Chart of the Month – November 2021

UK vacancies are at a record high. November’s Chart of the Month examines the causes behind this unprecedented labour shortage and its implications on the UK’s economic recovery.

During pandemic restrictions, domestic aggregate demand for consumer goods and services slumped. Businesses faced sharp falls in revenues and a loss of profitability. Without government support, many firms would have shut their doors forever.

To prevent irreversible job losses, the government stepped in to support firms through the furlough scheme and heavily subsidised loans. This cushioned the economic damage of the first lockdowns.

Thanks to a fast vaccine rollout, the UK has managed to temper the worst of the pandemic (touch wood). The end of restrictions released the latent demand within the economy.

However, soaring demand has not been met with an increase in output supplied. Generous government handouts have allowed workers to re-evaluate their careers and pursue more fulfilling jobs. This improvement in allocation of resources may boost productivity in the long run, but is currently contributing to a record shortage of workers. Our graph shows that shortages are particularly acute in the hospitality sector, where workers have long reported low levels of job satisfaction.

Restrictions on immigration appear to have exacerbated the problem, although it is difficult to disentangle the effects of the pandemic and Brexit. A disproportionate number of low-skilled workers originated from EU countries: this supply of labour has now ended. Low-skilled migrants filled a niche in the UK labour market, allowing domestic workers to specialise in other industries. 

Despite substantial wage increases, UK workers appear unwilling to return to these industries. From July to September 2021, the number of job vacancies rose to a record high of 1,102,000. This is an increase of 318,000 from the UK’s pre-pandemic level.

These vacancies have been caused partially by a contraction in labour supply, and partially by an expansion in labour demand. However, November’s chart shows that the ratio between vacancies and jobs has risen to 3.7: the increases in vacancies has outstripped increases in total jobs. In this case, supply-side factors appear to be more significant than demand. 

The sustained disequilibrium in the labour market has contributed to current supply-side bottlenecks, placing upwards pressure on the price level. To pay for higher wages, firms have raised prices to protect their profit margins.

Rising inflation causes a fall in real living standards. It also affects the poorest households the most, as they immediately spend a greater proportion of their income.

If inflation expectations are to set in, the economy may fall into an inflationary spiral: workers demand higher wages because of higher living costs, and businesses raise prices to pay for higher wages. Rampant inflation is costly to society and may prompt a contractionary fiscal and monetary response, leading to austerity and higher interest rates. To stop inflation, policymakers may have to make a trade-off with growth.

Today’s Question of the Month is:

“How might policymakers ease current labour shortages? Is raising the minimum wage an appropriate response?”

Data Source:

https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/datasets/vacanciesbyindustryvacs02

Notes:

The headline vacancy estimates are based on three-month averages, which naturally include time lag.

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