UK plan shows how not to deal with labor shortages

The problem we anticipated is not the one we had. Instead of high unemployment and a shortage of jobs, the pandemic has led to a shortage of workers in many countries. Last week, the UK government announced a plan to address this challenge. This is a great example of what not to do.

Faced with a record 1.2 million vacancies, ministers want to “get half a million people off welfare and into work”.

Under the new rules, jobseekers on unemployment benefit will have to seek employment outside their preferred profession or sector from the fourth week of claiming benefits, instead of three months. If they refuse a job offer from then on, they will be penalized by a reduction in their benefits.

It’s a bad solution to a problem that doesn’t exist. Worse still, it could make the problem that exists worse.

First, the policy will only affect a small fraction of the number of people benefiting from Universal Credit, the UK’s main benefit. Of the 5.7 million benefiting from universal credit, only 433,000 had been there for less than three months, including only 179,000 job seekers.

Second, nothing indicates that the newly unemployed are slow to find work. The number of people moving from unemployment to work every quarter has soared to more than half a million, the highest in nearly a decade. The unemployment rate fell rapidly to 4.1%, close to the pre-pandemic low in the labor market. Short-term unemployment is the lowest on record.

This is probably because there are already strong incentives in the UK for people to find work quickly. Basic unemployment benefit for a single adult over the age of 25 is just under £325 (€389.85) a month – well below the government’s own measure of absolute poverty, according to the group of the Resolution Foundation.

As a percentage of the jobseeker’s previous income, the UK has one of the lowest unemployment benefits in the OECD.

labor market

The reason the UK is short of workers isn’t because job seekers are too picky. This is because an army of people have left the workforce altogether.

The Institute for Employment Studies estimates that there are still 600,000 fewer people in work than before the pandemic, and more than a million fewer than if the pre-crisis trend of rising labor force participation labor market had continued.

About a quarter of this gap is explained by the decrease in the number of migrants, while three-fifths is explained by the fact that older workers leave the labor force.

Most academic studies show that sanctions push more people into employment, but they can also cause some people to leave their jobs altogether.

Also, more and more young people are studying and a growing number of people say they are too sick to work – possibly because of the long Covid, although we don’t yet have enough data to know.

Other countries, such as the United States, have also seen declines in participation. Policy makers are not necessarily powerless against these trends, but tougher penalties against job seekers will not help. They might even make things worse.

Most academic studies show that sanctions push more people into employment, but they can also induce some people to leave their jobs altogether, for example by opting for early retirement or the underground economy. A study of UK data by the National Audit Office found that after a sanction people were as likely to stop claiming benefits without finding work as to find a job.

Getting people to accept jobs outside their field can open up new opportunities, but it can also push some into unsuitable roles that don’t use their skills. The process of recruiting for a decent job, from application to offer, can take upwards of four weeks, especially if it involves more than one round of assessments or interviews.

Penalized

Research in Sweden found that those penalized were more likely to end up in part-time employment at a lower professional level, “suffering human capital losses”. It’s hard to see how this would support the government’s stated goal of fostering a “high-wage, high-skills, high-productivity economy.”

Companies with vacancies might not benefit either. A survey of employers in the UK and Denmark found that many disliked welfare conditionality, which they said led to large numbers of unsuitable people applying for vacancies simply because otherwise they would lose their benefits.

Most employers “want a matching job, not a conscripted workforce,” as Elizabeth Taylor, executive director of the Association for Employment Related Services, put it.

There are serious debates to be had about why people leave the labor market and how policy makers can respond. But it is politics as theatre: ignorant of the facts and indifferent to the consequences for individuals, employers and the economy. – Copyright The Financial Times Limited 2022

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