lorry drivers or care workers is that the hours are often irregular. Improving this would attract staff as well as a pay rise.
Of course, the necessary changes won’t happen quickly. It takes time for employers to adjust to the new reality and for workers to train for the new jobs. But this will happen. We should not, however, mistake the operation of basic economic forces for generalised inflation, which is why the Bank of England is right not to raise interest rates yet.
