Is the UK the ‘sick man of Europe’ once again?

Dysfunctional labour market driven by rise of the ‘economically inactive’ is a major block to growth

Pedestrians shelter from the rain beneath Union flag-themed umbrellas
Almost 9 million working-age Britons are not in work or looking for work
(Image credit: Daniel Leal-Olivas/AFP via Getty Images)

The UK is once again being labelled the “sick man of Europe” as wages continue to lag well behind the soaring cost of living and a dysfunctional labour market contributes to a looming recession.

According to the Office for National Statistics, GDP fell by 0.2% in the third quarter of the year, the first indicator of what the Bank of England predicts could be the longest sustained period of negative growth in a century, setting unemployment on course to nearly double by 2025.

UK productivity growth in general since the 2008 financial crisis has trailed that of comparable nations such as the US, France and Germany. Median incomes have also lagged behind neighbouring countries over the same period, according to the National Institute of Economic and Social Research. Only Russia – hit hard by crippling international sanctions following its invasion of Ukraine – is forecast to have worse economic growth in 2023 than the UK among the G20 nations.

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What did the papers say?

“Global factors are at play,” said The Telegraph: “inflation is sweeping across much of the world, Russia’s war has unleashed an energy crisis across Europe and interest rates are soaring as the cheap debt of the post-financial crisis years evaporates.

“Yet the UK has found itself at the forefront of the crunch,” said the paper, which asked: “Why is Britain suffering more than its peers?”

One major factor is the UK’s dysfunctional labour market. On the face of it unemployment, currently at 3.6%, is near its lowest point for nearly half a century. Yet despite demand for staff, the number of people in work has failed to recover to pre-Covid levels, unlike in every other G7 country where employment has risen compared with the end of 2019.

The answer, said The New Statesman, “goes beyond EU workers lost to Brexit, pandemic labour supply issues, or the discredited Big Quit theory – that we woke up to our meaningless 9-5 lives during lockdown and decided to resign en masse”. While these may have had some impact, “the real answer can be found in a clunky-sounding measure called ‘economic inactivity’: working-age people who aren’t working or looking for jobs”, said the magazine.

Almost 9 million people of working age are now classed as “economically inactive” – that is, neither in work, nor looking for work – a rise of more than 600,000 since the pandemic began.

This includes an increase in early retirement and, crucially, a sharp jump in long-term sickness, which is “the driving factor for increases in inactivity among older age groups”, reported The Health Foundation.

“The combination of rising long-term sickness and a backlog of 7 million people waiting for NHS treatments is a toxic one,” said David Smith, economic editor at The Sunday Times. “It all adds up to a labour market that is more dysfunctional than at any time in recent history.”

Back in the 1970s, the then US secretary of state Henry Kissinger famously declared that economically “Britain is a tragedy”, said Politico. Now “the United Kingdom is heading to be the sick man of Europe once again”, the news site added.

What next?

While “the starkest number contained in the latest employment figures is the record gap between pay rises in the private and public sectors”, that the size of the potential workforce continues to shrink “remains most baffling to economists”, said BBC business editor Simon Jack.

Chancellor Jeremy Hunt made it clear over the weekend that he saw the UK’s shrinking workforce as one of the main challenges facing the economy, because it would hold back economic growth while adding to wage pressures that could make higher inflation last longer.

As a consequence, with “living costs rising and fewer people available to work, employers have had to offer higher pay to fill vacancies, even though earnings have still not kept pace with rising prices”, said the Financial Times.

How exactly the gaps in the labour market can be filled “remains a source of debate”, said The Spectator: “should full emphasis should be put on getting British natives back into work, or do we need more immigration?”

“One certainty is that Tory ministers are concerned about the labour shortage – leading to internal rows over loosening immigration – and Labour has noticed,” agreed The New Statesman. Shadow work and pensions secretary Jon Ashworth has proposed a “reformed employment service” to give specialist, tailored help to over-50s.

“Reviving the UK’s flatlining economy will not happen overnight,” said Politico. “Experts speak of an unbalanced model heavily reliant upon Britain’s services sector and beset with low productivity, a result of years of underinvestment and a flexible labour market which delivers low unemployment but often insecure and low-paid work.”

But, the news site noted, “as Italy’s experience demonstrates, it’s one thing to diagnose an illness – another to cure it”.

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