To move that this House takes note of the Report from the Economic Affairs Committee Where have all the workers gone? (2nd Report, Session 2022-23, HL Paper 115).
My Lords, I am delighted to open the debate. Behind its innocuous title, the subject matter we are dealing with is enormous: the overall state of our labour force, the impact of immigration on an ageing population, and what that means for growth, inflation and debt—I could go on.
Let me start by taking a step back. Before Covid struck, labour participation was a major driver of growth, repeatedly outperforming forecasts and partially offsetting falling productivity growth. From July 2011 to February 2020, the level of inactivity fell by 1.2 million to just under 8.4 million, and the inactivity rate fell by about 3% to 20%, their lowest levels on record. During Covid, that trend reversed. As in other countries, inactivity rose by almost 650,000 between February 2020 and its peak in July 2022. Some sectors saw acute labour shortages. As the impact of Covid passed, while inactivity fell elsewhere, here it remained high, having an impact on growth, inflation, monetary policy and the public finances.
In the autumn of 2022, the Economic Affairs Committee therefore posed a simple question: where have all our workers gone? I thank the Committee’s members—many of whom are here—our clerk, our policy adviser and our excellent adviser, Robert Joyce, for their input and hard work. We asked that question partly because no one seemed to know the answer, which was both odd, given the mountain of data that exists today, and extremely worrying, given that this data is critical to decisions made by the Treasury and the Bank of England.
The uncertainty around the data meant that a number of our conclusions carried caveats. That is just as well, because, since our report was published, the credibility of the Labour Force Survey has been shot, thanks in part to challenges in conducting household surveys and in measuring populations during Covid. In October, the ONS stopped its monthly publication of the key job market data altogether. On Monday, the ONS published reweighted figures, with a new classification—“official statistics in development”—which I think is Whitehall-speak for “We’re not entirely sure what is happening”. The document says: “The reweighted estimates suggest”, and we should note that word,
“that over the last five months, though the employment rate has remained broadly flat, the unemployment rate may”—
note that too—
“have fallen, offset by an increase in the rate of economic inactivity; however, some uncertainty remains in these estimates”.
Furthermore, publication of the so-called Transformed Labour Force Survey is being delayed by six months to September. It therefore seems we can be certain only about the data’s uncertainty, making the credibility of the national statistics a subject for debate in and of itself, for how are the Treasury and the Bank to make critical decisions based on dodgy statistics?
My Lords, I am delighted to follow our chairman, who does such a wonderful job in leading our work.
This report is timely because everybody wants to see more economic growth. The most obvious way to achieve that is to increase employment. The central issue is how we can raise employment in the most cost-effective way. As our chairman hinted at, the most obvious way is to help the long-term sick back into work. I want to take in particular about those who have mental health problems.
Mental illness is by far the biggest illness among working-age people. People with mental health problems comprise at least half of all those on disability benefits who are unable to work. Yet mental health is treated by the NHS quite differently from physical health. Most people with physical health problems are in treatment while most people with mental health problems are not; only 40% of them get any form of help from the NHS. What is even more shocking is that, although NICE recommends that all mentally ill people should receive psychological therapy based on evidence-based methods, only 13% actually receive it.
Yet there is overwhelming evidence that these therapies more than pay for themselves in terms of the public finances. They are exceptionally cost effective; of course, this is because people with depression or anxiety disorders are often unable to work so relieving their problems helps them back into work, off benefits and into paying taxes. The evidence is clear: psychological therapy is the cheapest policy that we have for economic growth in this country. That is my central point.
For anxiety disorders or depression, a typical course of treatment costs around £1,000. If such a programme is offered to a clientele, some of whom work and some of whom do not, it needs only 5% of all those treated to move into work from not working to pay for the whole programme for the 100%, through the reduced benefits that they claim and the increased taxes that they pay. The evidence is clear: the existing programme produces at least that effect. It has now been copied in five other countries. Extraordinary evidence from Norway about a randomised trial shows that people who are treated earn four times more than the extra cost of treating them.
My Lords, first, I congratulate members of the Economic Affairs Committee on producing such a topical and insightful report on one of the key constraints on our economic growth. I should declare that, although I now sit on this committee, I sadly cannot claim any credit for this report as it came out a month before I joined.
My experience as an entrepreneur, employer and SME adviser tells me that labour supply remains a huge issue—both qualitatively and quantitatively—and continues to depress both our GDP and our productivity. I will focus on just two connected areas today: the health and fitness of our workforce, and its productivity. The committee’s report highlighted back in 2022 that ill health was rising and was one of the key factors contributing to increased inactivity. However, as the noble Lord, Lord Bridges, pointed out, much of the rise in sickness-related inactivity was apparently among those who were already inactive.
