What’s going on in the labour market?

By Stephen Evans


21 07 2020


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In normal times I would argue the Labour Force Survey (LFS) employment rate is the best headline measure for the strength of the labour market. On that measure, things still look relatively serene, with the latest reported employment rate being 76.4%; down slightly on the last quarter before the lockdown, and just 0.2 percentage points below the highest ever recorded employment rate.

But these are not normal times. The headline employment rate doesn’t tell us what is happening now for three reasons:

  1. Time lag. The latest data cover March-May 2020; this lag matters more in the current circumstances when lockdown restrictions are being imposed and lifted.
  2. How people respond to the survey questions. For example, the ONS say that 500,000 people report they’re employed, but did not work or receive any income. Perhaps these include more casual workers who consider themselves still employed?
  3. Furlough. Over is lifetime, more than nine million people have been furloughed – in employment, but not working and with their wages supported by the Government.

What measures can we use? For employment, there are three areas to focus on:

  • Total hours worked. This incorporates changes in employment, furloughing and hours, giving a good indication of the overall health of the labour market. Total hours worked are down 17% since the start of the crisis, back to 1997 levels.
  • HMRC payroll employment. This is more timely but excludes the self-employed. This is down 649,000 since March, the sharpest fall on record.
  • LFS measure of those temporarily away from work. 6.3 million people fall into this category, up from 2.2-2.4 million in recent years. These are counted as employed, but the increase of about 4 million on ‘normal’ levels gives a sense of the jobs most at risk as the furlough scheme unwinds. Plus there’s the 500,000 people saying they are employed, but not working and with no income.

Labour Market Analysis - July 2020

For those out of work, the survey measure of unemployment suffers from the same problems as the employment rate.

The claimant count provides an alternative, is timely (latest data in June 2020) and measures the number of people claiming benefits and being treated as though they were unemployed. It has more than doubled in three months, to 2.6 million (with a small fall in June). However, some people are out of work and not claiming benefits: the gap between ILO unemployment and the claimant count has narrowed significantly as Universal Credit has rolled out (partly as eligibility for UC is wider than for Jobseeker’s Allowance), but this may have changed in the crisis. Also, about 15% of those on the claimant count had some income from employment. This is unchanged since before the crisis (after an upward spike in April), suggesting that about 1.2 million of the 1.4 million rise in the claimant count is people losing their jobs.

Some of the fall in employment may be showing up in economic inactivity (people either not seeking work or not available to start work) rather than unemployment; a probable combination of lockdown and reduced Jobcentre Plus support (while it was focused on processing the huge increase in Universal Credit claims), as well as some of the 2.6 million people registered for the Self Employment Income Support Scheme waiting for business to return as lockdown eases. While overall inactivity is up and down, the latest data show a record rise of 230,000 in the number of people economically inactive but wanting to work. Ordinarily these would not be included in the claimant count (for which you need to be actively seeking work) but the suspension of back-to-work support during lockdown may have changed this.

While overall inactivity is up and down, the latest data show a record rise of 230,000 in the number of people economically inactive but wanting to work.

What does all this mean? Taken together, it is clear lockdown was a sharp shock to the labour market, with some limited recovery since then. Employment is likely to have fallen by at least one million (an overlapping combination of the 690,000 fall in PAYE employment, falls in self-employment, and at least some of the 500,000 people saying they are employed but not working or being paid), much higher than the reported 126,000 quarterly fall due to differences in time periods covered and how people are responding to the survey questions.

This would mean a ‘real’ current employment rate of around 74%, rather than the reported 76.4% for March-May. That would confirm our previous estimate that at least five years of employment growth had been wiped out by the crisis. In addition, at least four million additional people are temporarily away from work, likely down to the furlough scheme. This is 2.4 million down from its peak, suggesting a return to work of some furloughed workers during May.

For the coming months we need a basket of measures to understand what’s happening in the labour market – no single indicator is perfect, but together they paint a picture.

The employment rate remains important, but we should also look at total hours worked, the number of people temporarily away from work, and the timelier HMRC measure of payroll employment. The claimant count gives a helpful indication of unemployment, but we also need to look at economic inactivity and the proportion of those claiming benefits who have some earnings. Real-time data on vacancies can help show what is happening to labour demand.

The two big risks ahead are: first, that lack of job opportunities and reduced job search means that rises in unemployment and inactivity persist even as the economy recovers (hysteresis); and second, that we have a second spike in unemployment as the furlough scheme is withdrawn.

That’s why we welcome lots of what the Chancellor has announced, but think that more will need to be done in the months ahead.

Stephen Evans, chief executive of Learning and Work Institute.

This article was originally published by FE News.