NERI Co-director Paul MacFlynn: Where have all the workers gone?

Where have all the workers gone?

Despite a furlough scheme designed to keep employees linked with their employer and prevent high levels of unemployment, a labour shortage is evident in some sectors of the economy. Co-director of the Nevin Economic Research Institute Paul Mac Flynn examines where the workers have gone.

We are in the midst of one of the most serious economic disruptions since the financial crash of 2008. Skyrocketing energy prices are set to overwhelm businesses and households as we face into many months of double digit inflation. While much of our current predicament can be linked to the geopolitical and humanitarian disaster that is the war in Ukraine, there were serious concerns regarding inflation that predate the outbreak of the conflict.

As the economy eased out from the pandemic, we were facing serious production bottlenecks as supply desperately tried to catch up with a newly resurgent demand. Microchip shortages held up new phones and car sales, while building material shortages sent the cost of construction spiralling.

One of the other significant pressures on the economy was labour. The furlough scheme that was introduced in the UK during the pandemic protected earnings for many workers throughout the crisis. What it also did was it kept people connected to their employer. This was an important design feature of the scheme.

In the Republic of Ireland, many workers became unemployed and were supported through out-of-work benefits rather than remaining on the books with their employer. The thinking behind the furlough scheme was that if workers remained connected to their employer, it would be far easier to start the economy back up once the pandemic danger receded.

That was the plan. However, since the reopening of the economy, we have heard many anecdotes about businesses crying out for workers but unable to fill positions or retain staff. Where have all these workers gone then?

The first thing to say is that there has not been an appreciable drop in the population. The number of people in Northern Ireland and the number of people within that of working age has increased at pretty much the same pace as it did before the pandemic.

The next thing to look at is whether the pandemic dislocated lots of people out of their jobs. The main employment statistics show that the unemployment rate, at 2.6 per cent, is incredibly low by historical standards and close to its pre-pandemic low point of 2.3 per cent. The employment rate has dipped slightly on its pre-pandemic low, but is above the average rate of the previous few years.

If high levels of unemployment are not what is causing a labour shortage, then perhaps there has been a large exit of workers from the active workforce. In statistical terms we refer to people outside the labour force rather clumsily as ‘economically inactive’. This proposition has gained traction at UK level with many suggesting that the departure of older workers has led to a sudden, and likely enduring, loss to the workforce.

Looking at the figures, we can see that there has been a marked increase in inactivity in both Great Britain and Northern Ireland. However, there are a number of points that need to be considered regarding that increase. Firstly, the increase in inactivity is significant compared with the pre pandemic period, but the current level is not significantly above the average of the last few years. Secondly, in Northern Ireland the increase in inactivity has been spread evenly enough amongst the age groups. In fact, the largest percentage increase was among the 16-24 age group.

The final point to be made is that Northern Ireland has always had an elevated and volatile level of economic inactivity. This has been attributed to many things, but chief among them is a higher level of long-term illness that prevents many potential workers from entering the workforce. So, while we have seen a bigger increase in economic inactivity than Great Britain over the pandemic, the truth is that we have experienced these levels of economic inactivity in the recent past and it has not led to the type of labour shortage we are experiencing now.

Shortage

So, if we do not have masses of people unemployed and if the proportion of workers outside the workforce is only marginally higher, where is this shortage coming from? The next place to look is inside the workforce and the people who are at work. Is it possible that while the number of people at work is not at issue, but where they are working is?

We may have the same numbers and proportion of people at work, but they may be working in different sectors or industries. When we did start up the economy again, staffing bottlenecks became apparent fairly immediately. Restaurants and the hospitality industry were among the most prominent examples. When we look at the figures though, the number of people employed in the accommodation and food sector is almost identical to what it was before the pandemic. The retail and construction sectors both saw significant reductions in employment in the last two years, but they also saw almost outsized increases in the two years that preceded the pandemic. If anything, the pandemic just evened that out.

So, people moving between industries might explain disruption in some sectors, but not others. As with economic inactivity though, it does not feel like these figures have the necessary scale to really explain why we are seeing such disruption in our labour market.

The last statistic to look at is one that is less reported than the others and that is hours worked. It was a pretty good indicator of the labour market at the start of the pandemic, but since then, we have paid less and less attention to it. Hours worked in the economy has still not recovered from the pandemic.

In April 2022 the total average hours worked in Northern Ireland was 32.8 hours. That is up from a low of 27.4 in April 2020, but well below 33.9 in 2019. The decrease in average hours is almost exclusively confined to full-time workers. Part-timers are working the same hours as they did pre-crisis, whereas full-timers are working an average of two hours less per week.

So, what we can gleam from these statistics is that: • a certain number of people have left the workforce since the pandemic;

• some sectors have lost and gained employment but others, including hospitality remain the same; and

• the average number of hours worked for full-timers has still not recovered.