The multiple intersecting reasons for inactivity make statistical analysis particularly challenging. On top of that, the new data from the Labour Force Survey carries its own health warning: it is experimental so we have no historical trends based on this new mode of data collection. As we have heard, the latest survey suggests that an already dire situation has got much worse. The 2.5 million figure for long-term sick among working-age people, reported in 2022, has grown by another 300,000. How much of this increase is down to historical underreporting? How much of it is due to a continued deterioration in our health? This distinction is important.
While the long-term sickness figures are shocking, they should not come as a surprise, as NHS waiting lists for treatment have doubled, from 4 million to almost 8 million, in the space of just five years, and this factor alone was bound to impact on our workforce. In addition, employers report that NHS waiting lists are also impacting the productivity of those who are in employment but waiting for treatment. Can I therefore ask the Minister: do we have any reliable updated data on how many economically active have been taken out of the workforce due to ill health in each of the years 2020 to 2023 and how many long-term sick were able to rejoin the workforce in each of those years? Breaking down those numbers by health condition or disability would be very helpful. These numbers are crucial to help the NHS apply its resources in a more targeted way, to help more of the sick to return to work, whether full-time or part-time, but without joined-up health and employment data, such a strategy will misfire.
My Lords, I congratulate my noble friend Lord Bridges on an excellent opening to this debate and all members of the committee on a really topical and important review—made even more topical by Monday’s ONS announcements, revealing how little we understand what is happening to the labour market and making his call for better data particularly important. I would like to draw on my position as president of the Resolution Foundation to make four practical proposals as to how we might tackle this problem by intervening at different ages of the life cycle.
First, among young people aged 18 to 24, we seem to have an increasing problem of inactivity, particularly due to ill health, which has doubled, and within that mental ill-health. There is clearly a complex link with low skills because, by and large, more educated young people, even if they report mental health problems, appear to be more likely to remain in work and in the workforce, so low skills and inactivity are linked to ill health, particularly mental ill-health. It is very tricky to challenge this, but I am increasingly concerned by the Government’s proposal to defund 200,000 BTECs—the 200,000 young people studying BTECs, a vocational qualification introduced back in the 1980s—in the expectation that they will instead do T-levels, which are currently taken up by 5,000 people and are a far more academic qualification. There is a real risk that the defunding of BTECs over the next two years will contribute to a rise in inactivity and worklessness among young people, as they find that there is no suitable educational altercation which justifies their remaining in study until the age of 18. I hope that the Minister will give us assurances that the effects of this phasing out of the funding of BTECs will not lead to an increase in worklessness.
Secondly, for women—it is preponderantly women—with children, especially less well-paid women working relatively small hours for low pay and unemployed mothers with young children, the Government have an excellent initiative to increase access to formal childcare. However, low-paid and less educated mothers are least likely to be accessing formal childcare; their childcare arrangements tend to be less formal and, therefore, they are least likely to be helped by the Government’s initiative, however welcome it is. There are two specific things that could be done to help them. First, they are very likely to be using childminders, but the regulations about childminding that is accessible and will be publicly funded are very strict, so a more liberal regime on funding childminding might help a group whom it would be particularly beneficial to get into the workforce. Secondly, although universal credit also helps with childcare costs, the processes are very bureaucratic. There is no specifically identified line of universal credit for your childcare and, if you increase your hours, there will be an unpredictable reduction in your total universal credit entitlement, even if you are using childcare to reduce your hours. Therefore, the free childcare option that the Government are currently pursuing is not sufficient to tackle inactivity among less-educated low-paid mothers with children.
My Lords, I am delighted to follow the noble Lord, Lord Willetts, even if his incisive analysis is an extremely hard act to follow—as was the introduction by the noble Lord, Lord Bridges. Like my noble friend Lord Layard, I was privileged to be a member of the committee under the chairmanship of the noble Lord, Lord Bridges, and his introduction was as excellent as his leadership of the committee, which benefited hugely from the work and intellectual rigour of the staff who supported and guided us.
Although seasonally adjusted economic activity fell in the period following the completion of the report, from 565,000 above pre-pandemic levels to a low point of 281,000 in March to May 2023, it rose again to the most recent public figure of 410,000. There remains, therefore, the worrying adverse divergence from the experience of most of our peers, who have returned to a position as good as, or better than, pre-pandemic levels. Despite the length of time that has passed since the committee published its report, let alone since it began to take evidence, the analysis and conclusions remain valid and speak for themselves. I propose therefore to comment briefly on only a couple of points.
