Why are UK workers exiting from the Labor Market?
Difference between UK and Japan

Not-in-labor-force shows different trends in UK and Japan

In the labor force survey, those who are neither employed (employee + self-employed worker + family worker) nor unemployed are classified as not-in-labor force. They are a part of the population who are not engaged in the labor market. In the developed economies, the trend of the not-in-labor-force is watched with interest because, in the situation where aging and shrinking of the population is taking place, there may not be enough workers to support the economy in the future.

Figure 1 shows how the not-in-labor force in various countries changed under the COVID-19 pandemic. It shows that, compared to 2020Q1, it showed a steep increase in 2020Q2 and stayed high for a while before returning to its original level in 2020Q3 in the case of Japan, and returning in 2021Q2 for the Euro-zone countries. In 2022, it started to fall below the level in 2020Q1 in both Japan and the Euro-zone countries. In that sense, we can regard that any changes that have taken place in these two as being transient.

In contrast, the trends in the United Kingdom (UK) and the United States (US) is different. In both countries, not-in-labor force remains to be elevated even as of now. In these countries, a structural change seems to have taken place so that the trend do not return to the level before the pandemic. In this month’s column, we will pick-up UK and try to understand what has happened with regards the not-in-labor force in the country.

Exit from the UK labor market is notable in those who are aged 50 or over

Figure 2 shows the no-in-labor-force by age groups in UK. According to the figure, there were some fluctuations after the outbreak of the pandemic, mostly increases, in the age groups covering 16-49, but have returned to what they were in early 2022. In contrast, age groups covering 50-64 and 65 or over has increased towards early 2022 and remained high thereafter.

This is quite different from what we saw in Japan. As Figure 3 shows, in all age group except 45-54, not-in-labor force in Japan has fallen below the level in 2020Q1 by early 2023. Even the age group 45-54, even though it is slightly above the level before the pandemic, it is almost back to the level in 2020Q1. As far as not-in-labor-force is concerned, the impact of the COVID-19 pandemic seemed to have been transient in Japan.

Not-in-labor-force of those aged 50 or over increased for both genders in the UK

Figure 4 looks at the changes that have taken place in UK for males and females separately. It shows that, for females, not-in-labor-force remains high in both of the age groups covering 50-64 and 65 or over. As for males, it is falling in the age group 65 or over, but remains high in the age group 50-64.

Reasons for the increase in not-in-labor-force in the UK

What are the reasons for the increase of not-in-labor-force in the UK?

The result of the survey asking the question is shown in Figure 5. It shows that, during the early days of the pandemic, the main reasons were “other” and “student.” “Other” include people who are waiting the results of a job application, who have not yet started looking for work, and who do not need or want employment. “Student”, on the other hand, includes those who do not need to work, and who has lost a job and no longer seeking for a new one. What is notable is that those who are not-in-labor-force because of these reasons have returned closer to their original level by early 2023.

In contrast, what still remains to be high is those who replied that they are not-in-labor-force because they are “long-term sick.” It is true for both males and females. This should be the reason why there are more who “does not want job” than who “wants a job” among the not-in-labor force, as Figure 6 shows.

What increase in long-term sickness means

Why is long-term sickness increasing? What does it mean?

These questions are subject of debate in the UK. In order to clarify these points, the Economic Affairs Committee of the House of Lords published a report entitled Where have all the workers gone? in December 2022, and the Business, Energy and Industrial Strategy Committee of the House of Commons published its report entitled Post-pandemic economic growth: UK labor markets in April 2023. Readers who are interested in the details are asked to read the reports. A summary of their conclusion is as follows.

As for the “long-term sick”, both reports think that this may not be the reason why they became inactive and joined the not-in-labor-force. You cannot deny that “long-term sick” has been a problem in the UK but this has been a problem since before the COVID-19 pandemic. It is true that those who responded that “long-term sick” is the reason for “currently being inactive”, but it would not mean that it is because of “long-term sick” that the person “became inactive”. The understanding is that those who became inactive for some reason (about which we will discuss next) became “long-term sick” later and is now a person who “does not want a job”.

Early retirement seems to be the real reason

Then what is the reason for becoming inactive? The reason that both reports suggest is “early retirement”. There is a number of reasons for choosing early retirement.

The trigger was the change in the way workers worked because of the COVID-19 pandemic. Because of the pandemic, remote work became popular and people experienced a different working style. Also, many were placed on leave. Since it was such a difference compared to what it was before the pandemic, workers became mentally stressed and led them to rethink their work-life balance.

During the pandemic, UK introduced a program, similar to the Employment Adjustment Subsidy program in Japan, which offers subsidy to firms that retain workers by placing them on leave (Coronavirus Job Retention Scheme; from March 2020 to September 2021). It is said that the workers, while they were able to keep the job, were left alone and were not given supports from their employers. That kind of a situation seemed to have gradually deprived their willingness to work. Some points out that satisfaction that workers got from working in UK was low to start with.

The workers who retired early were also able to do so because they were workers who had enough assets such as their own houses, and were covered by defined benefit pensions that could be drawn early.

Facing this kind of a situation, there is a sense of crisis in the UK. Since aging and shrinking of the population is expected to bring down economic growth, there is an urgent need to see more contribution from those who are not-in-labor-force, especially the elderlies.

The reports make a number of policy recommendation. They include, for instance, such recommendations as (a) to provide elderlies with opportunities for training; (b) to improve access of elderlies to flexible working; and (c) to consider introducing menopause leave for female workers. Furthermore, in order to secure employment opportunities for the elderlies, establishing something like the “silver human resource centers” in Japan is proposed (Report by the House of Commons, paragraph 204).

Will Japan face a similar situation?

So far, Japan has not faced a situation where not-in-labor-force, including the elderlies, has increased significantly. As we saw at the outset, it is a big difference from the situation in the UK.

Japanese elderlies have strong desire to work. Since life expectancy continues to become longer (with the exception of the period under the COVID-19 pandemic), and situation surrounding public pension is becoming increasingly uncertain (including the possibility of eligibility age for public pension being put-off), there are also conditions which make elderlies uncomfortable to stay at home and become a member of the not-in-labor-force.

But the conditions that led to an increase in inactivity in the UK also exist in Japan: there are elderlies with assets and eligibility to receive pensions who may feel stressed at work or on leave so that they start thinking about more life-work balanced way of living.

In that respect, it is important for Japan to learn from UK experience and prepare any policy measures in advance so that we can make use of them when they become necessary.