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Exodus of more than half a million from workforce ‘puts UK economy at risk’

An exodus of more than half a million people from the British workforce since the Covid pandemic is putting the economy at risk of weaker growth and persistently higher inflation, a Lords report has warned.

The House of Lords economic affairs committee said the sharp rise in economic inactivity – when working-age adults are neither in employment nor looking for a job – since the onset of the health emergency was posing “serious challenges” to the economy.

Against a backdrop of severe staff shortages across the country, it said earlier retirement among 50- to 64-year-olds was the biggest contributor to a rise in economic inactivity of 565,000 since the start of the pandemic.

Rising sickness rates among working-age adults, as well as changes in the structure of migration after Brexit and an ageing UK population were also key drivers behind the rise of the “missing” workforce, it said.

According to the report, “Where have all the workers gone?”, workforce shortages exacerbated by the loss of these individuals from the labour market stands to damage economic growth in the near term, while also reducing tax revenues available to finance public services.

It said the fall in the labour supply could also add to inflationary pressure, as employers compete for fewer available workers by raising wages. Inflation slowed from a peak of more than 11% in October to 10.7% in November, still among the highest rates since the early 1980s. Average wage growth in the UK has strengthened to about 6% in recent months, although it remains significantly below inflation.

The report comes amid concerns over Britain’s position as the only country in the developed world with employment still expected to be below its pre-pandemic level at the start of 2023.

Reflecting the risks to the economy, the chancellor, Jeremy Hunt, used last month’s autumn statement to launch a review of workforce participation, which is due to conclude early next year.

Economists have warned that a deterioration in public services over recent years and record NHS waiting lists are contributing to the problem, amid a sharp rise in rates of long-term sickness.

However, the Lords report suggested the decision to retire early among 50- to 64-year-olds was the key driver of rising economic inactivity, with many appearing reasonably well off. Although it said this group may yet feel the full impact of the cost of living crisis, which could lead more people to return to work to meet rising expenses, it suggested that it was unlikely for a significant proportion of those who exited the workforce in 2020 to come back.

Separate figures from the Office for National Statistics published on Monday show those in economic inactivity aged between 50 and 65 years old who were considering a return to work were typically at the younger end of the age bracket.

Money was also an important motivation, particularly for those less likely to be able to pay an unexpected but necessary bill, or who were paying off a loan or mortgage.

Lord Bridges of Headley, the chair of the Lords economic affairs committee, said: “Taken together these findings are, like mid-winter, bleak. The rise in economic inactivity makes it harder to control inflation, damages growth and puts pressure on already stretched public finances.

“That’s why it’s critical the government does more to understand the causes of increased inactivity, and whether this trend is likely to persist.”

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