Bank of England and Treasury officials have been laser-focused on the problem of the UK’s shrinking workforce, but now faults in official data raise doubts as to whether they are tackling the right problem.
While other countries saw a post-pandemic surge in employment, the UK stood out for the rising share of older people shunning the jobs market, apparently due to debilitating ill health.
Bank of England rate-setters saw this as a key reason for labour shortages that were holding back output and fuelling wage growth, making inflation higher and more persistent in the UK than elsewhere.
Chancellor Jeremy Hunt has made tackling economic inactivity a priority, with a £4bn expansion of free childcare for working parents, a £2bn push to help people with health conditions into work and a tougher benefits regime for some who are no longer seen as sick enough to merit support.
But this diagnosis of the UK’s economic woes turns out to have shaky foundations.
Last month, the Office for National Statistics scrapped its usual monthly publication of labour market data because the survey on which the figures are based produced results that looked too unreliable to use.
Instead, it drew on tax records and claims for jobless benefits to publish bare-bones estimates of the UK’s employment and unemployment rate, with inactivity simply calculated as the residual.
Economists say the methodology underpinning these estimates looks flawed, and that because problems with the statistical agency’s Labour Force Survey (LFS) are deep-rooted, previous figures the ONS has left unrevised are also unreliable.
This means the BoE’s monetary policy committee will be meeting to set interest rates on Thursday without basic information on the state of the labour market.
“I think a lot of the story of the last couple of years . . . is looking more questionable now,” said Andrew Goodwin, chief UK economist at consultancy Oxford Economics. “I think it’s a big issue,” he added, arguing that now-discredited data showing a sudden rise in unemployment was “a big part of the reason the BoE stopped raising interest rates in September”.
The LFS has been hit by falling response rates, a long-term problem that is shared by many statistical agencies around the world. The demise of landlines; the spread of hoax callers; the plethora of competing surveys and concerns over data privacy make it hard to persuade people to devote time to answering detailed, personal questions at regular intervals.
But while the US Bureau of Labor Statistics has flagged similar concerns, the response rate to its Current Population Survey, the nearest equivalent to Britain’s LFS, still stands above 70 per cent, down from about 90 per cent a decade ago.
The UK’s problem is far more acute. The response rate to the LFS stood at 38.5 per cent just before the outbreak of Covid forced the ONS to stop in-person interviews. The most recent results, which the statistical agency decided were unusable, were based on a response rate below 15 per cent.
The ONS cannot be sure whether earlier results, which still formed the basis of its latest estimates for unemployment and employment, were skewed by certain types of people becoming more or less likely to respond than in the past. A further complication is that it has not yet been able to update the way it weights responses to take account of recent, rapid changes in the size of the UK’s population.
The result is that policymakers could form a very different view of the labour market depending on which data source they use.
The ONS is relatively confident of its estimates for the rate of employment and unemployment, which it puts at 75.7 per cent and 4.2 for the three months to August. It is much less sure of how many people this represents. Nor can it currently be split by age, region, industry or occupation.
Going by the LFS, employment only briefly regained its pre-pandemic level by the spring of 2023, before falling into a fresh decline. But HMRC payroll data and a separate survey of employers paint a different picture, in which the UK has gained a million employee jobs since 2020.
Meanwhile a swath of information for which the LFS is the only source — including the extent of self-employment, or the reasons that are keeping some people out of the workforce — is simply unavailable.
“This is a really big issue . . . Lots of policy decisions are hanging on this,” said Hannah Slaughter, economist at the Resolution Foundation think-tank.
The ONS will give more details this Thursday on which figures it plans to publish in the coming months while waiting for a revamped version of the LFS to yield results from the spring.
It hopes this new survey, already running in tandem with the existing one, will resolve many of the recent problems, capturing a bigger and more representative sample of the population because it will run primarily online — with researchers following up by phone or in person to nudge them.
The BoE is worried, however, that it could face a long period of uncertainty while the ONS is struggling to patch over the holes in its current data. Even once the new survey is fully up and running, it will be difficult to know whether its results are strictly comparable with those of the old one.
Despite the many uncertainties, economists say they remain confident that ill health and disability are constraining the UK’s workforce given the steady rise in applications for incapacity benefits and the lengthening NHS waiting list. But it has become harder to assess the scale of the challenge, or to track how the jobs market is changing as higher interest rates take their toll on economic activity.
The data sources on which the ONS was now relying could “imply that the labour market is tighter than it really is”, because they left out key groups who might be more likely to be looking for work at present, including migrants and older workers who could not claim unemployment benefits, said Gabriella Dickens, UK economist at consultancy Pantheon Macroeconomics.
“Greater uncertainty about the state of the labour market could result in the MPC becoming more cautious in its policy response to labour market news,” noted James Moberly, economist at Goldman Sachs.
