- Due to labour shortages, the bargaining power of workers has increased
- Will the UK see a permanent shift to a high-wage, high-inflation economy?
It may come as a surprise to learn that the UK labour force (those people working or looking for work) has declined by 473,000 since the start of the pandemic. It might subsequently come as less of a surprise to learn that (according to Office for National Statistics data), almost a third of businesses are experiencing a shortage of workers. As the chart shows, the situation is particularly acute for human health and social work activities, where more than half of firms are affected.
A key cause is a rise in inactivity, partially driven by the record high number of people unable to work for health reasons. Instinctively, we might also expect post-Brexit dips in immigration to have an impact, but the reality is more complex. Net international migration added 504,000 to the UK population in the year to June 2022 – another record high.
Immigration this year was boosted by international students (students usually don’t count as part of the labour force thanks to their full-time studies), as well as people arriving from Ukraine under the visa support scheme. Jonathan Portes, a professor of economics at King’s College London, argues that the UK today isn't closed to migrants, “just open in a different way” – a useful reminder that robust immigration figures do not necessarily correlate with the size of the workforce.
As labour shortages emerge, wage-setting power shifts back to workers. Kallum Pickering, chief economist at Berenberg Bank, even argues that today’s industrial action could be viewed less as the work of “bolshy trade unions” and more as the “expression of the increasing wage bargaining power of workers”. He notes that union demands are “mostly reasonable”, and that (unlike the 1970s) industrial action today is a response to higher prices rather than a driver of them. Food for thought for employers rocked by strikes - but cold comfort to anyone disrupted by industrial action this Christmas.
This increased bargaining power means that there is a chance that wages will be higher over the long run, too. Minutes from the December monetary policy committee (MPC) meeting revealed that the Bank of England remains concerned about the tight UK labour market, with the MPC noting that “inflationary pressures in domestic prices and wages could indicate greater persistence and thus justify a further forceful monetary policy response”. In other words, competition for workers could mean higher wages, higher inflation and higher interest rates, too. Capital Economics’ chief economist, Paul Dales, says that this could leave the UK facing higher inflation for any given level of aggregate demand plus a permanently lower potential growth rate.
What happens next will partially depend on patterns of migration. Although last month’s figures were robust, some of the effect was due to post-pandemic ‘catch-ups’ as student numbers recovered. Portes cautions that future flows are unlikely to reach the levels seen today, and warns that it is too soon to say whether overall work-related migration will increase in the future. He argues that although Brexit has been “a very clear negative for UK trade, the story on migration is much more mixed”.
Nevertheless, the issue remains a political hot potato. Immigration minister Robert Jenrick recently reiterated the government’s ambition to reduce net migration, adding that “we think that’s what the British public wants”. Keir Starmer has also rejected calls for looser immigration rules, telling the Confederation of British Industry conference that “all around the world, business is waking up to the fact that we live in a new era for labour”. He added that “the days when low pay and cheap labour are part of the British way on growth must end”.
Although increasing the size of the labour force through migration looks contentious, it is likely that the UK’s inactive workers will return to the labourforce to some degree. Early retirees may find that the rising cost of living renders a return to work desirable (or necessary), while Capital Economics expects some of the health impacts on the workforce to wane over time. As a result, Dales expects wage growth to slow, unemployment to rise and inflation to eventually fall back to 2 per cent. We may find that labour shortages, strong bargaining power and rising wages are not the new normal.