The committee came to recognise just how complex the various factors were that lay behind the change in the level of economic activity. “It’s complicated”, as the Alec Baldwin/Meryl Streep movie is titled, albeit in relation to personal relationships rather than labour market dynamics. The committee started work on its inquiry only months after the end of Covid-related restrictions. This can be taken, perhaps, as a proxy for the pandemic becoming endemic, rather than disappearing.
It is not surprising, therefore, that many of us started with the suspicion that long Covid and other health-related issues lay predominantly behind the increase in economic inactivity. But, as we received evidence, it became clear that this was no more than one contributory factor. Four years on from the start of the pandemic, its impact on long-term health is still hard to measure with accuracy and confidence. But it is none the less clear that—as previous speakers have highlighted—chronic health conditions of all sorts, mental as well as physical, pose a significant macroeconomic problem, as well as an even more devastating one for the individuals unfortunate enough to be affected. The desperate state of the NHS exacerbates this problem. I have no doubt that economic inactivity will remain higher than it should until the investment in, and careful reform of, the NHS are implemented—which, to be party-political for a moment, a Labour Government will do.
12:28 pm
Lord Skidelsky (CB)
My Lords, I add my thanks to the noble Lord, Lord Bridges, for his consummate chairmanship of the committee that produced this report, and on which I had the privilege of serving.
We are faced with a great British mystery: The Case of the Missing Workers. It is an especially British mystery. In all developed countries, workers were furloughed during 2020-21 as industry was locked down, and when it reopened, they went back to work—except in the UK. There were 560,000 people who stayed at home—“excess retirees”. There is a striking table on page 13 of our report which shows how the UK was simply out of line with what happened in similar countries. Today, the excess inactivity number is still over 400,000, and is mainly people in their 50s.
Why is this a problem? A reduction in labour supply limits growth and produces inflation through higher unit costs. It puts us in the slow lane for economic recovery. However, there is a sub-mystery within the mystery: a shortage of labour is normally associated with a booming economy. You can hardly call our economy in the last couple of years a booming one. It has not exactly been shrinking, but it has certainly been stagnant. That is another issue that needs attention; I will come back to it.
The inquiry was about why the inactivity rate shot up post Covid. I cannot say that we made decisive progress in unravelling this mystery, and there are a couple of reasons why. The first, as the noble Lord, Lord Bridges, pointed out, is the inadequacy of the statistics. The statistical basis to come to firm conclusions was simply not there. More important was the complexity of the causes—what doctors call the comorbidities. There are so many comorbidities here that it is very difficult to say what causes what.
We learned a number of distressing facts, chief of which is that Britain is the sickest nation in Europe, with life expectancy now falling and with the worst access to healthcare of any European country. Deteriorating health and health provision pre-dated Covid and could not have been the main driver of the spurt in inactivity rates that we experienced after the lockdown ended.
We also have more flexible pension provision than other developed countries, allowing earlier retirement, but until the pandemic we had a lower inactivity rate than countries like us; we worked more hours, days and weeks of our lives than our European counterparts. So better pensions cannot be the explanation for the spurt in inactivity. Similarly, population ageing cannot explain short-run effects and Brexit has not reduced the net flow of immigrants, so it cannot explain overall labour shortage, although it can explain shortages in particular sectors such as hospitality and agriculture.
My Lords, I was a member of your Lordships’ Economic Affairs Committee when this report was produced, and I pay tribute to my noble friend Lord Bridges of Headley’s leadership of that committee.
We produced our report in December 2022. It then took about four months for the Government to respond and another nine months for us to get this slot to debate the report. As I have said before in your Lordships’ House, our reports really must be debated on a timely basis. The delay is a particular problem for this debate, not only because the data on which our report was based are out of date but because it is difficult to work out exactly what has happened subsequently, as my noble friend Lord Bridges and others referred to. The Office for National Statistics has paused its Labour Force Survey and is using new, experimental workforce data. We simply do not have a complete picture of what is happening at present.
In October 2022, there were 8.9 million economically inactive 16 to 64 year-olds, some 565,000 more than the pre-Covid era, which had been characterised by falling inactivity numbers. The latest figures published by the ONS, which my noble friend Lord Bridges of Headley referred to, show 9.3 million, reflecting a reweighting by the ONS. Other factors mean that the percentage inactivity increase is somewhat less. Whatever the precise number or percentage, there is clearly a problem and the trend is out of line with international experience.
As other noble Lords have said, the workforce participation rate is key to the growth of our country’s economy. The Office for Budget Responsibility’s 2023 Fiscal Risks and Sustainability report tested scenarios that increased or decreased health-related inactivity by 0.5 million. This moved the participation rate by a little more than 1 percentage point up or down, but the debt to GDP ratio moved by around 3 percentage points by 2027-28. Understanding what drives participation and inactivity rates is one of the most important issues facing economic management.
