UK employment growth to slow dramatically in next decade, report suggests

Commentators urge government to take action now to avoid continued skills and labour shortages

Credit: Fernando Trabanco, Appleuzr/DigitalVision Vectors/Getty Images

Employment growth in the UK is set to halve in the coming years due to an ageing population, falling birth rates and lower labour market migration, according to new analysis.

The research by the Institute for Employment Studies (IES) and abrdn Financial Fairness Trust – which is being published as part of the interim report from the Commission on the Future of Employment Support – found that employment grew by 300,000 a year on average between 2000 and 2020, yet is forecast to drop to about 120,000 between 2020 and 2040.

This is the equivalent to 3.4 million fewer people in work by 2040, than if the trends of the last two decades had continued. 

Jon Boys, senior labour market economist at the CIPD, said the employment support offer is underserved due in part to “falling unemployment rates in the pre-pandemic job boom”, which meant that “the market was doing the heavy lifting and policy intervention could be light touch”. 

“Now that the smoke is clearing from the pandemic, we are seeing persistent skills and labour shortages,” he added.

According to Recruitment & Employment Confederation (REC) deputy chief executive Kate Shoesmith, the report illustrates “how desperately the country needs a workforce plan from government”.

“It should also work with labour-market experts to better understand and address the causes of economic inactivity, such as the scope of back-to-work schemes and the provision of childcare,” she added. “The picture painted of continued labour shortages in today’s report shows why businesses must look to broaden their help by building deeper partnerships with recruiters.”

Tony Wilson, lead report author and director at the IES, said that the analysis shows we are unable to rely on “ever-stronger employment growth to deliver future economic growth”. 

“We need a new approach that can help more people to get into work and be more productive in work, and that can work far better with employers, industry and wider partners,” he added. “If we don’t do this then we risk getting stuck in the rut we’re in now, of labour shortages, skills gaps, stagnant growth and high inflation.”

The report has called for major reforms to employment support in the UK to tackle labour and skills shortages and encourage higher productivity at work. It found that the current system, for example, prioritises the quantity of job search rather than its quality, and offers little to employers beyond vacancy gathering and advertising.

John McDonough, managing director at Recro Consulting, labelled the employability and skills system as “broken” and warns that the findings from this report should serve as a “huge wake-up call”.

“We cannot continue to sleepwalk with zero learning from government commissioners,” he said. “In my experience, it’s the refusal to listen, use evidence and course correct which is a root cause of this problem.”

Meanwhile, recent analysis by the OECD revealed that the UK has the least well-used employment service in Europe – fewer than one-fifth of jobseekers regularly access support, which is one-third of the European average, and one-quarter of the rates in France and Germany, according to the IES analysis.

Liz Sebag-Montefiore, ​director and co-founder of 10Eighty, said the UK needs “better quality services” in terms of careers and employment support.

“Relationships with employers have traditionally been the weak link in the public employment service,” she said. “Employers will pay more for what is seen as better service from private recruitment agencies and avoid insufficiently screened referrals from the public service. A robust knowledge of employer needs and effective targeting of direct referrals are lacking in the UK’s current publicly funded services.”

The IES report’s findings are taken from six months of consultation and analysis, gathering views from over 200 organisations and individuals.