How has COVID-19 disrupted the UK labour market, and how can better adult training and job placement aid the recovery?

Engineer showing apprentice how to use a tool-making machine

The UK ranks among the worst countries in Europe for ‘skills mismatches’ between employers and workers. Creating new opportunities for adult training and reskilling, and helping individuals navigate the jobs market more easily, are an essential part of helping the UK economy recover from the shock of COVID-19. By Andrew Eyles

Introduction: COVID-19’s impact on the UK labour market

COVID-19 has had a devastating impact on the UK’s economy. In response, the government has taken unprecedented fiscal measures to maintain employment relations, preventing rises in unemployment commensurate with the falls in output that have been triggered by locking down large parts of the economy.

While the government’s efforts to avoid a mass severing of employment relationships are commendable, they have not been without criticism. The extension of virus-related rescue support has taken the total cost of the rescue package to £344 billion, leading to levels of government borrowing unheard of outside of wartime. It is uncertain what this money will buy in the long run: there are suggestions that, for many jobs, the scheme has simply allowed firms to retain employees in positions that will not be economically viable in the longer term.

And while many jobs have been protected for now, the huge government outlay has still failed to prevent sizeable disruption to the UK labour market. Data from the Labour Force Survey show a greater number of redundancies in the period spanning Sept-Nov 2020 than in any other quarter since records began. And while recent months have seen a slight uptick in the number of payroll employees, the latest data show the total number of payroll employees still fell by 693,000 in the year February 2020-2021.

Data collected elsewhere also suggest the mini-resurgence in jobs may be short-lived. Utilising the latest ONS BICS survey, a study by Lambert and Van Reenen suggests that around one-in-seven UK businesses are at risk of failure in the coming months. Former Prime Minister Gordon Brown, who prefaced their report, offers a succinct overview by stating that ‘it shows the liquidity crisis of 2020 will soon become the solvency crisis of 2021’.

The UK’s skills mismatch problem

Without an appropriate policy response, the pandemic will continue to compound many job- and productivity-related issues the UK was already facing prior to the crisis. For example, while the UK labour market has wrestled with many of the same technological changes that many Western European economies faced – ie. automation and the rapid shift from ‘traditional’ industry to a service economy – it has found it particularly difficult to keep its workforce’s skills aligned with the growing needs of UK-based firms. A recent OECD analysis found the UK to be among the worst in Europe in terms of matching the skills of its workers to their field of employment – one potential reason for the abysmal performance of UK labour productivity since the onset of the Great Recession in 2008.

The UK’s productivity decline is also indicative of a wider imbalance between the skills demanded by firms and the skills that workers possess, with a surplus of some skills and severe deficit of others. This is borne out by data from the OECD Skills For Jobs database, which documents significant shortages in UK workforce knowledge in the fields of education and training, health, and science, technology, engineering and mathematics (STEM) subjects.

The potential for COVID-19 to accentuate these mismatches has been huge. Insolvencies are likely to continue to be heavily concentrated in certain sectors, such as the administrative and support services industry, and arts, entertainment and recreation. Laid-off workers in these sectors will find the skills they have accumulated, and that are specific to their sector, will become obsolete in the face of declining employment opportunities in their occupation.

Furthermore, the pandemic is expected to accelerate automation in the economy, reducing the need for many low-skill service jobs – one of the few areas of the UK economy where the demand and supply for skills is reasonably well aligned. The pandemic has also added to the uncertainty facing UK firms, who already have to deal with the economic uncertainties caused by Brexit – which has already been shown to reduce opportunities for workers to gain useful skills on the job. Taken together, these factors make the UK labour market a difficult landscape to navigate for workers in search of new employment opportunities.

The UK economy may now be slowly reopening, but returning to their old occupations will not be an option for many laid-off workers. Creating new opportunities for adult training and reskilling is therefore essential if the UK economy is to recover from the economic shock of COVID-19, and to ensure that workers have the right skills to gain employment in sectors where demand and employment opportunities are relatively more abundant.

The UK labour market prior to COVID-19: a productivity puzzle

Over the previous three decades, employment trends in the UK economy have closely mirrored those of other Western European countries. In broad terms, key changes in the UK economy can be characterised by increases in (i) the outsourcing of jobs, and (ii) information and communications technology (ICT) use in the workplace – both of which have polarised the job market. In particular, this polarisation has taken the form of decreases in the employment share of middle-income jobs, with parallel increases in the employment shares of both low- and high-wage occupations.

