What does the UK's growing inactivity crisis say about the state of the labour market and how should policy tackle this urban problem?
Talks of a labour shortage, recruitment difficulties, and a rapidly shrinking workforce have all grabbed headlines lately – with the Prime Minister recently citing tackling economic inactivity and getting people back to the jobs market as a top priority for 2023. This is the focus of this year’s edition of Cities Outlook – Centre for Cities’ annual health check of the largest cities and towns in the UK. The report looks at what economic inactivity says about the real state of the labour market, how that plays out across the country, what its drivers are, and how policy should tackle it.
On the face of it, the UK ended 2022 with a seemingly buoyant jobs market. Not only was unemployment lower than pre-pandemic levels but it was also the lowest rate Britain had seen since the 1970s. However, this was not because a record-high number of people were in work: it was in fact the result of a rising number of ‘economically inactive ‘people withdrawing from the labour market and not looking for a job.
Cities Outlook 2023 focuses on those ‘missing workers’ (excluding people for whom inactivity is a choice, like students or early retirees). It shows that adding them to official unemployment figures more than triples the number of people who are out of work, from 1.2 million to 4.7 million people. And it takes the unemployment rate from 3.7 per cent to a ‘hidden unemployment’ rate of 12.7 per cent.
Hidden unemployment is a much bigger problem in cities and large towns in the North of England than in the rest of the country. Of the 10 places with the highest hidden unemployment rate, nine are in the North (Figure 1). In cities like Middlesbrough, Hull, Blackburn, including those missing workers moves the unemployment rate from 5 per cent to 20 per cent – in contrast to Reading and Basildon where the unemployment rate increases from 3 to 8 per cent.
Source: ONS, Annual Population Survey 2022. Note: four cities have been removed from the analysis: Crawley, Cambridge, Ipswich and Worthing, because of missing data for 2022.
In many of those northern cities this is more than just a short-term problem. Increases in inactivity levels since the pandemic have received lots of attention lately – and rightly so. However, in some of the places that have seen inactivity levels jump the most, like Hull and Barnsley, an increase in inactivity is concerning not in and as of itself, but because it compounds already high pre-pandemic levels.
Health has been widely discussed in recent months as a factor in rising inactivity rates. It’s currently the main reason for why people are outside the labour force. There are clear regional divides here too. In Newport and Sunderland, for instance, more than 40 per cent of inactive people are not seeking work because of long-term sickness, against less than 15 per cent in Aldershot and Norwich.
Less has been said about how inactivity relates to the strength of the local economy. Hidden unemployment is particularly high in places that are economically weaker. Skills, for instance, play a key role: weaker economies in the North have a higher share of the working-age population with low qualifications, and those people face a disadvantage in the labour market.
It is also a demand issue. The economy is weak, which means the demand for workers is limited and there are few jobs available. Since the likelihood of finding work is lower (leading to higher unemployment), the incentives to stay active in the labour market and look for a job are reduced too (leading to higher inactivity).
As Figure 2 shows, most northern cities account for a higher share of Britain’s hidden unemployed than their share of job postings. Contrary to what the national story has focused on recently, in those places it is a job shortage, not a labour shortage, that drives inactivity up.
Source: Indeed, 2022. ONS, Annual Population Survey, 2022.
Much of the thinking within policy so far seems to have been framed in the belief that if people are brought back to the jobs market, there will be a job there for them. The result has been suggestions around revamping the benefits and welfare system, and encouraging the over 50s as well as those who are sick to return to work. This might indeed help in places – mostly in the South- that do face a labour shortage.
Yet in northern cities, where hidden unemployment is the highest, those announcements miss the point. Merely helping people to get back to the labour market will not go far enough because there isn’t a sufficient number of jobs for them to get back to in the first place.
Addressing this will require the Government to deliver on its levelling up promises. This means tackling the reasons for why there is a lack of jobs, skills, and good health in urban areas outside the Greater South East, and helping those places grow their economy. The Levelling Up White Paper, published nearly a year ago, did a good job of diagnosing the problems and setting out a broad approach to addressing them. Now 2023 needs to be the year this is followed up with policy implementation.
As well as providing a deep dive into the latest economic data on the UK’s cities and largest towns, Cities Outlook 2023 shines a light on the UK's growing economic inactivity crisis.
Chief Executive Andrew Carter and members of Centre for Cities’ research team explore the findings and implications of Cities Outlook 2023.
The UK’s seemingly record-low unemployment figures mask a hidden army of more than three million working-aged people that are involuntarily economically inactive.
As well as providing a deep dive into the latest economic data on the UK’s cities and largest towns, this year our flagship publication focuses on the scale and geography of economic inactivity across the country.
The launch of Cities Outlook 2023, Centre for Cities annual flagship publication.
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