The Sunday Telegraph - Business & Money
Britain’s missing workers are fuelling inflation worries
Economists feared unemployment after the pandemic but instead global labour forces are shrinking, report and
Adrian Hanrahan did not expect his thriving chemicals business would compete with a golf course, but Covid has provided endless surprises.
The managing director of Robinson Brothers in West Bromwich has 22 vacancies in a workforce which at full strength should employ 260 people.
“We’ve had a couple of people who were not due to retire for five or six years, and are saying, ‘you know what, I’ve got enough in my pension pot,
Covid has made me re-think, I’d rather retire to do something I really want to do’,” says Hanrahan.
“One is an avid golfer and wants to go and work on a golf course taking starters around – he is a highly qualified engineer.”
There is plenty of work for them to do – demand for the chemicals, used in everything from rubber products to pharmaceuticals, is as high as ever – but staff have left, including to retirement or rival businesses.
Even with pay rises on the table, they are hard to retain or replace, threatening Hanrahan’s ability to meet clients’ orders.
“Two years ago we had no problem, we filled vacancies easily,” he says. “We have never come across this before.”
His woes are a symptom of a squeeze in the jobs market which few would have predicted when Covid threw Britain into a record-breaking recession. Far from the mass unemployment feared, the economy is generating more jobs than the labour force can fill.
The Office for National Statistics found a record 1.2m vacancies last month. More than three quarters of businesses attempting to recruit reported difficulties to a survey by the British Chambers of Commerce.
Such figures are highly unusual, especially given the jobs market has not yet fully recovered. The number of employees on payroll is at a record 29.2m, but the total in work is still more than 650,000 down on precovid levels because self-employment has tumbled. Unemployment at 4.5pc is above February 2020’s 4pc.
It should mean there are still plenty of people to fill surging demand, whether for retail goods, the booming digital industries or the growing health and care sector, all of which need more staff than ever. Yet shortages of workers are not easing.
One problem is a rise in those neither working nor looking for a job. They are “inactive”, rather than unemployed. This category is up 350,000 among those of working age, focused among the oldest and youngest.
The early retirement hampering Hanrahan’s plans is a widespread phenomenon. The number of retired under-65s is up by 70,000 since Covid hit. The number of over-65s in work is down by 60,000.
This is a stark reversal of the past decade’s trend, in which the number of working over-50s surged by more than 2.6m. At the same time an extra 260,000 say they are inactive because they are students. Nick Hillman at the
Higher Education Policy Institute says: “Young people are very rational: bettering yourself through education in a crisis makes perfect sense.”
Some of Robinson Brothers’ European workers left for their home countries during the pandemic and have not returned.
The haulage industry cites this as one cause of the driver shortage, wreaking havoc in supplies of goods from petrol to Christmas toys. Even as EU workers with the right to stay in Britain prove reluctant, post-brexit rules on new staff make it hard to fill shortages.
Furlough may be another cause. While demand springs back in some sectors, industries with little growth have clung on to furloughed staff in the hope of a recovery.
At the end of August, 1.3m were still using the Coronavirus Job Retention Scheme, which has now closed. Of those, almost 730,000 were fully furloughed so had not even been brought back part-time.
In some cases, bosses found staff still on the payroll were no longer available to work, forcing them to recruit again. By contrast some laid off at furlough’s end may find their skills do not match the available vacancies now.
The UK is by no means the only economy stifled by a lack of staff. The US is struggling with even worse shortages amid the shortfall constraining economies worldwide.
The huge queue of ships outside ports in Los Angeles and Long Beach, major gateways for goods entering the US, are partly caused by shortages of truck drivers and warehouse workers to pick up and process cargo.
Meanwhile restaurants stateside have had to temporarily close or reduce opening hours as bosses try to find workers. Fast-food giants Mcdonald’s and Chipotle have hiked wages while diner chain Denny’s is touring with a 53-foot truck to give out free breakfasts to applicants.
The lack of workers in the US has baffled economists, persisting even after generous unemployment benefits ended and school reopenings freed up parents. The Biden administration opted for higher benefits rather than a furlough scheme, meaning workers have not been held back from the jobs market like in the UK.
“The US is at the forefront of this,” says James Knightley, ING economist. “That’s understandable because the US treated the crisis very differently so they lost jobs but raised incomes.”
Economists believe the workforce participation rate may have taken a permanent hit from Covid after concerning jobs figures this month. Its labour force shrank in September, compared to August with just 194,000 jobs being added, a 2021 low. A few days later, vacancies data suggested more than 10m roles need to be filled in the US.
Knightley believes early retirements have been the biggest factor, perhaps because “surging equity markets have boosted the 401k retirement pension
‘We’ve had people who were not due to retire for five or six years saying Covid has made me re-think’
‘We’re going to be pulling down GDP forecasts for the UK specifically because of this labour shortage issue’
Bolstered by stimulus cheques and a $600 a week boost to unemployment benefits, Americans flush with savings may not be ready to go back to work. That could change as nest eggs are depleted in the run-up to Thanksgiving and Christmas, Knightley argues.
It all means optimism over a quicker than expected global recovery is fading.
“We’re going to be pulling down some of those near-term GDP forecasts for the UK and highlighting the upside risk of inflation specifically because of this labour shortage issue,” says Simon Macadam, global economist at Capital Economics. He says it could be a constraint on the economy for months.
“If we’re going to take any lessons from the US, it would make us more cautious that this won’t just go away because the furlough scheme ends … these shortages will be quite acute until the middle of next year.”
An economic domino effect is feared. If shortages lead to a fight by businesses for workers, wage bills will rise and then be passed on to shoppers through higher prices.
Shortages could therefore add to inflationary pressures already threatening to run out of control. There is already a risk workers facing a sharp pick-up in inflation demand higher pay, creating so-called second round effects that cause a dreaded wage-price spiral.
If the workforce is permanently smaller, economies have less room to grow before they overheat and generate inflation – forcing central banks to ramp up interest rates.
“Certainly that risk is very much foremost on policymakers’ minds at the moment,” says Sandra Horsfield, economist at Investec.
“There are two schools of thought. One is this is the beginning of a wage-price spiral here. There are cost pressures, which will feed into higher wage demands, which companies will have no choice but to grant in light of the situation… The second school of thought is there may just be a one-off price change.”
Central banks could respond to signs of wage and price pressures by raising interest rates, slamming the brakes on the economic recovery.
Money markets are already pricing in three rate hikes at the Bank of England in the next 12 months after a sharp surge in investor expectations in recent weeks. The first hike from a record low Bank rate of 0.1pc is expected to come by Christmas despite worries tightening too fast could derail the recovery.
Meanwhile, Hanrahan fears losing out to foreign rivals, as shortages limit his ability to supply certain products.
“If we cannot supply them soon, our customers will go to our European or Far East competitors,” he says. “If we lose that business completely, we will start to lose jobs because we won’t have the work. We will go to the other end of the scale.”