Why has UK employment been so strong... and can it continue?

19 July 2018

By Mike Jakeman

The UK economy faces a difficult short-term outlook. Uncertainty around the country’s future trading relationship with the EU has caused business investment growth to slow, while a weaker pound has up inflation, diminishing real consumer spending power. In our latest UK Economic Outlook, we reduced our projection for real GDP growth in 2018 to 1.3%, from 1.5% in March.

However, these challenges have yet to subdue the vibrant labour market. According to the Office for National Statistics, the unemployment rate remained at 4.2% in March-May 2018, equalling its lowest level since the mid-1970s. The participation rate—the proportion of those aged 16-64 in work—hit an all-time high of 75.7%. But why is the labour market proving so resilient at a time of broader economic anxiety?

First, the strength of employment has been driven by women. Since the beginning of 2012, when employment began a concerted rise, women, who represented 47% of the workforce, have accounted for 52% of the increase in the size of the labour force. This has continued the long-term convergence in the gender balance of the workforce. The growth in female hiring has also been concentrated in full-time positions, which rose more than three times as quickly as part-time roles between 2012 and mid-2018.  

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The ONS identifies the increasing state pension age for women as one factor behind rising female labour participation, but there are likely to be other drivers too. In 2016 the government ended its practice of lifting working-age benefits in line with inflation. This is likely to have nudged women towards work, as women account for a higher proportion of benefit claimants than men. Other legislation has also changed. In 2014 workers were given the right to apply for flexible hours, while in 2015 the launch of shared parental leave made it easier women to return to work sooner after having children. Both shifts may have contributed to higher female employment rates relative to men.

More pensioners are remaining in their jobs, too. After remaining static at between 4% and 6% from the 1970s until the 2008-09 financial crisis, the proportion of those aged 65 and over in work has climbed to almost 11%. Our Golden Age index report suggests that the scrapping of the mandatory retirement age in 2011 and greater provision of training were factors contributing to this trend, but also notes that flexibility for women, in particular, who may have responsibilities to care for family members, is often insufficient to enable them to carry on working.

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Lastly, migration trends have led to an expansion of the UK workforce. Between 2012 and mid-2018 the number of EU migrants working in the UK rose by almost 900,000. The equivalent rise for non-EU migrants was less than 10% of that figure. EU workers have a consistently higher employment rate than both UK nationals and non-EU migrants, which has pulled up the overall rate. However, the EU workforce has shrunk by around 10% in the past six months, most likely in response to the Brexit vote and expectations of tighter visa requirements. Should this pattern continue, the positive influence of EU migration on the UK employment rate will weaken.

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Economists have identified several potential threats to the UK’s high employment rate but not all of these are convincing. In particular, we do not expect AI and related forms of automation to exert a significant effect on overall employment levels. Our analysis suggests that impacts will be small in the short run and, even over the next two decades, job creation from AI will broadly balance out job displacement, albeit with some large sectoral shifts. Likewise, past experience has shown that the economy is capable of absorbing higher minimum wages without major falls in employment levels. But we will continue to monitor the effect of changing migration patterns, particularly among EU nationals, and of a weakening domestic economy closely in the coming months to see if the exceptionally strong UK jobs growth since 2012 can be maintained.

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