Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.
What is the biggest challenge currently facing the UK’s jobs market? Not “mass unemployment,” as was feared as Covid-19 ravaged and lockdowns closed businesses last year. No, the concern today – according to the Governor of the Bank of England – is labour shortages.
Last Thursday, Andrew Bailey said, “The challenge of avoiding a steep rise in unemployment has been replaced by that of ensuring a flow of labour into jobs. I want to emphasise that this is a crucial challenge.” This is acknowledgement of one of the pains of what I call the “reallocation economy.”
In spring 2020, the furlough scheme was designed to avert mass layoffs and protect job relationships until things reopened. The idea was that government social insurance to pay wages would help firms “bridge” through a temporary shutdown, allowing them to retain workers and so protecting the productive capacity of the economy. Last spring, as many as 8.9 million jobs had wages subsidised by the taxpayer at the peak.
The Chancellor, and most pundits, will say it worked, albeit lasting longer than expected. Official unemployment peaked just 5.2 per cent last year, against 14.8 per cent in the United States. Now, with furlough winding down, just 1.1 to 1.6 million are left on the scheme, and with almost half of these on “flexible furloughs.”
Though many of these subsidised jobs may be non-viable as support ends, the Treasury will look at the huge 862,000 vacancies in the country and think: we have avoided a jobs disaster and now have a clear glidepath back to full employment.
So what’s the problem? Well, you can’t just “pause” an economy for a year in a world of ever-changing preferences, demands, and technologies. Research already showed larger job changes between sectors and occupations up until January than seen in the Great Recession.
It seems likely Covid-19 will have lasting effects on our preferences, where and how we want to work, and where we are able to travel too. As our lives re-normalise, this and a bounceback in service industries will see many workers temporarily finding themselves in the “wrong” jobs given new trends, or in the wrong places, and or with the wrong skills.
The result of this will be an extended period of teething problems as labour markets adjust to these new realities. There’s always substantial churn in jobs anyway, as workers and activities are reallocated over time. But this change is likely to be far more dramatic given the partial freeze of much of the economy. Rigidities in wages and an unwillingness to move risk creating temporary shortages and wage and price volatility along the way.
To be sure, this seems a better problem than mass unemployment. But Bailey is right: it’s a headwind to growth. Reallocation is a process, and often a slow one. Businesses have to attract and train new workers. Workers have to search for roles. People or firms have to move locations. And companies have to decide whether to risk taking on permanent new employees or undertaking new investments. All this limits the productive capacity of the economy.
The U.S. experienced some of these challenges with its earlier reopening. Leisure and hospitality saw particularly severe shortages of available workers through summer, due to ongoing worries about Covid-19, generous government benefits to the unemployed, and people reassessing their work ambitions.
Average hourly wages surged in these sectors and are still 10 per cent up on February 2020 as labour supply failed to meet growing demand. Businesses paid big signing-on bonuses and raised wages to entice workers to them, but that hasn’t always been enough to fulfil consumer needs: some restaurants couldn’t profitably open every day.
There’s suggestive evidence of similar difficulties in the UK. A British Chamber of Commerce survey for Q2 found that as a growing number of businesses sought to hire again, 70 per cent were having difficulties finding staff, with figures as high as 82 per cent and 76 per cent in construction and hotels and catering.
ONS data for June shows 102,000 vacancies in accommodation and food services–its highest ever recorded level. Pubs and restaurants had to pay temporary workers much higher wages and bonuses to get staff in June. The number of vacancies is surging too in arts, entertainment and recreation and real estate.
Many other factors will contribute to this reallocation challenge than just reopening services though. Surveys show the pandemic has led to a broader “rethinking” by the public about their work roles–perhaps unsurprising given the disruption we’ve seen.
An Aviva poll found 60 per cent of workers say they intend to “learn new skills, gain qualifications or change their career” due to the pandemic. It’s been well-documented that large numbers of young people have opted for extended stints in higher education too. Only a fraction of all this will need to occur for large shifts in local and sector labour supplies.
Other workers are willing to stay with employers, but demanding “let me work from home or I’ll quit.” Nick Bloom’s research suggests a modal desire from office workers for two to three days home working per week. As businesses experiment, some workers will not be happy with their arrangements and move on, while companies must decide whether to adjust to these preferences by widening the geographical net on remote hiring.
Any permanent shift in where work occurs as things crystallise will have sharp consequences for the spatial location of city’s service industries, such as eateries, entertainment, and bars, as well as reductions in demand for inner-city office cleaning, security, and delivery. The process of these support and service workers finding new roles, moving, and re-training will take time too.
Now when politicians hear the word “economic challenge,” their instinct is to dream up a policy to “deal with it.” And after over a year of subsidising jobs, it will be tempting for the Chancellor and Prime Minister to consider incentives, nudges, and public statements to try to force a return to the economy of February 2020, or else to devise new laws to entrench what workers want (see the new demands for a “right” to flexible working).
But beyond removing furlough and other policies that delay reallocation, the Government has no special insight about what’s best for the long-term. How to get the right workers to the right places will only be “addressed” by the experimentation and coordination that comes from market activity, and the reaction to the signals of profitability, wages, and prices.
Though relief helped avert mass layoffs, we will see a hangover as the economy adjusts to new realities. Not because “relief” was or is inadequate, but because the crisis has disrupted so much.