Action Needed in Budget to Deal with Workforce Shortages

Professor Alexander Nunn, Y-PERN Academic Steering Group member and Dean of Research, Leeds Trinity University

Wide-ranging and long-term support needed across a range of policy domains including employment services, skills, housing, transport, childcare, workforce wellbeing and immigration.

It is widely noted that employers are facing labour shortages. The latest data from the ONS suggests that around 12% of employers are facing a shortage of workers and that this rises to nearly a quarter in the ‘accommodation and food service’ sector and more than a fifth in ‘human health and social work’ organisations. These figures are more pronounced than they look though because of the effect of the large number of smaller employers who are less likely to report shortages. More than a quarter of employers with 10 employees or more report labour shortages. That said, the Federation of Small Businesses report that nearly 80% of small firms have struggled to fill a vacancy in the last 12 months.

In sum, workforce shortages are a major challenge now and unless urgent action is taken this will remain the case into the medium term.

There are a range of causes for the current shortage of workers:

  • Childcare costs and constraints – one feature of our current cost of living crisis is the price of childcare (which is also in part driven by a shortage of labour).  Costs and problems in access (e.g. childcare provision not matching work times) are preventing many families from working or working as much as they would like to.  This is a particular problem for women, especially lone parents, but it is a major problem for most families with children, even when in relatively well paid work.
  • Low pay and low quality work – while wages may be growing as a result of current labour shortages, relatively low pay (and low quality work) following decades of pay suppression is also likely to be part of the problem and adds to the cost of working crisis.  It would be a surprise to many that even workers in what might be thought of as relatively secure and high-status jobs might now be so low paid relative to costs of living that going to work is not financially rewarding.  Many now require significant help from Universal Credit to stay in work (2.3m people are working and rely on Universal Credit to make ends meet, almost 40% of those on UC).
  • Lower migration-  in the aftermath of Brexit and the various incarnations of a ‘hostile environment’ also drive labour shortages.
  • Ineffective matching of supply and demand – One notable aspect of our current labour market is that the number of vacancies reported over the last year or so roughly equals the number of people who are unemployed and available for work.  This hints at three issues: (1) poorly matched skills (those who are unemployed do not have the skills and experience to meet the requirements of vacancies), (2) poor levels of support for people bridging the gap between their current skills and those that employers are looking for and (3) problems with workers moving to areas where there are vacancies via commuting (because of transport problems; as anyone regularly trying to commute across the Pennines will readily attest) or relocation (because of the price of housing).

This is both a short-term problem and creates longer-term constraints on growth; as people withdraw from the labour market their skills lose currency and the likelihood of them returning to work at an equivalent skill level decreases. 

With all this in mind, Government action in the Budget to address each of these issues would be welcome:

  • Help with childcare costs through an uplift in Universal Credit payments has been promised already.  This is welcome but challenges remain and the prospect of this being matched by greater expectations for recipients may prove ineffective.
  • Measures to improve the skills offer and support for the unemployed rather than merely relying on benefit conditionalities are badly needed. This is not a matter of being nice or nasty to people that any one particular section of the electorate may see as deserving or otherwise.  Rather, it is absolute economic necessity that will benefit all of us through increased growth, increased tax revenues and a more socially just society.  The support needed is wide-ranging.  Part of this is about well-designed and accessible training matched to areas of skills growth in the economy.  However, it is also about other forms of support, notably mental health services and services supporting people with other needs such as addiction.
  • Special measures to incentivise older workers back into the labour market may be needed but there are some signs that this is already happening. However, the issues in our labour market that led to the Great Resignation were a long-time in the making.  Measures on the supply-side of the labour market will increase skills in the workforce, but reforms are also needed to improve pay, work quality and employee wellbeing.  Long-term structural change is required across a range of policy areas.  These include workplace cultures, improving employer skills utilisation and training provision.  They also include housing issues; housing costs have played an increasing role in overall inequality over a period of thirty years or more.
  • A new approach to migration – Successive governments have whipped-up an unhelpful political climate on migration and then responded to that climate by both rhetorically and materially constraining migration, especially, but not only, by ending EU free movement.  There are many reasons why this is problematic. Restoring the prospects for growth is just one of them. 
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