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Overly generous Covid government spending has broken UK job market new report finds

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The British economy has been held back by a flight of workers from the jobs market and staff electing to work fewer hours after the pandemic, tied to overly generous Covid government spending, a report has claimed.

Participation in the labour market is still below its pre-pandemic level, which the Bank for International Settlements, the central bank of central banks, said had been caused by “health concerns” and “large” government pandemic fiscal support.

“Workers’ preferences have shifted in favour of fewer working hours,” the BIS said, adding that “subdued growth in working-age population” in Britain and other developed countries had tightened labour markets.

The UK and other advanced European countries rolled out unprecedented job protection measures, such as the furlough scheme, during the pandemic. While that limited economic scarring, the BIS said it may have damaged the long-term labour supply.

Britain is grappling with a sharp increase in economic inactivity, when someone is unemployed and not looking for a job, which has prevented companies from expanding. An increase in long-term sickness — linked with large NHS waiting lists and the lingering effects of Covid — has driven a reduction in workforce participation.

Despite the country’s economic slowdown, unemployment has barely risen, confusing experts who had expected it to accelerate amid falling spending and higher interest rates. According to the Office for National Statistics, unemployment fell to 4.2 per cent in the three months to September. In October, the statistics agency released an estimate of unemployment based on a new survey, which found it had been much lower over the spring at 3.5 per cent.

The BIS said that anticipated difficulties in hiring workers amid a tight labour market had prompted businesses to “hoard” staff, helping to keep unemployment low. Typically during periods of weak growth, joblessness increases. However, the BIS said companies had elected to reduce working hours instead of trimming back staffing levels.

Weakening business conditions tied to the damaging impact of the Bank of England’s tightening of monetary policy is expected to increase unemployment over the coming year. The Bank has raised the UK’s base interest rate to a 15-year high of 5.25 per cent, from a record low of 0.1 per cent.

Lingering tightness in the jobs market has been identified by the Bank as the main risk that could keep inflation above the 2 per cent target for some time. Wages have accelerated at the fastest pace on record this year thanks to a combination of businesses seeking to attract staff and workers demanding pay increases that offset the impact of inflation.

Inflation has fallen to 4.6 per cent from a 40-year peak of 11.1 per cent. The Bank has emphasised that it is not considering lowering borrowing costs soon. The BIS said that sustaining such a commitment in Britain, where “labour market tightness is more persistent”, would involve “starker” policy trade-offs.

Low unemployment alongside declining inflation has boosted hopes that the world’s biggest economies will be able to tame price pressures without experiencing recessions, known as a “soft landing”. The American economy expanded by more than 5 per cent in the third quarter and inflation in the United States is down to 3.2 per cent. Eurozone growth is negative, with Germany, the bloc’s biggest economy, on the brink of recession, but inflation fell faster than expected last month to 2.4 per cent.

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