Official Labour Market Data Has Lost Almost A Million Workers, And Is Over-stating The Scale Of Britain's Economic Inactivity Challenge

21st November 2024

ONS labour market statistics have misrepresented recent trends in the UK labour market - by under-estimating the growth in employment by 930,000 workers since 2019, and over-estimating the extent of economic inactivity, according to new Resolution Foundation research published on Wednesday 20 November 2024.

As the new Government prepares to publish a White Paper that reaffirms its ambition of an 80 per cent employment rate. he report Get Britain's Stats Working warns that efforts to reach this ambitious target are marred by poor quality data that is leaving policy makers in the dark about the true state of the UK labour market.

Importantly, this uncertainty also hits our understanding of trends in labour productivity, makes it harder for the Bank of England to do its job of managing inflation, and for the OBR to set its fiscal forecasts.

As the ONS and Office for Statistics Regulation are aware, the Labour Force Survey (LFS) has been beset by problems since the pandemic, including a collapse in response rates (from 39 to 13 per cent between 2019 and 2023). This has opened the door to response biases, with workers potentially now disproportionately less likely to respond. Furthermore, the survey may have also struggled to reflect the growing importance of workers coming from beyond the EU.

With official data unable to provide an accurate picture of the labour market, the Foundation has created an alternative estimate of the employment rate, built up from HM Revenue and Customs payroll and self-employment data as well as the latest ONS population data.

This new employment index closely tracks the official employment rate up to 2020, before sharply diverging. The official LFS series suggests that the employment rate is currently lower than it was in 2019 - a pattern at odds with the high vacancy rates and strong wage growth that would usually imply a tight labour market. But the new index suggests that the rate returned to its pre-pandemic peak in 2023, before dropping off slightly in 2024 to reach broadly the same level as in 2019.

The Foundation's analysis suggests that there could be 930,000 more people in employment than the latest official figures suggest, and that the current 16-64 employment rate could be around 76 per cent (as it was pre-pandemic), rather than its official rate of around 75 per cent.

The report notes that an inaccuracy in the LFS's estimate of the employment rate would have implications for the level of unemployment and economic inactivity in the UK - which together must be lower than estimated by the LFS if the true rate of employment is higher.

Get Britain's Stats Working Again says that, while the unemployment rate is likely to be lower than official figures suggest, this cannot fully account for the LFS' ‘lost' 930,000 workers. Therefore, the overall rate of economic inactivity must also be lower, and possibly close to the pre-pandemic rate (rather than being considerably higher, as shown in official figures).

The Foundation says that this likely lower level of overall economic inactivity could still be consistent with a significant rise in the number of people inactive because of long-term sickness, due to offsetting factors such as a fall in the number of people who are inactive due to looking after their family or home, as well as simple population growth. Rising levels of long-term sickness are supported by independent - although not at all straightforward - benefit caseload data.

The Foundation welcomes the reforms planned by the ONS to improve the existing LFS and introduce a ‘Transformed' LFS. However, the ONS should do more to reconcile the different data sources as soon as possible given how fundamental these statistics are to our knowledge of the health of the economy.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

"Official statistics have misrepresented what has happened in the UK labour market since the pandemic, and left policy makers in the dark by painting an overly pessimistic picture of our labour market.

"The ONS Labour Force Survey appears to have ‘lost’ almost a million workers over the past few years compared to better sources. This has led to official data under-estimating people’s chances of having a job, over-stating the scale of Britain’s economic inactivity challenge, and likely over-estimating productivity growth.

"The Government faces a significant challenge in aiming to raise employment, even if the rate is higher than previously thought. But crafting good policy is made harder still if the UK does not have reliable employment statistics."

Key findings
We build up a new estimate of the employment rate using primarily HMRC payroll and self-employment data alongside the latest population estimates. This aligns well with the LFS rate prior to 2020, but the two estimates have since markedly diverged.

Whereas the existing LFS says that the 16+ employment rate has declined by 1.2 percentage points since Q4 2019, the ‘admin-based’ approach would suggest essentially no change. We show how this gap could in theory be reduced by any future upwards revisions of population totals, or a downgrade of estimated worker numbers.

If the LFS is underestimating the employment rate, it must be overestimating the unemployment rate and inactivity rate in some combination. In our main scenario, the most recent (Q3 2024) unemployment rate is 3.9 per cent rather than the 4.3 per cent rate in the LFS, but it seems unlikely that the rate has been radically lower.

As a result, we estimate that the inactivity rate is likely to be materially overestimated. Whereas the LFS currently says that the 16+ inactivity rate has risen by 1 percentage point from Q4 2019 to Q3 2024, our main estimate suggests there has been almost no net increase, despite a large temporary rise during Covid-19, although there is plenty of uncertainty around these estimates.

Given a combination of population growth and significant falls in some other forms of inactivity, we demonstrate that the number of people inactive due to long-term sickness specifically could have risen even with little or no rise in the overall inactivity rate, helping to reconcile our findings with the trends suggested by benefit caseload data.

Read The full report HERE
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