02The UK’s army of hidden unemployed people

Official unemployment figures mask substantial numbers of hidden workers in cities and large towns in the North of England, in particular. This underscores, once again, the need for a set of levelling up policies to tackle the struggles of places outside the Greater South East.

Big increases in economic inactivity – those people not searching for work – since the onset of Covid have grabbed headlines and led to the prime minister asking for a review to look at the causes.

While it is right to be concerned about recent rises, the debate has been largely blind to how this plays out across the country. This chapter shows there is a much greater, longer-term problem with inactivity that has a very clear North-South split.

Unemployment is at historically low levels

At first glance, the UK jobs market appeared buoyant in 2022. Unemployment was at record lows, with only 3.7 per cent of the working-age population (1.2 million people) classed as unemployed by October. That is not only less than pre-pandemic levels, it is the lowest rate Britain has seen since the early 1970s. And it is a picture that played out across the country.

There is a geography to unemployment – cities and large towns in the North or the Midlands had higher rates than those in the Greater South East, as Figure 1 shows. But even in places that fared the worst, like Birmingham and Middlesbrough, the unemployment rate was around six per cent, which is very low in the context of the last four decades.²

The cause of such low unemployment was not a booming jobs market – the UK is one of the only countries in the OECD not to have returned to pre-Covid employment rates.³ It was the result of rising numbers of people being classed as ‘inactive’ because they were withdrawing from the jobs market despite an increase in vacancies. And this spurred the prime minister’s request for a review.

Not all forms of economic inactivity should be a worry for policymakers. Some of it is driven by individuals making positive choices, such as enrolling in higher education or retiring early if they are financially secure enough to do so. These types of inactivity are unrelated to the economic performance of the local area in which people live and work. Instead, they are more closely tied to the benefits and characteristics that different places offer, such as universities in cities, or amenities that particularly appeal to retirees. This partly determines where people who are inactive choose to live (see Box 3).

Other forms of inactivity are less likely to be the result of positive choice. For example, people may leave the labour market and stop looking for work if they are discouraged, believe there are no jobs available (or no good positions) or cannot work because of health issues. These should all be concerns for policymakers.

There is an army of hidden workers in northern cities and large towns

By discounting those for whom inactivity is more likely to be a choice, it is possible to compute an ‘adjusted’ inactivity rate.⁴ This more accurately measures the share of the working-age population that is likely to be involuntarily inactive and, in principle, could work or look for a job if they had adequate support or better employment prospects.

Nationally, there are 3.5 million people who are involuntarily inactive – almost three times the number who are unemployed. Nearly two million live in cities, which is about 60 per cent of the total.

Reflecting the geography of unemployment, involuntary inactivity is greater in the North (Figure 3). In fact, eight of the 10 places with the highest rates are northern cities. More than one in eight working-age people in Barnsley and Sunderland, for example, fall into this category compared with around one in twenty in Reading or Basildon. And this pattern has persisted for many decades, as Box 4 shows.

Hidden unemployment is up to four times higher in some northern cities and towns than official figures suggest

Combining those who are registered as unemployed and those who are involuntarily inactive takes the national rate from 3.7 per cent to 12.1 per cent. That is an increase from 1.2 million to 4.7 million people, nearly the population of Manchester and Birmingham urban areas combined.

These shifts are even larger at the local level and reveal a much greater North-South divide than unemployment figures on their own suggest. Of the 10 places with the highest hidden unemployment rates, nine are in the North. In Middlesbrough, Hull and Blackburn, accounting for that group increases the rate from 5 per cent to 20 per cent – a four-fold rise. In Liverpool, it takes the total number of unemployed people from 13,000 to more than 46,000 people, which is almost enough to fill Anfield stadium. This is a strong contrast with cities like Gloucester, Reading and York where the hidden unemployment rate is around 8 per cent, which is much closer to the headline unemployment figures.

The result is much greater disparities between cities than those headline figures suggest, as Figure 4 shows. The gap between cities with the lowest and highest unemployment rate is 4 percentage points. But for hidden unemployment, this increases to 12 percentage points.

Recent increases in inactivity rates have created new problems in some southern cities, in addition to compounding existing ones in the North

The well-documented recent rises in inactivity have compounded this picture at the national level, but they have not been evenly spread across the country.

Inactivity had generally been declining since the turn of the 21st century, mostly driven by more women joining the labour force.⁶ But the Covid-19 pandemic has reversed this trend. Between December 2019 and October 2022, the total number of people in the jobs market shrunk by 370,000, despite low unemployment and worker shortages. This moved the inactivity rate from 20.2 per cent of the working-age population to a six-year high of 21.7 per cent, making the UK a clear international outlier.

