The job market is booming – but not everyone is taking advantage of it

Two groups of people you might expect would be sucked into work by this wall of demand for labour have not returned, writes Hamish McRae

As for over-65s, the disruption of the past months may also explain why so many have dropped out of work (Getty/iStock)

Let’s start with a puzzle. The UK job market is booming, with just under 29.5 million people on payrolls in January, the highest ever. The number of job vacancies is also at an all-time record, with 1.3 million unfilled posts. But self-employment is down. Indeed, compared with two years ago, the fall in self-employment has more than offset the rise in salaried employment, so that the total number of people in work is not quite back to its pre-pandemic peak.

Here’s another puzzle. The ranks of older workers – people over the age of 65 – had been rising steadily until the pandemic struck. Then, unsurprisingly, it fell sharply, and while it has recovered somewhat it is still well below its pre-pandemic level. The latest data from the ONS shows that two years ago 11.7 per cent of over-65s were in work – more than double the proportion from 20 years ago. But now it is only 10.7 per cent.

So, two groups of people – the self-employed and the elderly – you might expect would be sucked into work by this wall of demand for labour have not returned, or at least not in the numbers you might hope. It’s even more surprising when you consider that prior to the pandemic, numbers of both were rising fast. What’s up?

We can see bits of the explanation. As far as the self-employed are concerned, there has been some reclassification of jobs that were notionally self-employed but actually full-time jobs that should have been on payroll. The government tightened up on tax legislation, the IR35 rules, so that these contract workers would pay broadly the same income tax and national insurance as they would were they employees. The aim was reasonable enough, and the original legislation goes back to 2000, but while the change has caught a number of high-profile media figures, including many working for the BBC, there may have been unintended consequences.

The situation is still unclear, as the National Audit Office reported last week, but it does seem that some self-employed people have dropped out of the workforce as they don’t want the hassle of proving their status, and some companies have stopped using self-employed people as they are concerned they may be breaking tax rules. The rules came into full operation last April, but even employment lawyers are puzzled as to how they will eventually work in practice. So while the principle of IR35 is admirable, it almost certainly is partly responsible for the very tight market for certain skills.

Other parts of the explanation include the fact that many self-employed people are in activities that have not yet fully recovered from the pandemic. These include the visual arts, corporate events, some parts of the hospitality business, travel and tourism – and so on.

For older people who have switched to self-employment towards the end of their careers, there may be the option of early retirement, perhaps funded by the rise in property prices. For others, it may simply be a result of disruption. If you have had to shut down your business, it may not be worth restarting it. Better to take a job instead, since there are so many of them on offer.

As for over-65s, the disruption of the past months may also explain why so many have dropped out of work. What has happened in the past is that every time the pension age is increased, there is a jump in the number of over-65s staying in work. You would expect that.

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The Institute for Fiscal Studies reported last month that as a result of the state pension age going up from 65 to 66 for men in December 2018 and for women in October 2020, last year there were 25,000 more men and 30,000 more women of this age in employment than would have been the case had the state pension age remained at 65. But this is mostly because people stay in the jobs they are already in, rather than taking on new ones. So if those jobs were put on furlough, or lost altogether, the chances are that older workers would move out of the labour force. As with the self-employed, the property boom may also have helped some would-be retirees bump up their pensions.

We are still in the middle of all this, so maybe, as post-pandemic normality returns, both these sources of labour will revert to normality too. It would be good news if that happens because countries with high employment rates, such as Switzerland, the Netherlands and Japan, tend to have good social outcomes more generally. The UK is relatively high on the employment league table too, but I expect that there will be a lot of soul-searching in the coming months as to how to persuade people who have dropped out of the labour market to do some form of work, maybe part time.

And that will mean making jobs more satisfying, treating self-employed people better, encouraging older workers – and so on. In short, trying to make people happier in the jobs they do at every level. Actually, that would be worth doing anyway, wouldn’t it?