A stable picture, but economic inactivity fault line remains
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This month’s labour market statistics show a broadly stable picture between November 2023 - January 2024, with employment and unemployment levels largely unchanged, and a stubbornly high number of people in economic inactivity, meaning they are out of work and not looking for work. This overall picture of stability hides a great deal of variation. Although the regional figures must be interpreted with caution due to issues with the reliability of the survey, the broad trend seems to indicate that London’s strong employment growth may be skewing the overall picture for the UK, with other regions lagging behind.
Bringing more people into work could boost the economy
Currently, over nine million people in the UK are economically inactive, translating to one in five working age adults (21.8%). In a historical context, this is not at all unusual. In fact, the rate of people out of work and not looking for work has hovered between 21 and 22% since the early 2010s, and was much higher during, and in the aftermath of the global financial crisis. Approximately a fifth of this group of people does want to work and represents a sizeable potential addition to the labour market which could boost the economy.
Figure 1: Rate of people aged 16-64 who are out of work and not looking for work, 2010 to 2024
Source: Work Foundation calculations using Office for National Statistics Dataset A01: Table 1 - Labour Force Survey summary (12 March 2024), seasonally adjusted.
Policy makers looking to address sluggish economic growth, low productivity and labour shortages see tackling economic inactivity as a solution to the UK’s problems. Government has a myriad of options at its disposal, some more effective than others.
Cutting National Insurance contributions won’t get people into work
In last week’s Spring Budget, the Chancellor prioritised tax cuts, reducing National Income Contribution (NIC) by an additional two percentage points over last autumn’s reduction of two percentage points. Government estimates this will put several hundred pounds into people’s pockets (more for higher income than lower income workers) and hopes it will incentivise people to take up work to fill one in five vacancies. However, the Office for Budget Responsibility (OBR) estimates that it will not bring substantially more people into the labour market, but is more likely to incentivise some people to take on more hours.
In reality, even the take up of additional hours due to this policy may be limited, as this month’s statistics show that working people have already been taking up more hours even prior to the NICs cuts coming in. The average number of hours worked per week are now at 31.9 hours, higher than the previous quarter (31.4 hours) and back to the level it was in November-January of 2020, prior to the Covid-19 pandemic.
This is particularly driven by full-time workers taking up additional hours, as well as part-time workers taking up enough additional hours to become full-time workers. This could be prompted by a number of factors, such as needing to work more hours due to cost of living pressures, as well as businesses having increased scope to offer more hours following a slow post-pandemic recovery. We will be looking more closely at the drivers of working hour fluctuations over the coming weeks.
Ultimately, it means that an approach which relies on people taking up additional hours to boost the economy will be limited – because there is a limit to how many more hours people can take on.
Figure 2: Average weekly hours worked, 2010 to 2024
Source: Work Foundation calculations using Office for National Statistics Dataset A01: Table 7 – Actual weekly hours of work (12 March 2024), seasonally adjusted.
Addressing inactivity requires action
Reasons for being out of work are complex. Whilst a tax cut for working people could be a lever for some already in work to take up more hours to maximise their income, for those out of work, earning any kind of income through work may feel out of reach.
A tax cut does not make working “worth it”, if you don't have access to a decent, reliable and secure job with good working conditions. A bump in a pay cheque means little if some weeks you don’t get paid at all.
Therefore, what is needed is a focus on enabling the transition from inactivity into looking for work, or taking up work for those who are able and willing. This includes a substantial reform of the welfare system to de-risk the move into work for those who are on benefits, which is particularly key for those with disabilities and health conditions.
Furthermore, the 2.7 million workers who are out of work because they are long-term sick require appropriate access to health care, occupational health support and wrap around employment support in order to get back into work. Employers have an important role to play in this, and should be encouraged and supported to redesign jobs to make them more accessible to people with health problems, for instance by embedding flexibility in job roles.
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