The Mysterious Case of the Missing Workers

No work, please – we’re British!

It seems that much of the UK is short-staffed. Local workers seem to be hard to find, whether sales assistants in Next or fruit pickers in the ‘garden of England’. It is not surprising, then, that there are growing calls to relax immigration rules and import foreign workers to fill vacancies, not least in the hospitality sector.

This is particularly true for the UK’s largest employer, the National Health Service (NHS). Last year, over half of all new nurses joining the NHS were from overseas. But that is only half the story. The other half is that, as a country, we have consistently failed to train up enough nurses to meet demand and have resorted to ‘stealing’ them from poorer countries than ours, such as the Philippines and Romania. This is a long-term failure of policy on the part of successive governments of all political hues.

The same is true in the private sector which, especially after the accession of the eastern European formerly communist countries to the EU in 2003, became overly dependent on cheap foreign labour. During the last 15 years of the UK’s membership of the EU, two thirds of the growth in the labour market was accounted for by foreign-born workers. Thus, we learnt on 2 November that, according to the 2021 Census, out of the 59.6 million residents of England and Wales in March 2021, 49.6 million (83.2 percent) were born in the UK and 10.0 million (16.8 percent) – about one in six − were born abroad.

The size of the non-UK-born population has risen by about one third since 2011, when it was 7.5 million (13.4 percent). So, anyone who voted Brexit in the hope and expectation that mass migration to the UK could be halted will have been disappointed. In fact, UK work visas have been issued at a rate of 8,500 a week over the last year – the highest number on record.

Some will argue that all those visas go to “skilled” people, that is to say people with skills which are in demand. At least they are working here legally. There is a separate issue concerning the illegal immigration of undocumented workers who just disappear into the black economy. Its workforce is also thought to be at record levels even if we don’t have the exact numbers.

The fact that over 40,000 people have illegally arrived by dinghy across the Channel this year is evidence that word has got out that the UK is a place where people can easily live and work in the black economy. That is something that makes the French and others apoplectic with rage – they think we have brought this affliction on ourselves by refusing to require ID cards, even in digital format. They have a point.

In many advanced economies, such as Japan, labour shortages have accelerated automation and robotisation – but not in the UK. Here, farmers bemoan the lack of pickers, even as Japanese farms automate at speed.

But labour shortages have been exacerbated by the contraction in the British labour market by at least 320,000 since the pandemic struck in March 2020, according to figures from the Department of Work and Pensions. Huw Pill, chief economist at the Bank of England (BoE), puts the figure for labour-market contraction at 600,000. In fact, the contraction of the labour market is much more dramatic than that, and the root cause is the UK’s dysfunctional welfare system.

About 16 percent of the working-age population of Rotherham, where Next and others are looking for shop workers, are on out-of-work benefits. Rotherham is not the only town in the UK where widespread jobs vacancies coexist with large numbers of people who should be economically active but who are not. Birmingham, Glasgow and Liverpool have about 20 percent of the population on out-of-work benefits. In Blackpool, it is 25 percent. Something has gone badly wrong.

One issue is that the NHS is not doing its job of providing prompt health care where it is needed. There are now over seven million people across the UK awaiting treatment. Many such people – possibly 2.5 million − are genuinely unable to work; other sick people could work but, understandably, don’t want to. One factor, which has been insufficiently discussed, is that many people’s mental health and wellbeing were affected by the pandemic lockdowns.

Another issue is that the introduction of universal credit (UC), which was rolled out from 2013 onwards, has made it more difficult to identify how many of its claimants are in work and how many are not. UC was the brainchild of Sir Iain Duncan Smith and was designed to make applying for benefits more straightforward and to encourage people to get back into work.

The official unemployment rate – which refers to those who are actively seeking work and can prove it – is at a historic low of 3.6 percent. But this is misleading. According to Fraser Nelson, editor of The Spectator, the number of people who are of working age but not looking for work is around 5.3 million or well over 10 percent of the entire adult population. That is an unofficial figure because it depends on how you crunch the data. Labour’s shadow employment minister, Alison McGovern MP, cited a figure of three million in the House of Commons the week before last.

Many studies suggest that gainful employment is beneficial to physical and mental health. Therefore, it would serve both the UK economy and its citizens’ quality of life if a good proportion of those who are not in work could be incentivised back into the labour market. That would also reduce the need to import foreign labour, legally or otherwise. Until this happens, declining productivity and thus declining growth will remain on trend.

