Post-pandemic Participation - Exploring Labour Force Participation In The Uk, From The Covid-19 Pandemic To The Decade Ahead

22nd February 2023

The Resolution Foundation looking at various issues on employment sine the pandemic and to the future.

Despite unemployment reaching historic lows, a rise in economic inactivity means that the UK employment rate remains one percentage point lower than pre-pandemic. This paper investigates the causes and sets out some policy recommendations.

The rise in economic inactivity since Covid-19 has not been a universal experience. The UK's labour force participation rate among 15-64-year-olds is still relatively high, but has fallen from the seventh of 38 OECD countries in 2019 to fifteenth in 2022. While there was an increase in flows from employment into economic inactivity due to retirement during the Covid-19 pandemic, the UK is facing a longer-term, and more widespread, rise in economic inactivity due to long-term sickness. This is part of a wider trend of rising disability and long-term sickness that is not limited to those out of the labour market: the number of working-age people with disabilities increased by 2.3 million between 2013 and 2022, with four-fifths (83 per cent) of this rise among people in employment.

Government efforts to boost activity should not focus solely on the newly inactive, since there are good reasons to think that policy will not reach many of them. Many have come from high-paying, professional jobs; many of these adults will be living comfortably in their early retirement, and government policy is unlikely to prompt them to ‘un-retire'. Policy should instead focus on groups that saw significant improvements in the 2010s, both here and in other advanced economies: older workers, women with children, and those affected by rising ill-health and disability.

Key findings
The UK employment rate remains one percentage point lower than pre-pandemic (the employment rate for 16-64-year-olds is down from 76.6 per cent in December-February 2020 to 75.6 per cent in the final three months of 2022. This comes after a decade of fast-rising labour force participation, with the participation rate among adults aged 16-64 rising from 76.6 per cent in 2010 to 79.2 per cent in 2019.

Between 2010 and 2019, average supply growth in the UK was just 1.7 per cent, but rising labour hours supplied (a combination of rising labour force participation and rising average hours of work) contributed to two-thirds of this growth (1.1 per cent). In contrast, the Bank of England expects labour supply to contribute less than a quarter to potential GDP growth between 2023 and 2025 (0.2pp/year).

This has not been a universal experience - in fact, most OECD countries have seen their working-age labour force participation rate rise since the start of the pandemic. For example, while the participation rate for 15-64-year-olds has fallen by 0.8 percentage points in the UK between 2019 and 2022, it has risen by 1.5 and 1.8 percentage points respectively in France and Germany. But The UK's labour force participation rate among 15-64-year-olds is still relatively high, but has fallen from the seventh highest, among the 38 OECD countries in 2019, down to fifteenth in 2022.

Economic inactivity among all adults has risen by 830,000 since the start of the pandemic, with more than three-quarters (630,000, or 76 per cent) of this rise being among people aged 50 and above. This group is split evenly between those who are working age (50-64) and those who are aged 65 and above.

There have been three key trends behind this rise in economic inactivity:
First, among the over 65s, the rise in economic inactivity is almost entirely down to an increase in the size of this age group; indeed, the labour force participation rate for the over 65s has remained unchanged at 11 per cent over the last three years.

Second, among working-age people, there was an increase in flows from employment into economic inactivity due to retirement during the Covid-19 pandemic: quarterly flows from employment into retirement among 16-64-year-olds increased from 67,000 in the autumn of 2019 to peak at 120,000 in the autumn of 2021.

Third, the UK is facing a longer-term, and more widespread, rise in economic inactivity due to long-term sickness: the number of working-age people who are inactive due to long-term sickness has risen by 460,000 since the start of the pandemic to reach 2.5 million in late 2022. This is part of a wider trend of rising disability and long-term sickness that is not limited to those out of the labour market: the number of working-age people with disabilities increased by 2.3 million between 2013 and 2022, with four-fifths (83 per cent) of this rise among people in employment.

The cohort of older workers who have left the labour market since the start of the Covid-19 pandemic have disproportionately come from high-paying, professional jobs; many of these adults will be living comfortably in their early retirement, and government policy is unlikely to prompt them to ‘un-retire'. For example, in 2021, 35,000 more workers aged 50-70 from higher-paying professional and scientific roles flowed from employment to economic inactivity between the second and third quarter of the year compared to 2019. Conversely, in the lower-paying hospitality industry, the number of older workers flowing from employment into economic inactivity was actually 16,000 lower in 2021 than in 2019.

Recommendations
Participation rose in the 2010s and could rise further among three groups in particular: older workers, women with children, and those affected by rising ill-health and disability. In the decade running up to the pandemic, the UK saw employment rates rise by 13 percentage points for women aged 55-64 (and four percentage points for men) and by five percentage points for coupled mothers, while the employment gap between those with or without a disability fell by five percentage points between 2013 and 2022.

For older workers, policy makers should: consider further raising the age at which tax-relieved private pension wealth can be accessed, or at least slowing the rate at which money can be withdrawn before state pension age, and reduce the amount that is tax-free; ensure that defined-benefit pensions rules do not affect re-employment; and (with employers) improve job quality to attract and retain older workers.

For women with children, reforms to childcare should address its complexity and the significant barriers it poses to people entering work. Policy makers should consider radical policy changes, including moving childcare support for low-to-middle income households outside of the Universal Credit system altogether, and introducing a work allowance in Universal Credit for second earners
On workforce health and its relationship with employment, the goal must be to build on promising changes in the past decade in closing the employment rate ‘gap' between those with and without disabilities. Policy makers’ focus should be on keeping those who become ill or disabled in work, rather than just on returning those out of work to employment via changes to the benefits system, and should potentially include a ‘right to return’ period, during which employers must keep jobs open to workers who are away from work due to sickness or disability.

Read the full paper HERE
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