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OPINION

The shrinking labour market

The shrinking labour market
April 20, 2022
The shrinking labour market

Many companies say it is become harder to find workers. One reason for this is that there are fewer of them. Latest figures show that the number of people in the labour force – either employed or unemployed – has fallen by 662,000 (or 1.9 per cent) since just before the pandemic.

This is not simply because foreign-born workers have gone home. Instead, there has been a big increase (of 487,000 or 5.8 per cent) in the number of under 64-year-olds who are economically inactive.

For the most part, this is not because people have taken early retirement; only one-in-six of the increase in inactivity is because of this. Instead, we’ve seen a rise in the number of students – a fact which undermines the idea that job prospects have improved for those without qualifications; if this were the case, students would leave their courses to take those good jobs. More alarmingly, we’ve seen a rise of 256,000 (11.1 per cent) in the numbers of people too unwell to work; this might not be wholly due to long Covid, as these numbers were rising before the pandemic.

Whatever the reason for the fall in the workforce, what we are seeing here is what economists call an adverse supply shock. Just as with oil and gas, a lower supply should lead to higher prices and hence a higher cost and greater difficulty of producing goods and services.

Herein, however, lies a massive difference with oil and gas. The cost of labour-power is still falling in real terms. The ONS estimates that median monthly pay rose 6 per cent in the year to March. That’s a full percentage point less than the rise in consumer prices. Nor is there much sign of a pick-up here. Average weekly earnings in the private sector, excluding bonuses, rose at an annualised rate of 5 per cent between October and February – but consumer prices rose 5.9 per cent.

Yes, there are pockets of wage growth. But the overall picture is that the labour market is not yet so tight as to push up real wages.

Another possible response to a shortage of labour would be to use what labour there is more wisely – that is, to find ways to raise productivity. It’s unclear, though, that this is happening. Yes, in the past two years real GDP per hour worked has risen at an annualised rate of 1.2 per cent – which is paltry, but compares well to the 0.7 per cent growth we saw in the 10 years before the pandemic. But on the other hand, productivity is lower now than it was last spring.

Companies, then, are not responding to labour shortages in the ways one might expect. One reason for this is that while labour supply is lower than it was just before the pandemic, so too is demand. The best measure of this is total hours worked. And in the last three months, these were 1.4 per cent down on their pre-pandemic level.

If, however, economists are right and the economy grows well this year (which is a big if) then labour demand will rise. Will we then see rising productivity and real wages? Maybe not immediately. The Nobel laureates Abhijit Banerjee and Esther Duflo showed in Good Economics for Hard Times that markets are slow to adjust to change – something likely to be true of an ending of decades of a buyers’ market for labour power. Talk of labour shortages might well remain much more abundant than macroeconomic evidence of them.