One possibility is that some early retirees will be forced back into work because their pension pots are unequal to the challenges of the cost-of-living crisis. This week, leading recruitment agency, Reed (private), revealed an eight percent rise in applications by job seekers since the beginning of September.

At the same time, data from the Recruitment and Employment Federation, found that job offers for permanent positions fell in October for the first time in two years, while vacancies dipped by 133,000 below record highs to a still huge 1.2 million. We all know that the big tech firms such as Meta and Twitter are “de-hiring” at scale; but now small and medium-sized businesses in the UK are taking a defensive stance and resisting increases in their payroll costs.

The BoE expects that unemployment will rise to around five percent by early 2024, given the expected recession next year. That probably means an end to the “golden hellos” offered by the likes of British Airways and Tesco until recently. Interestingly, LinkedIn is reporting a decline in the number of “remote”, aka working-from-home-based positions. Despite the welter of strikes in the public sector, the balance of power is swinging back to employers.

What Christmas-pudding sales tell us…

On Wednesday (16 November), BoE governor Andrew Bailey told MPs that early retirement and long-term sickness had caused a “labour force shock” unique amongst rich nations. The number of people unable to work due to long-term chronic conditions was 2.5 million, he thought. The contraction in the labour force is one of three inflationary forces, he said. The other two are supply-chain bottlenecks caused by pandemic lockdowns and Russia’s war in Ukraine.

The Bank had already opined that a super-tight labour market will result in further interest-rate rises despite mounting fears of an imminent recession. People are now cutting back on spending because their disposable incomes have been hit by higher fuel, food and mortgage costs. The London School of Economics reckons that the “Brexit effect” has pushed up food prices by six percent more than would otherwise have been the case. A cutback in household spending means lower sales for businesses and an economic slowdown which, in turn, implies lower future tax revenues.

A precious economic snippet was released by Kantar last week. The number of people who had bought Christmas puddings by the end of October was down by one third on the year before. That might indicate delayed consumption (they will buy their Christmas puddings at the last minute) or, possibly, substitution (they will make their own Christmas puddings at home). And fewer households bought pumpkins for Hallowe’en this year compared with last year. Figures from Barclaycard suggest that spending in restaurants is down by 10 percent.

The Institute for Fiscal Studies (IFS) has found a significant rise in the number of single working-age men living on low incomes. Successive governments have prioritised support for pensioners and families over one-person households.

All this means that a priority of the Tory government, which must hold a general election by January 2025 at the latest, should be to get economically inactive people back into work. The welfare state was launched after World War II by the Labour government under Clement Attlee (1883-1967) as a “safety net” for the less well off. It was never intended to provide lifestyle choices.

It was Gordon Brown who, as Tony Blair’s chancellor, introduced in-work benefits in the form of working tax credits, which incentivised employers to keep wages low and to import cheap labour wherever possible. Now, people can only get working tax credits if they qualify for child tax credits; but people on low wages who are in work are still getting their earnings topped up by UC, taking the pressure off employers to upskill and pay higher wages.

The way things stand there are perverse incentives in the system. Many more people are going to become ensnared in the higher-rate tax band of 40 percent as wages rise with inflation while tax bands are frozen. As soon as a parent’s income approaches the 40-percent threshold of £50,270, their child benefit is reduced. Given that the cost of childcare in the UK is the second highest in the OECD, and is not tax-deductible, it is not surprising that some parents think that it’s not worth working all hours, and that they would be better off working part time.

The autumn statement – more gloom

Yesterday (17 November) Jeremy Hunt delivered his autumn statement against a backdrop of deteriorating economic data. Deutsche Bank estimated that the UK economy shrank by 0.6 percent in Q3 (the official figure was minus 0.2). Inflation for October came in on Wednesday at 11.1 percent – higher than expected.

Real household incomes in the UK dropped by 3.5 percent between Q4 2019 and Q2 2022, according to the OECD – and the drop will be even bigger next year. That’s worse than any other G-7 nation. In France, the drop was just 0.3 percent. Since growth in Q2 was marginally negative and was down by another 0.2 percent or thereabouts in Q3, the UK is officially in recession. So, stagflation is now a reality.