My Lords, I too congratulate the noble Lord, Lord Bridges, on securing this debate and on his speech, and the Economic Affairs Committee on its report. A number of factors were identified for the remarkable and increasing exodus from work. One was long-term sickness. Among other things, the report cited an ONS survey that found that 10% of those who were economically inactive gave as a reason mental ill-health and stress, about which my noble friend Lord Layard has spoken. A trade union general secretary pointed to the “intensification of work demands”. The report cites a survey that found that only 58% of UK workers aged 50 to 64 liked their job, compared with 74% in the USA and 73% in Germany.
I suggest that one critical factor in the “Great British mystery” cited by the noble Lord, Lord Skidelsky, and amplified in his question, “Where have all the good jobs gone?”, is that pay, terms and conditions in the United Kingdom have become so bad that those who can are opting out or being invalided out. Taking pay alone, according to the ONS, median pay in November 2023 was £2,299 per calendar month, or £27,588 per annum. By definition, half the UK’s workforce earns even less. True, half the workforce earns more—the pay of FTSE 100 CEOs is about 116 times that of the median worker, up from 11 times in 1980—but the well paid are few in number. The fact is that only 25% of our wage earners earn more than £42,300 a year, and one-quarter of the workforce earns less than £16,068 per annum. The real value of average weekly earnings, including bonus, was the same in November last year as it was in March 2007.
Consider, as an example, the food sector. The workers who grew or caught our food, processed it, sold it in shops and supermarkets, and transported and delivered it were hailed as heroes during the pandemic, but that praise did not enhance their living standards. The Bakers, Food and Allied Workers Union recently published a report, Foodworkers on the Breadline, which showed that over 60% of its members did not have wages high enough to cover their basic needs, 88% had reduced their heating, and 60% had reduced their food consumption to cope. The other side of that equation is captured by the UN Trade and Development Report at the end of last year, which stated:
20 of 45 shown
With that Big Ben-sized caveat about the data in mind, I turn to our report. It found that between 2020 and late 2022, the UK’s workforce had been squeezed by four factors:
“retirement among those aged 50-64; increasing sickness; changes in the structure of migration; and the impact of an ageing UK population … an increase in the numbers in age groups which have lower participation rates”.
We concluded:
“The reduction in labour supply has been driven by an increase in economic inactivity, in particular amongst 50-64-year-olds”.
The causes appeared complex. The biggest contributor to this rise in inactivity had been an increase in the number of people leaving work and considering themselves retired rather than leaving work primarily due to worsening health. Although the population was getting sicker, much of the rise in sickness-related inactivity was among people who had already been out of work rather than people who were employed becoming inactive due to sickness.
I have asked our experts whether these findings, especially those about retirement, are now invalid given what we now know about the data. I was told that they are still valid, mainly because the longitudinal version of the LFS—the one that follows the same people from one quarter to the next—is less likely to be vulnerable to the statistical issues that have dogged the rest of the LFS, especially as regards response rates.
Alongside this trend, changes to the structure of migration also had an impact on specific sectors seeking workers for lower-paid roles. Many EU workers who did these jobs left the UK. Counterbalancing their departure was the arrival of non-EU workers granted visas under the new immigration scheme, which prioritises skilled workers. This contributed to a mismatch within the labour force, accentuating labour shortages in these sectors.
Finally, our report draw attention to the impact of the ageing UK population. Before the pandemic, ageing was driving down labour supply, but this effect was masked by other trends towards higher participation. The key difference since the pandemic has been that the ageing effect was reinforced rather than offset by those other factors.
It has now been a year since our report was published; events have moved on. I will turn to the lie of the land now, and especially what we learned from Monday’s ONS bulletin, so as to frame this debate. Officials now estimate that the adult population is 750,000 larger than previously thought. That is a city the size of Sheffield which has suddenly emerged. That alone I find astounding. More worrying still is how this has contributed to inactivity, which has risen to 9.25 million, 414,000 more than previously estimated and back to near its Covid peak. While inactivity in the UK is still below that of the other EU countries and below 2010 levels, the fact that more than one in five 16 to 64 year-olds are economically inactive poses an enormous challenge for our society and our economy.