Some of this has been driven by a rise in students who may have delayed their entry into higher education because of the pandemic. More older workers retiring early, either in response to redundancies and dismissals or as a result of post-pandemic lifestyle changes, may have played a role too. National data for October 2022 suggests these two reasons combined explain, at most, a third of the overall increase. This means, therefore, that it has largely been made up of involuntary inactivity.

Perhaps surprisingly, despite the national focus, involuntary inactivity has not gone up across the country. Figure 6 looks at the performance of cities and large towns in 2019 and changes in involuntary inactivity since then, and there are four things to note:

• Not all cities saw a rise; in places like Derby, Edinburgh and Wakefield rates actually decreased.
• Recent changes have not entirely followed the geography of inactivity set out above. Cities with large increases are located across the UK. For those in the top right quadrant of Figure 6, such as Barnsley and Hull, the rises have compounded high long-term rates. For mainly southern cities, such as Northampton, Swindon and Milton Keynes in the top left, this has posed a new problem for their economies.
• Similarly, places that have seen either low increases or decreases are geographically spread. For cities like Dundee and Liverpool (bottom right), recent falls have brought some relief to their inactivity challenge. For those in the bottom left, such as London, Edinburgh and Bristol, inactivity continues not to be a great concern.
• Despite the attention the recent increases have received, they are small relative to the much larger problem of stubbornly high levels of involuntary inactivity in many places. In a city like Swansea, the 2 percentage point rise over the past three years is a concern not because it has happened, but because it has added to the 10 per cent of working age people who were already involuntarily inactive.

The recent focus has been on worsening health as a cause of economic inactivity

In recent months, national headlines have largely focused on the role that poor health plays in economic inactivity.⁷ It is undoubtedly a concern, as long-term sickness is now given as the main reason why people are outside the labour force. Quarterly national data for October 2022 shows about 28 per cent of inactive individuals reported being outside the labour market for health reasons – that’s about 2.5 million people.

Health does appear to be a driver of long-run patterns of involuntary inactivity. Looking at places with the highest share of inactivity driven by ill health shows, once again, a clear North-South divide, matching the geography of hidden unemployment (Figure 7). In Newport and Sunderland, for example, more than 40 per cent of all inactive people are not seeking work because of poor health compared with less than 15 per cent in Aldershot and Norwich.

In many places, particularly in the North, poor health among the workforce and the working-age population is not a new issue. Cities like Sunderland, Newcastle and Barnsley have historically had higher than average rates of inactivity because of sickness. In the 1980s and 1990s, it was especially acute among former coal miners, steelworkers and other industrial workers. Exposure to industrial injury led many to become inactive, often claiming incapacity benefits, when their industries shut down.⁸

These patterns have persisted.⁹ ONS data for 2022 shows people who previously worked in wholesale retail and trade, transportation, construction and manufacturing were most likely to be inactive due to poor health.¹⁰ And this could be for two reasons. Firstly, many of these jobs still tend to be physically demanding and are more likely to impair health than most white-collar roles. Secondly, jobs in these industries are harder to carry out while managing long-term sickness and are less adaptable to hybrid and homeworking, which compels workers to withdraw from the labour market. What is less clear is the role of health in explaining more recent increases. While long Covid and NHS backlogs have been put forward as explanations, data on NHS waiting times doesn’t correlate very well with changes in involuntary inactivity across cities (see Box 5).

Economic factors have been less widely discussed, but also play a major role

Skills are an important predictor of both employment outcomes and economic inactivity. Nationally, unemployment rates are two percentage points higher for people with no qualifications compared to those who have a degree.¹² About half of people with no qualifications are economically inactive (for all reasons combined), against 11 per cent of those with Level 4 and above.¹³

This illustrates two potential impacts on people – the ‘scarring’ of long-term worklessness on employment prospects. This can lead people, particularly those with low educational attainment, to become ‘discouraged workers’ and leave the labour force, or they don’t enter the workforce in the first place because of the lack of opportunities.¹⁴

The disadvantages faced by people with low skills or educational attainment in the jobs market help explain why cities with the highest percentage of residents with no formal qualifications also have the largest hidden unemployment rates (Figure 8). Many, like Hull, Sunderland and Barnsley, are in the North.

But this is only part of the explanation. As Figure 9 shows, employment rates are determined by the strength of the local economy.¹⁵ Low-skilled people are still more likely to be employed in economically stronger cities (with a high share of knowledge-intensive jobs) like Reading and Edinburgh than in Sunderland and Mansfield.