While the increase in employment opportunities in high-wage sectors can be seen as a good thing, the UK labour market has encountered numerous problems in more recent years. Since 2010, labour productivity in the UK has broken from the trend of its peer countries, with the UK suffering a ‘lost decade’ of negligible productivity growth. Unsurprisingly, almost-zero productivity growth over this period has translated into wage stagnation, with the median UK worker experiencing no real pay increase over the past decade.

Given the strong empirical relationship that has been documented between labour productivity and measures of skills mismatches, the UK’s recent poor productivity performance is suggestive of a deterioration in the ability of its labour market to match the skills that employers demand with the skills that are available in the workforce.

The OECD’s analysis indicates there may be a number of institutional factors driving skills mismatches in the UK. For example, when considering demand for different levels of education, the UK is shown to have a considerable oversupply of workers who have completed tertiary (above school-age) education: 43% of UK adults achieve this, but only one-third of jobs requiring qualifications at this level.

Despite the abundance of tertiary-educated adults, the UK is suffering from a lack of  ‘middle-skills’: jobs requiring specific post-secondary vocational skills that are in short supply. These jobs include those in IT and programming, engineering and skilled trades – many of which may be best suited to workers who have been through apprenticeship schemes.

Yet only 24% of the UK’s upper-secondary students were enrolled in apprenticeships in 2017 – less than half the number enrolled in Switzerland (58%), and much smaller than the percentage enrolled in Germany (42%) that year. Such a phenomenon is not UK specific; US employers are also struggling to fill roles in middle-skills jobs, in part because of a perceived surfeit of liberal arts graduates.

The unequal impacts of COVID-19 on UK employment

Despite much of the world being affected by COVID-19, the economic impacts have varied significantly across countries. The UK economy as a whole took a huge hit in 2020 – amongst G20 countries, only Argentina and Spain had sharper falls in real GDP last year. The labour market was somewhat insulated from this in the period leading up to and during the first lockdown. The furlough scheme protected workers to the extent that employment relationships were not abruptly severed as the crisis unfolded. This led to a large drop in working hours, but a negligible change to unemployment in the first quarter of 2020.

More recent evidence shows that the economic strains of Covid are being felt more acutely. Workers who were once protected by furlough are now being made redundant as businesses close or scale back operations in the face of declining demand and falling profits. The latest data on redundancy rates from the Labour Force Survey, which shows the number of redundancies per 1,000 employees, peaked at 14.2 in Sept-Nov 2020, and remained at 11 in the quarter for which the latest data is available (Nov-Jan 2021). It is worth noting that, at least when comparing peaks, redundancy rates during the COVID era have now exceeded those recorded during the Great Recession of 2008/09.

As is typical of downturns, not everybody has been equally affected by this latest economic contraction. In line with the 2008-2009 crisis, labour market losses have fallen disproportionately on the young. A study by Elliot-Major, Eyles and Machin found that young adults aged 18-25 were 7.2 percentage points more likely to have lost their job by September 2020 (having been employed in February) than the oldest group of workers (aged 55-64), once gender, employment type and family background were controlled for. The study also found an increased likelihood of lost earnings of 13 percentage points for young people compared with those aged 55 and above, over the same period.

Quantitatively similar results hold when the youngest age group are compared with those in other age brackets. They also uncover a number of other differences along the lines of gender and baseline employment status – the self-employed and women were shown to be the most susceptible to lost earnings in the period studied.

The breakdown in unemployment rates across regions displays a striking pattern as well. The emerging UK-wide picture is that job losses are heavily dispersed across different regions, with unemployment having increased the most in London, Northern Ireland, and the South West of England. London in particular has seen a dramatic increase, with unemployment hitting 7.4% in November-January 2021 – up from 4.5% at the end of 2020. In contrast, the year-on-year unemployment changes in England’s North East and South East regions have been modest when compared with the scale of the overall economic shock.

No doubt some of these geographical disparities are due to differences in the types of jobs located in each UK nation and region. In an early analysis looking at labour market outcomes in the UK, Germany and the US, Adams-Prassl et al found large differences in job losses across different industrial sectors – including pronounced differences between industries where workers were able to work from home and those where they could not. Job losses were systematically higher in the accommodation and food service industry and in wholesale and retail trade. Worryingly, their evidence came from April 2020 – when national unemployment rates had barely shifted. As previously furloughed workers become unemployed, it is likely that differences across industries and regions will widen, with sectors that have been the most affected by lockdown restrictions facing greater solvency issues.