The largest reason for this is what I and our report touched on: long-term sickness. Monday’s bulletin revised this figure up to 2.8 million people: 200,000 more than previously forecast. We bandy figures around but let us just pause here. On my estimates, 2.8 million people is roughly equivalent to the populations of Stoke-on-Trent, Middlesbrough, Coventry, Cardiff, Bournemouth and Edinburgh combined. It is an astoundingly large figure. These people are typically older; they are suffering from poor mental health—I very much look forward to the noble Lord, Lord Layard, talking about this—or other specified conditions, and it is worth noting that the rapid rise among 16 to 24 year-olds appears driven by mental health; they are relatively low skilled; and previously they worked in lower-paid jobs. As our report found, the vast majority who are inactive for health reasons have been inactive since before the pandemic. Roughly 1.5 million have been out of work for three years or more, and half a million have never had a job.
The OBR’s fiscal risk report, which also came out after our report, cited three factors that may be causing this: a slowdown, and in some cases partial reversal, in the rate of improvement in many health conditions that predated the pandemic; the impact of the pandemic on the health of the working-age population; and
“the degree of ongoing assessment, conditionality, and return-to-work support for those on health-related benefits versus other out-of-work benefits”.
It is worth noting that the OBR says that the
“numbers on incapacity benefits have increased sharply over the past three years”,
and that:
“The expansion of conditionality and rising rates of sanctioning in the non-incapacity parts of the means-tested, working-age welfare system may have made applying for (largely unconditional and often-more-generous) incapacity benefits more attractive”.
We must stress “may”, and remember that this is only one factor. Longer NHS waiting lists and the strikes may also have contributed to inactivity due to long-term sickness rising, although it is worth noting that the OBR states that halving the waiting lists would reduce inactivity only by 25,000.
All this underlines a core point in our report. We need to understand much more about the causes of this trend and what can be done, to help these people not just to become healthy but to find a job. This is key, because the OBR said that these numbers
“remain on an upward trajectory”.
No one here wants to see ever-growing swathes of our communities trapped in a terrible, vicious cycle of ill health and inactivity. Nor can we afford this to happen. Inactivity puts pressure on welfare spending: 80% of those inactive receive incapacity benefits. It results in lost revenue: £9 billion this year. It pushes up health spending: each person who becomes inactive due to ill health costs the NHS between £900 and £1,800 a year. Consequently, inactivity due to ill health adds to borrowing: almost £16 billion since the pandemic. According to the OBR, if the working-age population falls for another year and remains there, and half a million more people are out of work for health reasons, that could add £21 billion to borrowing by 2027-28, which is more than we will spend on policing in England and Wales this year.
This is happening against the backdrop of two other trends. The first is migration. We know that net migration hit a record high of 740,000 in 2022 and is forecast under latest estimates to average 315,000 a year in the long run. The second trend, coming back to our report, is our ageing population. The demographic shift, as we said, comes through quite abruptly right now, and will put yet further pressure on our public finances, accentuating the need for growth to pay for this.
This highlights another question we need to ask ourselves. Is it right that growth is to be powered in part by immigration of 315,000 a year while hundreds of thousands of people are off sick and too ill to work? Are we doing enough to help them get back into the workforce?
Therefore, coming back to our report and what we ask the Government to do, I will be most grateful if my noble friend the Minister can shed light on three things. The first, as I have alluded to, is the ONS. It is absolutely critical that it addresses the failings of the statistics. I would like him to tell the House what the ONS is doing to ensure that our statistics, and those core statistics, are fit for purpose. Secondly, as our report asks, what is being done to encourage older people back into work? We made a series of proposals here, including those looking at pensions and other things, but also suggested practical measures. I will be grateful if he can highlight that. Thirdly, the most worrying thing for me is the rise in long-term sickness. What is being done specifically to address inactivity in that group and help that group also find work?
Inactivity combined with an ageing population, low growth, low productivity and high levels of debt makes for a dangerous cocktail. If we do not have a fit, dynamic workforce, how will we get the growth that we so badly need? We urgently need to understand the reasons behind the rise in activity and we need to do much more to address it.
I want to talk about a programme that we have, NHS Talking Therapies, with which I have been associated. It now treats 700,000 people a year; half of them recover within a course of treatment, which averages eight sessions. The Chancellor has wisely given the programme another £600 million to expand over the next Parliament but this programme covers only people suffering from depression and anxiety disorders. There is another large group of people who are unable to work because they suffer from addiction to alcohol, drugs or gambling, as well as people who suffer from personality disorders that either make them anti-social or make them self-harm. Hardly any of these people receive any form of psychological therapy from the NHS yet they have very low employment rates—lower than for people with depression or anxiety disorders. They suffer and cause others to suffer, and they cost the country a lot of money. We need a programme parallel to NHS Talking Therapies to provide psychological therapy to this group too; I would like to see this as a commitment in every party’s election manifesto.