In northern cities and large towns with high hidden unemployment rates and relatively weaker labour markets, demand for workers – and job opportunities – is limited. As 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). Figure 10 shows the interaction between demand for labour and hidden unemployment across Britain’s cities and largest towns. Cities are broadly split into two groups.¹⁶

Weaker economies – those above the dotted line – account for a larger share of Britain’s hidden unemployment relative to their share of job postings.¹⁷ This suggests they are suffering from a job shortage, with too few available compared to the size of the hidden unemployed population. There are 38 cities in this category and most are in the North or Wales. Middlesbrough, for instance, accounts for only 0.5 per cent of all job postings in Britain, but around 1 per cent of all hidden unemployed. In total, all cities in the North or Wales account for 16 per cent of vacancies but 21 per cent of hidden unemployed.

The problem in many of these places isn’t just that they have too few jobs, it’s that many are low-skilled, low-paid roles. Cities like Sunderland, Barnsley and Hull have a far higher share of those than places like Reading, Cambridge or Edinburgh. This is a symptom of the weakness of their local labour market and there are two reasons why it is likely to contribute to economic inactivity. Firstly, the prospect of low pay may deter people from entering the jobs market in the first place and secondly, many low-skilled roles tend to be physically demanding so increasing the chances of people withdrawing from the labour market for health issues.

This relationship between hidden unemployment and the strength of the economy illustrates, in part, the legacy of deindustrialisation, as Box 4 noted. Many post-industrial cities, particularly in the North, have not transitioned towards high-skilled, high-wage economies. As industry declined, policy interventions failed to provide these places with the tools to adapt to (and attract) more knowledge-based services, for instance by investing in the skills of the workforce. Instead, they have replicated the low-skilled nature of their economies.¹⁸ As a result, some places have not only lost jobs in mining and manufacturing, which were relatively well-paid, but the jobs that have subsequently been created are disproportionately lower skilled and lower paid in workplaces like distribution sheds and call centres.¹⁹ It has meant that deindustrialised cities such as Sunderland, Barnsley and Hull have been stuck in a low-skill, low-wage equilibrium.

This is in stark contrast to the stronger economy cities below the dotted line of Figure 10, which have the opposite mismatch. Their share of the UK’s total job postings is higher than their proportion of hidden unemployed. Bristol, for instance, accounts for 2.1 per cent of all UK vacancies, despite representing only 0.9 per cent of all hidden unemployed. In London, it is 23.6 per cent and 16.1 per cent respectively. This does not necessarily mean that, in absolute terms, there are more vacancies than people outside the labour force in these cities, but it suggests their jobs markets have more capacity to accommodate those currently inactive than weaker city economies.

The UK’s long-term inactivity problem is largely one of job shortages

Addressing recent increases in inactivity has tended to be framed in terms of bringing people back to the jobs market to fill open vacancies. But in many cities the bigger challenge is a long-term jobs shortage rather than a short-term worker shortage. And this is before the expected recession further worsens the picture.

If policy is to tackle the UK’s true inactivity problem, it will need to address the lack of work in many northern cities and large towns in particular, alongside health and skills issues. In cities like Middlesbrough, Hull and Blackburn, there is more slack in the jobs market than headline figures would suggest. This means their economies are unlikely to be able to absorb higher levels of employment should those outside the labour force decide to return to paid work, because currently there aren’t enough jobs for them.

The expected recession is likely to put even greater short-term emphasis on policies to deal with the fall-out from it, such as employment support schemes. But the jobs shortage problem shows how important delivering on the levelling up agenda is if we are to turn around the struggles of many places outside the Greater South East.

This requires the Government to deliver on its levelling up promises

The levelling up agenda has been derailed by a series of short-term crises since the current Government took office. Covid was the biggest of these, followed by the immediate response to the war in Ukraine and the rising cost of living. A recession and the recent increase in inactivity are likely to be the latest reasons as to why policy attention is diverted away from tackling the UK’s entrenched geographic divides.

The constant firefighting of short-term problems means there has been almost no policy delivery to address the long-term issues of poor national and local economic growth. The analysis in this chapter shows the implications of continued inaction, with hidden unemployment rates up to four times higher in places like Middlesbrough, Blackburn and Hull than official figures suggest.

There needs to be a programme of delivery set out in 2023 that tackles the reasons why there is a lack of jobs, skills and good health in a number of places outside the Greater South East, in particular.

Last February’s Levelling Up White Paper 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.