Rising economic inactivity in the UK: what are the implications for local economies?

In the last of the LED Confidential Espresso Shots for May 2024, David and Mike examine the concerning rise in economic inactivity rates across the UK and what this means for local economies and communities. According to recent data and studies, the UK is now the only G7 country where the share of working age people outside the workforce remains higher than pre-pandemic levels.

This is a recent trend – only since the pandemic have the numbers withdrawing from the labour market risen steadily

Economic inactivity rates had been falling consistently for years in the lead up to 2020, and was at its lowest rate in 50 years on the eve of the pandemic.  Among those aged 16-64, the number who are economically inactive has risen by more than 850,000 over the past four years to 9.4 million. This is putting a strain on the public finances, and according to the OBR, is cancelling out the economic gains from population growth.  But why is this happening?

Declining mental and physical health are likely culprits

Initially, factors like early retirement and reduced student employment were blamed by commentators, but the data now shows these do not fully explain current trends. Poor physical and mental health appear to be the primary drivers, as evidenced by a substantial increase in incapacity benefit claimants. Over half a million more people have claimed these benefits in recent years. In response, the UK government has announced a series of measures aimed at moving people off IB and into work, including removing the power of GPs to issue 'sick notes'.

Local development strategies need to address worrying trends in inactivity, which now extend to most subnational economies in the UK

This evolution of the labour market is a shift from challenges local leaders are accustomed to dealing with, but it should be put on an equal footing with unemployment in future strategies. In the episode, David and Mike emphasise that local leadership teams must gain an understanding of economic inactivity patterns specific to their own areas. Though a common challenge, rates vary widely between locations, and interventions must be tailored to be effective. Intensive assistance programmes, micro-jobs, partnerships with local employers, trialling universal basic income approached, were discussed as policy approaches for helping those furthest from the labour market.