Employment is at its highest level ever. If only we knew why

Economic View

The employment rate in the UK – that is the proportion of people of working age in some form of work – is now not only the highest it has ever been, it may also be the highest in the European Union and the G7. If this is right, and you always have to be careful with data, then something big may be happening that goes far beyond economics. You might say that work is coming back into fashion.

Employment statistics are in some ways more interesting than those for unemployment. The latter are distorted by a number of factors, including the adequacy of retirement pensions, the level and structure of welfare benefits, training opportunities, disability legislation and so on. Employment, on the other hand, is pretty clear because people are either working or they are not. The main distortion is the level of undocumented jobs in the informal economy and whether that is changing in relation to the whole.

But if the story told in the top graph, showing UK employment at a record 73.6 per cent of the working-age population, is remarkable, it is also incomplete. The definition of working age, from 16 years old to 65, means that the headline number does not take into account the higher proportion of students now than in previous peaks, nor the growing number of people of pensionable age who are still at work. Allow for these factors and the number is more remarkable still.

There is a further twist. What is happening in the UK seems to run counter to what is happening in the rest of the developed world. The International Labour Organisation (ILO) looks at global trends in the labour market, and one of the things it does is to project forward labour participation rates in the different regions of the world. As you can see in the bottom graph, the trend has been down in recent years, and though the ILO expects the global trend to level off, it thinks that in the developed world labour participation rates will carry on falling.

That has certainly been happening in the US, where unemployment has fallen sharply as the economy has recovered. But that decline, though of course welcome, has – unlike here – been associated with a fall in labour participation. It seems that in the US there has been a rise in “discouraged workers”, people who simply drop out of the labour force, whereas in the UK there has been a rise in “encouraged” ones. In all markets there is a supply side and a demand side; the supply side in the UK seems to be behaving differently from the supply side in the US.

When something as big as this happens, you hunt around for possible explanations. The most obvious one is that there have been changes in the UK that have not occurred in other developed countries. There are three main candidates.

The first is immigration. We have had a large increase in the workforce resulting from immigration, recently mostly from the rest of the EU. Roughly half of the net jobs created in the past five years have gone to immigrants. It may well be that since most people are coming to the UK specifically to get a job, that naturally increases the overall participation rate for the country as a whole.

The second is that there have been changes in the structure of the jobs market that have not occurred to the same extent elsewhere, and which – taken together – have encouraged more people into the workforce. These include more flexible hours (including zero-hours contracts), the growth of self-employment and the rise in teleworking made possible by the communications revolution. These forces do exist elsewhere in the developed world, but the UK seems to be an outlier in terms of teleworking and growth of self-employment. This increase in supply of labour would be consistent with the low pressure on pay rates, at least until recently.

The third is that there is some sort of social change under way. It is impossible to pin this down, but it is at least plausible that, for whatever reason, there has been a rise in the proportion of people who can do some work who feel they should do so. Among older people, who, as noted above, are not included in these stats, there does seem to have been some shift. The evidence is anecdotal, but parallel to the rise in retirees doing some paid work there seems to have been a rise in them doing unpaid work, too. Volunteering has risen among all ages. While it is hard to get comparable international statistics on this, it also seems that unpaid work rates may have risen faster in the UK than elsewhere.

If the labour participation rate goes on rising, then this will have a number of consequences. One is that growth can continue faster than it otherwise would, because it will take longer to run into labour- supply bottlenecks. There will still be skill shortages, so this is not a cure-all. But given the concern about the public finances – we are getting close to full capacity and we still have a fiscal deficit – anything that suggests that the capacity of the economy is larger than we thought must be most welcome.

Another is that it takes some pressure off pensions. The effect is direct in that if more people are pulled into the labour force, they have more opportunity to save for a pension. There would also be indirect effects from people reaching normal retirement age in some form of work, making it easier for them to continue in work afterwards. In other words, it could have the effect of increasing the average age of full retirement.

Still another would be the impact on health and wellbeing from a larger proportion of people being employed. There is quite a lot of evidence that people who are involved in some form of activity outside the home – paid or unpaid – reap wider benefits from this. This is not to say that work is always wonderful, or that we should welcome a society where there is less leisure. It simply makes the point that, other things being equal, the rise in employment levels is probably a strong net plus and we should welcome it, even if we do not fully understand why it is happening.