The threat of unemployment scarring – and how to avoid it

As with previous recessions, there is a fear that shocks to employment will persist into the future, meaning that workers in the most-affected regions face enduringly lower earnings (known as ‘scarring’). Evidence from the US suggests that more than half of the 2007-2015 age-adjusted employment decline in the US can be attributed to longer-run scarring effects caused by employment shocks during the Great Recession. This backs up a wealth of UK-based evidence documenting how job loss can lead to lower earnings upon re-entry into the labour market, with effects that persist decades later.

The role that skills and reskilling play in shaping future outcomes for those who have experienced job loss is not directly addressed in the aforementioned papers; however, there is indirect evidence that it plays a role. The scarring literature generally finds larger long-run earnings penalties for those who experience multiple bouts of unemployment following an initial layoff. In analysis of the ‘class of 1981’ – those who entered the labour market in the 1981 recession – Burgess et al found scarring effects were only evident for those who had left school without qualifications (O-levels at that time).

If those with higher-level qualifications have more transferable skills and are able to avoid further unemployment spells by finding work in growing sectors, this suggests that scarring can be avoided if workers can acquire the skills required to adapt to the changing needs of the labour market.

Policy responses to help the UK’s most vulnerable workers

It is imperative that policies aimed at helping workers through this crisis are designed with the long run-in mind. If the labour market turmoil caused by COVID-19 is to be limited to the short run, policies should aim to offer upskilling opportunities to affected workers to allow them to meet the changing needs of the labour market.

Policy responses to previous recessions arguably failed to do this. At the onset of the 1981 recession, survey evidence showed a mere 2% of firms reporting that skill shortages were constraining their output. By the end of that decade, that number had risen to 31%.

The labour market may not be going through the same structural transformations that were occurring in the 80s, when manufacturing jobs were in precipitous decline. However, labour markets do appear to be changing, and COVID-19 may well be accelerating these changes.

There are suggestions that firms might wish to automate certain worker tasks to mitigate the risk posed by future lockdowns and pandemics. Jobs where workers have a high risk of transmission and where automation can substitute for their tasks are thought to be most at risk. Increases in homeworking and declines in commuting also have the potential to permanently reduce demand for the types of service jobs that form a large part of low-wage employment in major urban areas.

The changing economic climate means that traditional efforts to combat unemployment may not be effective. Active labour market programmes to get the unemployed back into work – such as job search training, sanctions for failing to search, and subsidised employment (e.g. the UK’s New Deal for Young People) – have proved successful, at least in the medium term. However, if there is a permanent shortage of employment options in low-wage jobs, then upskilling workers, increasing skills supply, and channelling displaced workers into growing sectors will be necessary to avoid a growth in long-term unemployment and wage stagnation.

Evidence for different policy options: what works best?

The importance of addressing skills mismatches and retraining opportunities can be gauged from a global scan of responses to the pandemic, with a number of regional and national governments having steered investment towards reskilling. In Canada, the government of Ontario increased investment in online programmes aimed at providing micro-credentials for workers who wish to gain business skills and greater knowledge of STEM topics, while Sweden announced increased funding for online learning providers as part of their crisis package for businesses and jobs.

The UK government has been slightly more conservative in its approach by increasing funding for traditional vocational pathways. The Chancellor announced an additional £375 million for the National Skills Fund in November 2020 to widen free access to vocational qualifications for adults. This came alongside an increase in cash grants for firms to take on apprentices.

Although vocational qualifications and apprenticeships are viable options for those looking to retrain, and apprenticeships have been shown to lead to appreciable earnings gains for those who complete them, it is not obvious that these policies go far enough in providing opportunities for workers needing to adapt their skills.

Even in normal economic conditions, evidence casts doubt on the extent to which one-off payments can increase apprenticeship provision. Coupled with evidence from the Sutton Trust, who found that only 40% of apprenticeships were continuing as normal as of April 2020, it looks as though much larger investments would be needed to go beyond ‘breaking even’ and spur net increases in apprenticeship places.

Distinct problems surround vocational training. While free provision is to be welcomed, the system is overly complex. In perhaps the most systematic overview of post compulsory education in England, Hupkau et al concluded that, among a huge array of different vocational pathways, making an informed choice as to the relative merits of various routes is very difficult. For workers who want to get the skills needed to start a new profession, gaining new qualifications will require foregone earnings and hard work. It is unlikely that they will do so if the returns, and pathways, to these qualifications are not clear and transparent.

