Don't be fooled – under Covid-19 the UK labour market is in deep crisis

Rishi Sunak knows it. Andrew Bailey knows. Every economic pundit knows it. The UK labour market is facing its grimmest period in decades. It is not a question of whether the dole queues will lengthen markedly but by how much and when.

A cursory glance at the latest data produced by the Office for National Statistics would suggest the outcome is not going to be all that bad. Unemployment, on the internationally agreed measure, remains below 4% and has barely budged since the arrival of Covid-19 earlier this year. Employment was down 220,000 between the first and second quarters of 2020, which doesn’t look that terrible given that the economy contracted by a fifth over the same period.

But don’t be fooled, because neither the chancellor nor the governor of the Bank of England is taken in by these encouraging-looking figures for a minute.

The true state of the labour market has been veiled by two things. First, and most obviously, Sunak’s job retention scheme has meant millions of workers have been furloughed since March. In the absence of 80% wage subsidies, many of them would have been laid off.

Second, the way the figures are compiled means that someone is counted as unemployed only if they are both out of work and seeking employment. There hasn’t been much point in looking for a job while the economy has been locked down, so people have been classified as inactive rather than jobless. The government’s alternative measure of unemployment – the claimant count – provides a better guide to what has been happening. It has doubled since the start of the Covid-19 crisis and rose by 94,000 in July to stand at 2.7m.

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There’s more. The number of hours worked fell by a record 18% in the second quarter to 849m – the lowest level since 1994. On average, a worker put in 25.8 hours a week – falling by an unprecedented 5.6 hours on the quarter. Vacancies have more than halved over the same period.

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So, the true picture looks like this. Since the early months of the year, about 730,000 workers have been removed from company payrolls in the UK, a figure that would have been much higher were it not for furloughing. The labour market pain is being felt most keenly among the young, the elderly and the unskilled, groups that will struggled to find new job opportunities. The use of zero-hour contracts is rising fast.

August to October – the furlough phase-out period – was always going to be crucial because firms now have to decide whether to keep people on or not. The Treasury and the Bank of England await data for this period with some trepidation and rightly so. It will not be pretty.



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