A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.

Britain’s labour has seen significant and unexpected change since 2020. Three major factors are at work. First, a surge in the number of people retiring early has shrunk the workforce. Second, increasing levels of migration from outside the EU have partially offset the ending of unskilled migration from the EU. And third, the pandemic has increased hybrid and home working, possibly by a factor of three. This week’s briefing examines each of these changes.

More people are in work today than on the eve of the pandemic in most industrialised countries, though not in Britain. Its workforce has shrunk, mainly because of a rising number of people of working age withdrawing from the workforce: 575,000 people have left work since the onset of the pandemic, equivalent to almost 2% of the workforce. Illness has played a part, with Covid and delays in treatment on the NHS, fuelling levels of long-term sickness and disability.

Yet most of those leaving the UK workforce have taken early retirement. Retirement has surged among the 50- to 64-year-olds, most of whom own their own homes outright and have pensions and other savings. The pandemic has caused many people to re-evaluate their priorities and, for some, led them to opt for early retirement. In the UK, private pensions and the option to take 25% of pensions as a tax-free lump sum provide more flexibility over the timing of retirement than in much of the rest of Europe where state provision plays a larger role.

Most of these early retirees seem unlikely to return to work. Indeed, almost all the rise in inactivity is among people who say they do not plan to work again. 

The second change in the labour market relates to immigration. Migration into the UK has played a major role in Britain’s labour market since the mid-1990s. Today 6.2m people in employment, or 19% of the UK’s workforce, were born abroad. The number of people coming to the UK from the EU fell sharply after the Brexit referendum, well before the ending of free movement with the EU in January 2021. But significantly more people are coming to work in the UK under the government’s skilled worker visa scheme. The rules for the skilled worker visa were eased in January 2020, with a reduction in the level of skills required, greater flexibility for applicants and the removal of the limit on the number of visas that are issued every year. The scheme is available for hundreds of occupations and requires a wage in excess of about £26,000pa. Almost 300,000 work visas, the majority skilled-worker visas, were issued in the 12 months ending June 2022.

Special factors have also played a major role in recent immigration into the UK. The increase in the number of visas granted to non-EU citizens since 2019 is largely because of the introduction of a visa route for Ukrainian and Hong Kong nationals and the return of foreign students after the pandemic. Since the EU referendum in 2016, net migration to the UK appears to have run at somewhat higher level than the 250,000 people a year seen in the period 2007-2016.

These numbers should be treated as broad and provisional estimates. Immigration is hard to measure after the event, let alone to predict, and official forecasts have frequently been wide of the mark, generally in the direction of underestimating levels. Looking ahead, the effects of the special schemes for Ukraine and Hong Kong nationals will fade, as will the impact on the numbers of the return of foreign students to the UK. The latest Office for Budget Responsibility forecasts show net migration averaging around 210,000 a year over the next five years, roughly 16% lower than the pre-2016 trend. With the government keen to bolster rates of GDP growth and increase the number of foreign students coming to the UK, I am inclined to think the OBR may be underestimating future levels of immigration.

The third and most obvious change wrought by the pandemic is in where work happens. In the weeks prior to the pandemic, 12% of working adults in the UK reported working partly or wholly from home. That figure peaked at almost 50% at the start of the pandemic and has run at around the 38% mark in recent months. The frequency of journeys to work has also stabilised, suggesting that we may have hit a steady state between home and the workplace. If homeworking settles in the region of 38% this would mark a tripling of homeworking compared to pre-pandemic norms.

Those who regularly work from home tend to be concentrated among higher-paid occupations, particularly in information and communication and in the professional, technical and administrative sectors. Rates of home working vary by age, with people aged 35-54 most likely to work from home.

The move to hybrid is one of the few good things to come out of the pandemic. Surveys show improvements to work-life balance and reduced commuting times being key benefits. A survey conducted for the Brookings Institute in early 2022 found that the average UK worker saw working from home for two to three days a week being worth the equivalent of a 4.4% pay rise. UK workers were also markedly less enthusiastic about returning to the workplace full time than in any of the other 24 major countries surveyed by Brookings. Some 42% of UK respondents said they would resign immediately or seek a new job that allowed remote working if their employer removed the hybrid working option.

This new labour market shaped by the pandemic, Brexit and government policy has yet to be tested through the economic cycle. It is not clear how weaker growth and rising unemployment this year will affect the attractiveness of the UK to overseas workers or the appetite of employers for hybrid working. The government can increase, or reduce, the number of work visa issued under the skilled worker scheme. The relatively high levels of personal wealth enjoyed by the over-50s could face increased levels of taxation and a further increase in the age at which the state pension becomes payable. Despite telling pollsters they are unlikely to return to work, some early retirees will find the lure of work, and the challenge, social connection and money that comes with it, irresistible.

What is clear is that the UK labour market has undergone significant change in a short period of time. Much of it is likely to stick.

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