Labour shortages to exacerbate UK's economic contraction

The United Kingdom is set to experience a demographic time bomb as severe labour shortages and a tight recruitment market threaten to worsen an expected economic recession.

Unemployment in the UK is set to peak at 4.9 per cent in 2023, while over the next 12 months, the UK economy has been forecast to dwindle by 1.4 per cent.

Fresh data from the Office for National Statistics showed the amount of job vacancies from October to December was 1,161,000 – a decrease of 75,000 from the previous quarter.

The ONS also revealed quarterly jobs growth fell for the sixth consecutive period, going backwards by 6.1 per cent in October to December 2022, with vacancies falling in 14 out of 18 industry sectors.

In October to December 2022, total vacancies were down by 85,000 from a year ago but remained 365,000 above their pre-pandemic (COVID-19) January to March 2020 levels.

The number of unemployed people per vacancy was at 1.0 during September to November, which was up slightly from the previous quarter (June to August 2022) but remained indicative of a tight labour market, the data revealed.

Donal Laverty, Consulting Partner at Baker Tilly Mooney Moore in Northern Ireland, says 2023 is set to be characterised by most economies experiencing a “recessionary kind of mode,” of varied scales.

“Ultimately, the labour market can be characterised by the fact that we’re sitting on a demographic time bomb,” he says.

“All of the world’s advanced economies don’t have enough people to fill the jobs available and we don’t have enough people with the right skills to fill them either.

“So we’re not properly equipping and skilling people to the jobs required now and we all recognise how roles are changing. So that’s fundamentally down to policy and bad government planning.”

Unlike recessions of the past, this recession will not be known for its aggressive impact on high unemployment, but will instead have a different impact, Mr Laverty says.

 “That’s primarily due to the fact that there are historically high vacancy rates in the economy and that goes back again to the shortage of labour,” he says.

“Now in the UK, that’s been exacerbated by the fact that there’s a missing 600,000 people.

“The shortage of labour can be attributed in part to the impacts of Brexit, tighter restrictions on overseas workers and challenging public pay environment.

“These things are all conspiring to create anomalies in a job market, a market with high levels of vacancies and where there are still high levels of recruitment activity.”

Continuous industrial strike actions within the broader public sector were creating a grim environment, Mr Laverty says.

“I’m not quite sure what the end game and all of that is, but some people are leaving the public sector going into the private sector, where wages are trending higher” he says.

“The current economic situation is highly charged and volatile, but it means that the number of candidates remains low, and employers are chasing the same talent pool and that creates a tight recruitment market.”

While the ONS predicts unemployment in the UK will peak at 4.9 per cent in the fourth quarter of 2023, Mr Laverty says this is in strong contrast to April 1993 recession data, where unemployment hit 13 per cent.

“You’ve probably got a core three to four per cent who are economically inactive so (they) can’t work, won’t work,” he says. 

“So, you know, that in this current recessionary period less people are going to be laid off.”

“While vacancy rates are high and availability of talent is in short supply, and there is a sense that unemployment will remain low, that’s not to say, though, that all sectors are going to withstand the pain of the of this recession because as the cost of living crisis bites, and it’s beginning to bite, some sectors are probably going to take a bigger hit than another – we’re seeing that currently in the IT sector”

Mr Laverty says that in the recent past, there have been historical instances where the UK economy was weaker, but with a current combination of high-interest rates and a shortage of money, some sectors – notably manufacturing and construction were the sectors set to suffer most in 2023.

“Those sectors get hit quite quickly, and that’s probably where you will see some job losses, but most of the sectors will probably be able to withstand that given the general trends in labour shortage and high levels of vacancies,” he says.

“And I’d say the character of this recession will be less than a ‘whole economy’ impact. It’ll be much more sector-specific.”

At present, the UK and Ireland are at full employment of 74 per cent to 75 per cent, Mr Laverty says, with no additional talent coming into the workplace.

“We have a million plus vacancies in terms of across all sectors,” he says.

“So, if anyone wants to work at the moment, even if they are laid off in their own sector, there are jobs there.”