How does the programme for addiction compare with the case for other types of expenditure? Our group at the London School of Economics is analysing the relationship between benefits and costs across a whole range of public expenditures. For example, in road building, the average ratio of benefit to cost is about three to one; it is less than that for many rail projects. However, as I said, the benefits obtained by psychological therapy for anxiety and depression are zero costs, so surely the case for expansion there is absolutely overwhelming. Our calculations also suggest a cost-benefit ratio that could go up to 25 to 1 with psychological therapy for addiction and personality disorders.
Our policies for economic growth are too centred on things and not centred enough on people; that is the fundamental point I want to make. For example, we shamefully neglect the skills of people who do not go to university, although even the Department for Education estimates a cost-benefit ratio of seven to one for apprenticeship—double that in road building—because of, again, the effects on employment and earnings. We should, within five years, be guaranteeing an apprenticeship to every qualified person who wants one; in my view, this is another election pledge that every party should be considering.
When one looks at the pattern of public expenditure, the tragedy is this: the small sums needed to transform people’s lives are so difficult to raise while we splash out on physical infrastructure, which makes much less of a difference to people’s lives. Going back to mental illness, according to the OECD, it reduced GDP by at least 4%. It is mainly a disease among people of working age whereas, as we know, physical illness is mainly a disease among retired people. Yet, despite all the rhetoric over the past 20 years, the share of mental health spending in the NHS budget has not increased at all. It is time for that to change. The economics are clear: mental health should be the number one component of a strategy for growth.
Let me provide one example—the condition of migraine, which I raised in a Question to the Minister last year. The cost to the economy through working days lost due to migraine is estimated at between £5 billion and £10 billion per annum, yet the NHS spends just £150 million per annum on treating a condition that impacts 10 million people across the UK, the majority of whom are of working age. That is a mismatch—an economic as well as a health own goal.
Numerous studies have also shown that economic inactivity is bad for your health—none more so than for the hundreds of thousands of those who are off work suffering from poor mental health, where inactivity hits them not just financially but in terms of anxiety, self-esteem and general well-being, as the noble Lord, Lord Layard, so eloquently explained. Studies have shown that, for the 64 to 75 age group, working part-time or full-time is better for your health than retirement, in terms of mental and physical health. That is even more relevant to an ageing population such as the UK’s, as we need some of this cohort to return to the workplace. Perhaps I could hold up this House’s workforce, with your Lordships’ average age of 72, as a shining example of the benefits of an extended working life.
I was tempted to amend the report’s title to “Where Has All the Workers’ Productivity Gone?”, because demographic and health trends tell us that it will be very difficult to grow a workforce beyond the current 33 million who are active other than through immigration. The only sustainable way to grow out of economic stagnation is by addressing worker productivity. Output per hour lags Germany and France by 12% to 15% and the US by 18% to 20%. The UK’s productivity has been a long-standing problem ever since the financial crisis of 2008, since which an historic average of 2.3% annual improvement has slowed to a miserly 0.5%. That remains the economy’s qualitative problem. I do not have time to address the so-called productivity puzzle other than to point out that the declining health of our nation is strongly correlated to our poor productivity rates. While it is true that we do not have enough people in work, it is also true that those who are economically active are not active enough.
Thirdly, on sickness and the links between sickness and inactivity, the committee draws attention to the fact that, sadly, being long-term sick seems to lead to people disengaging from the labour market. We on these Benches are always very wary of more labour market regulation—our labour market is already very heavily regulated—but, at the moment, when you cease receiving sick pay from your employer and go on to sickness benefit, you lose all rights to remain in contact with, and have the potential to return to, your employer. There is an argument for a right to return for the long-term sick, in order to keep them in touch with their employer. Such an initiative that is worth considering.
Fourthly, on older people, as the committee explains, the British model, with a higher rate of pension income from funded savings and less dependence on state benefits means that the benefit regime is less shaping behaviour—you keep on working until you get your benefit—and behaviour is more influenced by private pension savings. The Government already have some proposals in place for increasing the age at which you can access your private pension savings without tax penalty to 57. There is a strong case for raising that age further, so that if you wish to access your pension savings, you have to remain in work—you are not able to do so without a significant tax penalty—until you are even older than 57. I have always been rather a hardliner on raising the pension age. I personally think that the obvious way to help offset the enormous costs of the triple lock is to carry on raising the pension age as rapidly as possible. At least the proposal is to link the tax relief—the tax benefits—to pension age minus 10, but I think pension age minus 10 is too generous; we should have a more ambitious goal so that people are able to access their funded savings only at a later age.
