Early signs suggest a stronger than anticipated initial recovery in output as the UK economy re-emerges from grasp of the COVID-19 pandemic, with both the International Monetary Fund and the National Institute of Economic and Social Research upwardly revising forecasts for UK economic growth in 2021. However, threats to the long-term sustainability of this recovery have started to materialise, with the gradual reopening of different sectors of the economy contributing to a widespread labour shortage.
According to the Office for National Statistics (ONS), the number of job vacancies over the three months through June 2021 was 9.9% above the pre-pandemic level recorded over the three months through March 2020.
The number of available workers declined at the fastest rate since 1997 in June 2021, according to the Recruitment and Employment Confederation. Mounting pressure on employers to fill vacant positions is expected to restrict productivity in the short term and contribute to the record highest rate of starter salary inflation, as recorded by KPMG’s jobs survey.
Many of the worst-affected sectors had contended with skills shortages prior to the COVID-19 pandemic, and with a significant number of foreign-born workers leaving the UK ahead of the deadline for the EU Settlement Scheme on 30 June 2021, these have been exacerbated following the reopening of the economy.
According to estimates from the Economic Statistics Centre of Excellence, 1.3 million foreign-born residents left the UK during the year through September 2020.
Although many of these workers are likely to have planned to return as the economy reopens, the implementation of stricter immigration rules following the end of the Brexit transition period is expected to limit the ability of overseas workers to resume their roles.
This article will explore the sectors that are expected to face the most acute labour shortages and the knock-on effects this will have along the supply chain.
Construction
The construction sector has been a key focus of the UK government’s strategy for economic recovery from the pandemic, with activity across the sector recording a swift rebound from initial lows in April 2020 to reach pre-pandemic levels of output by March 2021. This is symptomatic of trends in global construction markets, which has led to a shortage of key construction materials, contributing to record high cost inflation in the sector.
In the UK, materials shortages have been exacerbated by an acceleration of long-term skills shortages within the sector, spurred mainly by an exodus of EU workers.
According to the ONS, employment in the construction sector fell from 2.3 million in 2017 to 2.1 million in 2020, with the decline underpinned by a 42% fall in EU workers.
Access to new workers from overseas to replace these employees and other workers that were let go during the height of the pandemic has been significantly reduced following the implementation of the new points-based immigration system, with two-thirds of construction firms surveyed by the Royal Institute of Chartered Surveyors stating difficulties hiring bricklayers and carpenters.
Although the broader outlook for recovery in the sector remains positive, with the Construction Products Association forecasting a 13.7% increase in output in 2021, shortages of materials and labour contributed to an unexpected fall in construction output over the two months through May 2021.
It remains to be seen to what extent current shortages across the sector can be attributed to a short-term excess in demand; however, with an ageing pool of UK-born construction workers and plans for construction to underpin the UK economy’s rebuild, reduced access to overseas workers poses a significant threat to both the sector and the wider economy’s long-term recovery.
Manufacturing
The manufacturing sector has also been hit by shortages of key inputs following a post-pandemic surge in domestic and global activity. Firms have warned of potential interruption to the supply of essential items, such as food in supermarkets, due to these shortages, with high COVID-19 infection rates remaining the root cause of this disruption.
Despite showing signs of easing, rising infection rates since the initial outbreak of the Delta variant of COVID-19 have led to long periods of sick leave for factory workers, with several other workers instructed to self-isolate after being identified as a close contact of an infected individual. This has particularly affected food supply.
The Society of Motor Manufacturers and Traders stated that the ‘pingdemic’ and a global shortage of semi-conductors were the force behind a 38.4% fall in UK vehicle production over the six months through June 2021, compared with the previous five-year average.
Exemption rules for essential workers, in addition to the easing of self-isolation rules from 16 August 2021, are expected to reduce disruption for manufacturers. However, access to skilled labour is expected to remain constrained, with one-third of the 234 firms surveyed in the latest SME Trends Survey by the Confederation of British Industry citing fears over skills shortages.
Transport and logistics
Further along the supply chain, the rebound in large parts of the economy has stretched road haulage and logistics operators. There are a number of reasons behind this shortfall in workers, which has widened from 60,000 prior to the pandemic to more than 100,000 in June 2021.
In an industry already contending with an ageing workforce, just 15,000 HGV drivers completed their training in 2020, compared with 40,000 in a typical year.
This is because vocational driving tests were prohibited for much of the year. Several drivers have also returned to their country of origin as a result of the pandemic and tighter immigration rules, while the introduction of IR35 legislation has reduced the viability of agency labour within the sector.
Hospitality
Consumer-facing sectors such as hospitality have been among the worst affected by the pandemic, with revenue in the Full-Service Restaurants industry expected to have fallen by almost two-thirds in 2020-21. The reopening of hospitality at the beginning of 2021-22 has provided welcome relief to firms that were able to weather the storm; however, following such a long period of closure, companies in the sector have been greeted by a smaller labour pool than prior to the pandemic.
According to the ONS, vacancies in the Accommodation and Food Service Activities sector were 21.4% higher over the three months through June 2021 than they were over the three months through March 2020.
Long periods of enforced closure caused many workers to leave the sector in search of alternative employment, with chefs and front-of-house staff in shortest supply. Stricter immigration rules implemented following the UK’s exit from the European Union have also intensified shortages within the sector, with 90,000 EU workers leaving their hospitality roles over the past year, according to a report published by jobs site Caterer.com in August 2021. In addition to coronavirus-related self-isolation among staff, this has created significant disruption since the lifting of capacity restrictions in England on 19 July 2021.
Conclusion
Widespread labour shortages have been reflected by a decline in the UK unemployment rate, which fell to 4.8% over the three months through May 2021.
As the Coronavirus Job Retention Scheme (CJRS) continues to wind down before coming to an end in September 2021, the pool of potential candidates available to employers is expected to expand, easing cost pressures. However, the latest Bank of England forecast for unemployment is expected to peak at 5.5% following the end of the CJRS, representing a notable downward revision on previous estimates, and significantly below peak rates of unemployment in previous recessions. This points towards a limited boost to the number of available workers in the short term.
As the effects of tighter immigration rules and ageing workforces in specific sectors continue to unfold, policy-makers will be keen to address the longer-term structural mismatch of skills in the labour market. The government has already published a list of shortage occupations for which overseas workers are subject to less stringent rules on immigration; however, according to various industry trade groups, more needs to be done to reduce barriers to previously accessible labour markets.
The Bank of England has brushed off fears of inflation, which is expected to hit 4% later in 2021, stating that it is only a temporary phenomenon driven by a sudden rebound in demand. However, as skills shortages continue to push up wages in key sectors of the economy, the prospect of cost-push inflation increases. Coupled with a slowdown in output growth, this presents a significant threat to the UK’s economic recovery from the COVID-19 pandemic.
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