Written By:
Edward Thomas Jones
Senior Lecturer in Economics
Bangor University
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Ill health, early retirement, and lack of skills are some of the reasons why people decide not to participate in the labour market.
In March I had an opportunity to present at the Institute of Directors (Wales) Spring Leaders lunch. During my presentation, I discussed the current business environment and what we could expect to happen to the economy during this election year. It’s fair to say that the economy has been through a lot in recent years. We’ve had the 2007/08 financial crisis, austerity, uncertainty surrounding Brexit, Covid-19. 2023 was another difficult year for businesses as they had to contend with rampant inflation and the ‘remedial’ high interest rates. There was no surprise therefore when the Office for National Statistics announced that the UK economy fell into a technical recession in the second half of 2023.
Of all the data I presented during the event, it was the economic inactivity rate that caused the most discussion. The economic inactivity rate measures the percentage of working-age people – that is, 16- to 64-year-olds – who were ‘economically inactive’. The Office for National Statistics defines a person as being economically inactive if they are aged 16 and over without a job, have not sought work in the last four weeks, and/ or are not available to start work in the next two weeks. The main economically inactive groups are students, those looking after a family member, long-term sick and disabled, temporarily sick, retired, and discouraged workers. Those who are economically inactive are a subset of the out-of-work population, differing from those unemployed, in that they are not actively seeking and/ or not available for work.
One in every four person of working age is economically inactive in Wales
A high economic inactivity rate can lead to social and economic problems. For example, the capacity of an economy to grow is restricted when the proportion of people not participating in the labour market is high unless it is offset by an increase in immigration or productivity. The economically inactive population represents a substantial potential labour supply, especially those who report that they would like to work. Accessing and mobilising this group is critical for supporting economic growth, especially during periods when labour markets are tight and there is an ageing population.
Participating in good quality work can have positive benefits, from health and well-being to financial security and quality of life through social participation. A society where everyone who wants to work can secure and retain employment should be the aspiration for all stakeholders who seek a sustainable and inclusive economy.
Since comparable records began over 50 years ago, the economic inactivity rate has generally been falling. But in March the Office for National Statistics announced that the UK's economic inactivity rate was 21.8% between November and January, marginally higher than a year earlier. That is, one in every five people of working age was not actively looking for work. This figure was even higher for Wales at 26.9% – one in every four people was economically inactive.
Ill-health is a key driver of economic inactivity
The increase in economic inactivity is not only harming the economy but also indicates a deeper health crisis occurring across the country. Some of those economically inactive are workers that have chosen to take early retirement or students, who are not active in the labour market because they are studying full-time. Even when accounting for these two groups, there is still a large number who are not part of the labour market because they are unable to work.
One key driver of economic inactivity in recent years has been ill-health. Those who suffer from ill-health face real challenges in participating in work and those with health-limiting conditions cannot just slot into the jobs available. Employers should offer flexible working conditions and the support needed to help those with ill-health adapt to the working environment. The Government has an important role to play too; rising levels of ill-health are linked to years of under-investment in the NHS and economic inactivity will not be tackled without more funding. It is worth mentioning that work itself may be the cause of ill-health. There is evidence that as work has become more intensive over recent decades, work itself has become a health risk. Work that does not pay enough and is unrewarding in other ways can lead to economic inactivity.
Other factors also influence economic inactivity. Skills, for instance, play an important role in determining who participates in work. Those with low qualifications face a disadvantage in the labour market, especially with the development of new technology and knowledge critical in the workplace. If the likelihood of finding work is lower for those with low qualifications the incentive to stay active in the labour market and look for work is reduced.
The Government’s Levelling Up programme needs to deliver on its promises
There have been various attempts by the Government to reduce the number of economically inactive people. Such initiatives have been designed with the belief that if people are brought back to the labour market, there will be work there for them. The result has been suggestions around revamping the benefits and welfare system to encourage more people to return to work. While this approach might work in places that face labour shortages, it is not effective in those regions where demand for labour is weak. Such initiatives miss the point where unemployment is highest. Merely helping people to get back into work will not go far enough because there isn’t a sufficient number of jobs for them to get back into in the first place.
Part of the solution to address this will require the UK Government to deliver on its levelling up promises. The Government’s Levelling Up programme was launched in 2021 when Boris Johnson was still Prime Minister and included no fewer than 35 different pots of money. These covered areas from broadband access to low-emission vehicles. The largest funds associated with this programme are the UK Shared Prosperity Fund and the Towns Fund. The Levelling Up programme has done a good job at diagnosing the problems across several regions and setting out a broad approach to addressing them. The Government now needs to deliver on the vision it set out three years ago and deliver on tackling the reasons for why there is a lack of jobs, skills, and good health in many areas, and help those that are economically inactive.