Finally, I very much agree with the points in the committee’s report that, although there is frustration about what has happened to the stock of economically inactive people, we should focus in particular on the flow of people into economic activity; there is more we can do there and that should be the policy priority. Although it is rather a cliché at the end of every piece of policy research to say that more data is needed, on this occasion it really is very important. As my noble friend explained in his powerful opening contribution, the labour market statistics, particularly the Labour Force Survey, are now in a total mess. Nobody can make sense of what is happening, the ONS has confessed it cannot really understand it, and this is an area where more data and research are certainly needed.
Early retirement emerged as arguably the most significant factor behind the economic inactivity changes, as the noble Lord, Lord Bridges, highlighted. The committee questioned whether this would, at least to some extent, reverse itself as the cost of living pressures then emerging pushed early retirees back into the labour market. I think the caution expressed in the committee’s conclusions is being borne out, but, if there is little likelihood of many of that cohort of early retirees returning to work, whatever measures might be introduced, it is highly likely that this is essentially a one-off phenomenon.
There were a number of factors that appeared to encourage early retirement with no significant adverse health issues in this cohort. Arguably, the experience of lockdown during the pandemic and, in many cases, support through the furlough schemes, offered individuals a trial period of a changed lifestyle—a number of witnesses concurred with this. Less well explored, and a subject I hope for future work, is the possible effect of a long period of low interest rates that will have enabled mortgages to be paid off earlier, facilitating early retirement, even if occupational and state pension entitlements on their own, as described by the noble Lord, Lord Willetts, might not have made this so financially feasible.
Even if the early retirement trends in recent years have contributed to the labour market issues on which we are focused, I suspect that this is an ephemeral issue and that future generations are more likely to need to continue working beyond their preferred date of retirement, rather than being able to anticipate it. Migration trends were the subject of a particularly interesting evidence session with Madeleine Sumption of Oxford University's Migration Observatory and Professor Jonathan Portes. Though they argued that the move from EU to non-EU driven immigration, resulting from Brexit, was not itself a major factor in overall labour market changes, it posed a significant problem for certain sectors such as hospitality and agriculture, where shorter-term flexibility in migration is so important; Professor Portes warned against becoming dependent on migration in the care sector in particular.
It is hard not to feel that Mel Stride’s announcement last year that the measures announced in the spring Budget represent the conclusion of the DWP review of workforce participation is a signal that the Government do not really get the severity of the problem and the need for the improvements in data from the ONS that the noble Lord, Lord Bridges, referred to.
So we are left with unexplained lifestyle choices. I quote from paragraph 81 of the report:
“It is possible that people got used to different habits and ways of working during the COVID-19 pandemic, which prompted them to reflect on their careers”.
Indeed that is possible, but the unanswered question is why we should have been so much more reflective than the Germans, French or Americans.
There is also the question that we skirted around: how many premature retirees would like to return to work if they could? Our report took the view that retirement was a positive, not reluctant, choice and would not be reversed by increasing the aggregate demand for labour, but I am quite sceptical about this. It is plausible that people choose not to work because they are discouraged by persistent insufficient demand for their services and just leave the labour market. Retirement, for those who can afford it, is an alternative to unemployment benefit. Labour supply cannot be separated from labour demand; in other words, it is a macroeconomic and not just a microeconomic problem.
To start in another place, why should the rising inactivity rate pose a challenge for the economy? We are talking about the human activity rate. The challenge to the economy is not that there is a shortage of labour but that there is a shortage of machines to replace the jobs being evacuated. The report hints at this when it says that some sectors are destined to shrink unless they are “replacing labour through automation”. So one can say that the problem with the economy is that inactivity is growing faster than innovation or, to put it another way, people are leaving the workforce faster than they are being rebranded. This is a long-term problem, which Covid-19 might have speeded up. But one has to dig deeper.
The report cites a survey by Phoenix Insights, which suggests that British workers aged 50 to 64 dislike their jobs more than the same cohort in Germany and the United States: 58% in the UK like their jobs, compared with 74% in America and 73% in Germany. In other words, people retire early or work less not just because they are financially able to but because they do not like their jobs. This brings out a fundamental truth: we work not just because we have to but because it gives meaning to our lives. This is something that economists, who treat work as a disutility, have never understood.
The case of doctors is one of the most popular. There is an acute shortage of GPs—doctors of working age are leaving the profession faster than new doctors are entering it—because they have lost their sense of vocation. Doctors tell you this all the time.
The revelation that so many people dislike their jobs has opened up a field of inquiry beyond the scope of our short report. The question we asked was: where have all the workers gone? I suggest that the subject of a subsequent committee report should be: where have all the decent jobs gone?
