Rise In Long Term Sick Brings Headache For UK Economy

November 28, 20220

Bank of England officials do not usually pore over the details of NHS waiting lists. But, in recent months, the health of the UK workforce has become an urgent question for monetary policymakers.

Britain avoided big job losses at the height of the pandemic but, since Covid-19 lockdowns lifted, it has seen an exodus of older workers from the labour force. The number of people of working age who are economically inactive — neither working nor looking for a job — has risen by more than 630,000 since 2019. And, in contrast with other countries, there has been no sign of them returning — even as inflation puts new strains on household finances.

On current trends, the UK will soon be the only country in the OECD where the workforce remains smaller than it was before the pandemic. At present, it is behind only Latvia and Switzerland.

Ill health does not seem to be the main driver of this wave of early retirement, according to a data analysis by think-tank the Institute for Fiscal Studies. Many older workers said they wanted a change in lifestyle and could afford to retire, while others felt they were forced out by ageist recruitment practices or an alienating workplace culture.

But growing numbers of people who were already out of work at the start of the pandemic say health conditions have prevented them returning. The latest official data show a record 2.5mn working-age people are now inactive because of long-term sickness, up from 2mn in spring 2019.

“People are choosing to stop working or looking for work . . . the after-effects of the pandemic on health are probably a key driver,” said Huw Pill, the BoE’s chief economist, last month — speculating that long Covid, lengthening NHS waiting lists, a rise in mental health issues and the growing need to care for family members at home “have all weighed on labour force participation”.

While worsening health among the UK population is an emergency in its own right, with at least 5.5mn people in England now waiting for hospital treatment, it is also has serious repercussions for the economy.

Jonathan Haskel, an external member of the central bank’s monetary policy committee, believes official data understate the extent of health-related inactivity, because health is often an underlying factor when people decide to retire early. He argues that the crisis in the NHS is exacerbating a shortage of workers, fuelling wage growth and threatening to create “inflationary pressure in the UK for longer than other countries”.

If this is true, the BoE may feel the need to raise interest rates further and keep them high for longer than it otherwise would — deepening the recession the UK already faces as a result of the energy price shock.

A smaller workforce will also be a lasting drag on economic growth. In the decade before the pandemic, a boom in employment was the main reason the economy kept growing, helping to offset the UK’s persistently poor performance on business investment and productivity.

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