A combination of all these effects likely explains our current labour market predicament. What we have to think about is why people leave the workforce or chose to work fewer hours within it. That brings us to other significant labour market issue of our time, pay.

While pay has certainly rebounded since the pandemic, the years that preceded it produced less than impressive wage growth. In order to build a strong and resilient labour force, pay growth and progression needs to be seen as a necessity and not a hindrance.

Economic inactivity rate (16+) NI and GB 2017-2022

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

15.0% 40.0%

36.3%

10.0%

5.0%

0.0%

7 1 a r M 1 7 a y M 1 7 J u l 1 7 p S e 1 7 o v N 1 8 J a n 8 1 a r M 1 8 a y M 1 8 J u l 1 8 p S e 1 8 o v N 1 9 J a n 9 1 a r M 1 9 a y M 1 9 u l J 1 9 p S e 1 9 o v N 2 0 J a n 0 2 a r M 2 0 a y M 2 0 J u l 2 0 p S e 2 0 o v N 2 1 a n J 1 2 a r M 2 1 a y M 2 1 u l J 2 1 p S e 2 1 o v N 2 2 J a n 2 2 a r M

NI GB

(Source: ONS)

“Hours worked in the economy has still not recovered from the pandemic.”

Challenges to increase the circularity of the Northern Ireland economy

Northern Ireland’s economy is only 7.9 per cent circular, leaving a 92 per cent circularity gap. If the economy is to transition away from its current linear model, which will be necessary with net zero commitments by 2050, then changing the operating model of many businesses, particularly in the agriculture and manufacturing sectors, will be key.

A transformation in lifestyle for the people of Northern Ireland away from avid consumerism, and towards a cohesive, community-based lifestyle will be key to transitioning away from the linear economic model. In addition, a change to the tax model will be necessary to provide incentives for businesses to adapt circular operating models, as well as investment in waste management schemes.

Annually, Northern Ireland consumes over 33.6 million tonnes of materials, equating to 16.6 tonnes per annum per capita, a figure which surpasses the global per capita average of 11.9 tonnes.

The Circularity Gap Report was published by Circle Economy as an affiliate project of the Platform for Accelerating the Circular Economy (PACE).

The report acknowledges that Northern Ireland’s higher consumption per capita is underpinned by a relatively small population density of 135/km2 , compared with, for example, England’s population density which is 434/km2. One of the contributing factors is the rural road network in Northern Ireland which consumes significant materials but serves relatively few people.

The report asserts: “[Northern Ireland’s] low population density, requiring a higher use of resources for the provision of social amenities, roads and electrical infrastructure, for example, also contributes to the rather high levels of material consumption per capita.

“Its moderately high material footprint is strongly tied to its emissions. With a consumption-based carbon footprint of 23 million tonnes, the average resident of Northern Ireland represents 9.1 tonnes of emissions per year—nearly double the global average,” the report states.

Jobs

Meanwhile, only 8.9 per cent of jobs in Northern Ireland currently fall into any category of circularity, meaning that less than one-in-10 of workers are currently in jobs which fall into any of the circular categories. Therefore, the task of increasing the circularity of the jobs market would have profound consequences, especially for the agriculture, manufacturing, and construction sectors, all of which are identified as big contributors to the linear model of the economy.

Over 70 per cent of land in Northern Ireland is used for agriculture, 80 per cent of which is used to raise cattle and sheep. The report critiques the use of agricultural land and indicates that the current proportion of farming land used for crops (5 per cent) needs to be increased.

“The concentration of agricultural activity, manure from grazing livestock and use of synthetic fertilisers has contributed to excess of phosphates, ammonia in soils, and emissions of nitrous oxide and methane, greenhouse gases more potent than carbon dioxide,” the report adds.

Simultaneously, the required retrofitting of the built environment to achieve circular growth will increase demand for roles such as installers, maintaining techniques, construction managers, quality control, and coordinating roles to help transition buildings away from oil-based heating systems. Therefore, construction employers, the report insists, have a responsibility to upskill their workforces.

The report further identifies challenges if the economy is to transition towards a circular model, with many workers in ‘non-recycling’ sectors, such as mining, needing to be reemployed in other sectors.

“For Northern Ireland specifically, research estimates that while moving towards a circular economy could bring between 13,000 and 17,000 jobs, the predicted net effects are modest or neutral,” the report notes, adding: “It is important to not just focus on the number of new jobs the circular economy can create, but to also consider the new ways of working and skills needed within existing jobs to enable the circular economy.”

The way forward

The report estimates that, although “current solutions are grossly inadequate for the challenges we face today”, Northern Ireland’s circularity can be viably doubled from 7.9 per cent to 16.1 per cent by 2032. Such an increase would almost halve the material footprint, bringing substantial positive impact in terms of climate objectives, supporting biodiversity, and reducing pollution.

“This will also bring Northern Ireland's circularity nearly in line with the global average needed to limit global warming to 1.5oC and prevent the worst impacts of climate breakdown.”