Behind the headline increases of economic inactivity, we found two key contributors: long-term sickness and inactivity among 51 to 64 year-olds. Most commentators, including the OBR, describe this in terms of the 50-plus age group getting sick and therefore leaving the workforce. Our examination found a different explanation, in that the over-50s became sick after they had decided to leave the workforce.
We really do not know much about the drivers of long-term sickness or early retirement. We were much encouraged during our evidence sessions that the Government were carrying out a workforce participation review. Several of our recommendations were aimed at ensuring that the review addressed many of the grey areas that we had identified. We thought that more work should be done on long Covid and the impact of NHS waiting lists. We wanted the review to focus on whether there had been a secular change in attitudes to work in the 50-plus demographic, and what could encourage them to stay in or return to work. We also recommended further work on the impact of savings and the furlough scheme on inactivity.
It was disappointing that the Government’s response to our report made no reference to the workforce participation review. My noble friend Lord Bridges of Headley then wrote to the Secretary of State for Work and Pensions, who replied saying that the review had resulted in a number of changes in the 2023 Budget. However, there was no sign of the further work that we had suggested. I find it curious that the Government do not want to get to the bottom of the issues impacting workforce participation and inactivity.
The government response, as is typical of government responses, listed lots of initiatives of varying degrees of significance. I do not doubt the Government’s desire to reduce economic inactivity. What I cannot see is a forensic approach to the problem. The initiatives might well produce results, but it is not clear that they are underpinned by a clear understanding of the underlying issues. This does not appear to be the best way to proceed.
I will highlight just one other area dealt with in the report, namely the impact of ageing on the UK’s workforce. This is not a new phenomenon, but in the past the reduction in the workforce due to retirement was masked by other factors, in particular the increased participation in the workforce of women. A simulation by the Bank of England shows that population ageing is increasing, knocking about five percentage points off the workforce each year by about 2032. Other factors are thought to be broadly static, so ageing will start to be a really big factor in the size of the workforce. The implications of this for economic growth are clearly significant.
In addition, successive reports from the OBR have shown how demographic changes contribute to a dramatic increase in the growth of debt as a percentage of GDP. The Government must face some difficult decisions, including about pensions and taxation, pretty soon if a longer-term financial crisis is to be avoided.
The response to our report was described as “the Government’s formal response”, but it came from the Department for Work and Pensions and ignored the broader economic issues of an ageing population. I hope my noble friend the Minister will be able to respond on behalf of the whole of government, including the Treasury, when he winds up.
“The last few years of commodity price volatility have coincided with a period of record profit growth by global energy and food traders. In the area of food trading, the four companies that conservatively account for about 70 per cent of the global food market share registered a dramatic rise in profits during 2021-2022”.
Nearly half the population of the United Kingdom are workers: 32 million out of 67 million. In its report UK Poverty 2024 from a couple of weeks ago, the Joseph Rowntree Foundation tells us that 14.4 million people were living in poverty in 2021-22, and that nearly 3.8 million people experienced destitution—a 148% increase in just over five years. That included 1 million children—nearly three times as many as in 2017. Low pay is a principal contributor. Two-thirds of working-age adults in poverty lived in a household where someone was in work. More people in work are reliant on benefits than those who are not in work.
The consequences of inequality are well documented, in terms of misery, hopelessness, mental and physical ill-health, homelessness, diminished life expectancy, increased perinatal mortality, damage to children’s education, increase in crime, and anti-social behaviour—see the brilliant work of Professor Sir Michael Marmot and that of Professors Wilkinson and Pickett.
I suggest that the major factor behind this state of affairs is the collapse of collective bargaining in the United Kingdom. From the Second World War until the 1980s, the terms and conditions of around 85% of British workers were negotiated between unions and employers. Since then, collective bargaining coverage has been driven down to less than 25% today, so three-quarters of our workers—some 24 million of them—have no collective say over their terms and conditions, and next to none are in a position to negotiate individually. This lack of voice leads to both low pay and alienation.
International law, including the International Labour Organization, mandates the promotion of collective bargaining. The OECD annually recommends it in its employment outlook. Even the EU has now finally recognised the importance of collective bargaining. Its directive on national adequate wages requires member states to have an action plan to ensure that at least 80% of workers are covered by a collective agreement. I commend the course adopted by Sir Winston Churchill, who, as President of the Board of Trade in 1909, introduced a legislative scheme of compulsory sectoral collective bargaining to combat low pay, which became wages councils. The Labour Party is committed to a similar model in the form of fair pay agreements. Will the Minister say whether the present Government will fulfil their duty to promote collective bargaining and low pay?