Hunt’s plan, as revealed yesterday, is to fill in the fiscal black hole with about £25bn of tax hikes, combined with about £30bn of (eventual) spending cuts. I’ll take a look at the slew of forecasts on growth inflation and borrowing from the OBR in the near future; but the key takeaway from yesterday is that pensioners and welfare recipients have been prioritised over those who graft.

Orchestrated pre-budget leaks forewarned us that we would be hit with higher capital-gains and dividend taxes, higher levels of council tax and even a hike in the cost of registering a new company. The UK was once rightly admired as a place where it was straightforward to start a business. If that reputation is lost, then few investors will want to launch new businesses here.

When Hunt ran for the Tory leadership in the late spring of 2019, following Theresa May’s resignation, his proposal was to reduce corporation tax from 19 percent to 15 percent. Now, he is raising it to 25 percent, making the UK a less attractive destination than France. What’s more, the Tories stood for election in December 2019 on a pledge not to raise income tax, national-insurance contributions or VAT. That pledge has effectively been broken. Voters in 2024 will not have forgotten that.

Tax bands are now frozen until 2027-28 and the VAT registration threshold frozen until 2024-25; there will be a lower threshold for higher-rate income tax and capital gains tax (CGT) is about to become more punitive. As Camilla Tominey asked in the Daily Telegraph last week, why would anyone want to start a business in the UK today?

A country with a rising economic inactivity rate, falling productivity, stalling growth and inexorably rising welfare costs − partly as a result of generous in-work welfare payments for low-skilled migrant workers − has a bleak future.

Add to that increasing chronic illnesses such as diabetes, obesity and drug addiction, which keep people off work, driven largely by what I call cultural poverty. Few people at food banks look skinny and even fewer know how to cook (or, as Nigella would say, how to eat), even if they carry top-of-the-range iPhones in their pockets.

After 12 years of Tory rule, taxes are higher and NHS waiting lists longer despite huge budget increases. We have more civil servants; unions are more militant; and inflation is rampant. Energy security has been imperilled by the rush to net zero. Food security is threatened by incoherent agricultural policy. A significant proportion of the populace is entirely dependent on state hand-outs. The buy-to-let market, which provides a critical social good, is distressed. Illegal immigration is out of control. And now taxes are going up.

It is as if the ‘Thatcher revolution’ never happened. Until we have a government which espouses self-help, hard work and ambition, and which rewards risk-taking, the current economic malaise will continue. Alas, there is no augury of such a government yet.

Crypto: the republic of the nerds is dead

The truth always comes out in the end. Cryptocurrency never had any intrinsic value and the people who believed in it were generally second-lifers, conspiracy theorists, tax exiles, gangsters, geeks – and, oh yes, hedge-fund ‘heroes’ and state-sector pension funds.

FTX attracted hundreds of millions from blue-chip backers including Blackrock and even the Ontario teachers’ pension plan. As recently as last January it was valued at $32bn. But when FTX folded last week with liabilities of $9bn, its founder Sam Bankman-Fried – a man with a PhD in virtue-signalling − went from multibillionaire status to bust in just a few days. His backers lost their investments entirely. Bankman-Fried admitted to having “f****** up, big time”. There will still be those who think that cryptocurrency is the future of money but, whatever it is, the FTX saga proves that it is not investible.

Let’s hope the appalling “metaverse” goes the same way.

And in the same week, the millennials’ favourite online furniture store, Made.com, became the first significant retailer to be taken down by the cost-of-living crisis. At least Made sold tangible products like sofas. Its chairman until 2016, working alongside its founder, Ning Li, was Brent Hoberman who was co-founder with Martha Lane-Fox in the 1990s of Lastminute.com, a one-time market darling before the dot-com bubble burst.

Made never came close to making money and yet was floated in June 2021, valued at £775m – three times its 2020 revenues. The share price evaporated to almost nothing as the company burnt through its cash. Made will live on in the cyberspace afterlife: its brand name has been purchased by Next.

Then a purveyor of upmarket clothing, Joules, which is listed on AIM, appointed administrators this week after emergency fundraising talks failed. Joules was worth £140m when it listed in 2016.

In times of persistent inflation and recession – stagflation – investors need to be just as concerned with dropping losers as with picking winners.

Listed companies cited in this article:

• NEXT PLC (LON:NXT)