Some of this opaqueness could be alleviated by the wealth of data that is collected on returns to various qualifications. There is an ongoing discussion as to how digital technologies might make navigating the labour market easier for jobseekers. This focuses on how collecting information on job advertisements, future job forecasts, and average returns to occupations can make it easier for jobseekers to better understand opportunities available to them. Augmenting this data with simple information on the particular skills required for specific roles, and information about the vocational pathways to these skills, would be a positive step towards demystifying the process of adult learning and worker reskilling.

Options aimed at increasing firms’ investments in skills may also be considered. The UK’s poor productivity performance has led economists to suggest adopting similar tax provisions for investments in workers to those currently in place for investments in research and development. Human capital tax credits would provide tax incentives to firms to provide on-the-job training to workers, and would bypass the need for workers to navigate an opaque vocational educational system and attain the skills themselves. These tax credits could go beyond apprenticeships in covering a wide range of training activities, and include training that does not necessitate off-the-job study at training providers.

Empirical evidence and economic theory provide some support for credits such as these. Without incentives, firms are naturally reluctant to train workers in skills that are useful in the wider labour market, for fear that they will bear the cost of training but not reap the benefits should other firms ‘poach’ the worker or should the worker use their newly acquired skills to gain employment elsewhere. Such concerns may in part explain the UK’s pre-COVID downward trend in adult job training (most of which is undertaken by the private sector), and by firms increasingly attempting to fill skill gaps by hiring new workers rather than investing in skills on the job. By sharing some of this cost burden and providing tax relief, government could push employers towards providing skills that are currently in short supply.

Conclusion: three (interlinked) approaches for reducing the UK’s skills mismatch problem

The economic reverberations caused by COVID-19 will be felt for years to come. While efforts at preventing widescale job losses are commendable, it is not obvious that the UK response has struck the right balance between maintaining employment matches and providing opportunities for reskilling. Spending on efforts to upskill the labour force have been small when compared with the massive outlay on maintaining job ties, many of which are now being severed anyway.

As evidenced by previous research, job loss and limited employment opportunities can have a long-lasting effect on individuals who are unlucky enough to fall into a cycle of low-wage work and repeated unemployment spells. This fact, coupled with the unequal economic burden of the pandemic – which has fallen disproportionately on the young and on certain industrial sectors – means that pre-existing inequalities will be exacerbated in the absence of an appropriate, forward-thinking policy response.

Finding solutions to the complex problems faced by the UK will be difficult. But what is clear is that addressing skills mismatches should be a priority for government. The UK has a paucity of lifelong learning options for workers and school leavers who wish to obtain the skills that are most in demand – and which will continue to be demanded in the coming years. There are a number of interrelated policy options that would better align the skills-needs of employers with that of the UK workforce:

  1. A clear impediment to skills acquisition in the UK is the complexity of the system. The textbook economic model suggests skill shortages should be short-lived; rising prices for skills in short supply should drive workers to invest in these skills and reap the rewards from doing so. However, an overly complex system is a barrier to these forces. Workers who are unaware of the economic returns to skills, and how those skills are best acquired in the context of an opaque vocational education system, will not be able to plug the shortfall in skill supply. Information on labour market returns, job vacancies, skills required for jobs, and pathways to acquiring those skills are available, but are not centralised and presented in a way that makes the options clear for those who need them the most.
  2. Changing incentives for firms can also play a role. The UK government provides tax incentives for firms to engage in research and development, but does not treat investments in workers in a parallel manner. Greater tax incentives for firms to develop the skills they need the most through internal training schemes will substantially upskill the labour force, rather than leaving firms competing over a fixed set of skilled workers.
  3. Policies to align workers’ skills with the changing needs of the economy, including through the better provision of training resources and career advice, is a necessary part of any recovery package aimed at limiting the long-term economic impact of COVID-19. Many workers will have to acquire skills they do not currently possess if they are to avoid joblessness, precarious employment and low pay for years to come. Enabling them to do so and to find stable employment that offers opportunities for earnings growth can reverse many of the negative trends in the UK labour market that were already apparent prior to the pandemic.

Andrew Eyles is a research economist in the Education and Skills programme at the Centre for Economic Performance (London School of Economics). He is also a PhD (Economics) student at University College London.