This month’s labour market statistics point to a largely stable labour market. While there was a small uptick in unemployment and a slight drop in the employment rate, pay growth remained strong while vacancies remain higher than pre-pandemic which indicates strong demand for labour. However, inactivity due to ill-health remains at near-record levels which reinforces the importance of the new Government’s plan to boost employment support and improve job quality.

Labour market overview

This month’s headline indicators suggest that the labour market is steady. Employment decreased by 0.1 percentage points to 74.4% and unemployment edged up by 0.2 percentage points to 4.4%. Economic inactivity, which refers to people who are out of work and not looking for work, fell slightly by 0.1% and now stands at 22.1%. In a much-needed boost to workers, nominal regular pay (excluding bonuses) grew at a healthy 5.7% on the year, which is equivalent to a 2.2% increase in regular real pay. However, while pay growth remains strong, the labour market continues to be held back by long-term challenges that the Government must tackle in order to meet its central mission of boosting economic growth.

Government’s “Back to Work” plan is promising

The employment rate is 1.1 percentage points lower than a year ago and 1.8 percentage points lower relative to the pre-pandemic quarter (Dec-Feb 2020). The UK is the only G7 economy with a smaller workforce than before the pandemic with 195,000 fewer people in employment. The new Government has pledged to reverse this trend and boost the employment rate to 80% which is equivalent to increasing the size of the workforce by approximately two million workers. To do this, it recently announced its “Back to Work” plan which includes three central pillars:

· A new National jobs and career service to ensure people get the employment support they need

· Integrated work and health and skills plans designed by Mayors and local authorities

· A youth guarantee for all young people aged 18-21.

These policies are aimed to ensure that Work coaches at Jobcentres focus on providing employment support as opposed to monitoring claimant behaviour and compliance with conditionality requirements.

Review of punitive benefits system essential to change Jobcentre culture

However, the Government has not announced any measures to review or reduce the punitive side of the benefit system. Stringent work search requirements mean that claimants are often compelled to take on insecure and low-quality work in order to avoid getting sanctioned. This punitive approach often stigmatises claimants and undermines a Work coach’s ability to build a genuinely supportive and engaging relationship with benefit claimants. Previous Work Foundation research has found that this punitive system often has unintended consequences. We found that many UC claimants are unable to undertake training activities and attend courses that would help boost their employment opportunities because of the time it took for them to comply with the work search requirements they faced. Therefore, while the steps outlined in the Government’s “Back to Work” Plan are welcome, they are less likely to be effective if they are not accompanied by a review of some of the more punitive aspects of the benefits system.

Government’s employment rate target welcome but focus on job quality is essential

While boosting the employment rate to 80% is a welcome ambition, achieving that target should be not be at the cost of sacrificing job quality. In 2023, there were 6.8 million people in severely insecure work. These workers face a mix of financial and contractual insecurity and often struggle to make ends meet. More than one in two people (55%) on Universal Credit were in severely insecure work. In light of these figures, the Government’s “Make Work Pay” plan – that includes policies to ban zero-hour contracts, reform fire and rehiring practices and extend eligibility to sick pay and parental leave from day one – is a step in the right direction. These policies will help to drive up employment protections across the labour market. Better job quality will not only improve working lives but also, along with more job opportunities across the country, help incentivise those who are economically inactive to return to the labour market and find secure employment.

Inactivity due to long-term sickness remains the central labour market challenge

Inactivity due to long-term sickness continues to be stubbornly high at a near record of 2.81 million and makes up 30% of the total inactive population. However, nearly one in four (23%) say they would like a job which equals around 600,000 people. There are no quick fixes to bring these numbers down. Tackling this challenge requires a cross-Government approach which involves reducing NHS waitlists, improving mental health support provision, and scaling up Universal Support – the voluntary employment programme for those unable to work. These steps are essential ingredients to help people get the health and employment support they need to return to the labour market.

Figure 1: Economic inactivity due to long-term sickness (March-May 2020 to March-May 2024)

Source: Work Foundation calculations of ONS (Office of National Statistics) data (18 July 2024) using Dataset A01, table 11: Economic inactivity – People aged 16 to 64 by reason for inactivity (seasonally adjusted).

This month’s statistics highlight the scale of the Government’s task ahead

The new Government has inherited a challenging labour market with a workforce that is smaller and sicker than it was in 2019. While they have worked quickly to establish set out a new “Back to Work” plan and issued an employment rights agenda that has the potential to improve many workers’ lives, there are no quick fixes. Improving the state of the UK labour market is likely to take time. The Government needs to ensure that the new employment rights for workers are properly enforced, Jobcentres can genuinely support people to access high quality work, and that its industrial strategy increases employment opportunities across the country.

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