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Chief Economist’s note: Labour market in need of a boost

Chief Economist’s note:Labour market in need of a boost

Yael Selfin, Chief Economist in the UK, discusses where the UK Government can support up-skilling and job creation for workers affected by the pandemic.

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Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK

Contact

Also on home.kpmg

Key Points

  • Muted inflation paves the way for further action from the Bank of England as economic activity remains anaemic
  • High government debt calls for targeted programmes to support the unemployed into new jobs
  • Between 200,000 to 1.1 million workers in retail and hospitality with low- and mid-skill levels will need help to retrain this year  

Inflation figures released this morning point at ample room for the Bank of England to act. But with interest rates already at a record low and quantitative easing in train, anticipation of new measures is on the rise.

May figures for GDP released yesterday underscore the challenge ahead. The figures showed only a small pick up during the month as some sectors, such as manufacturing, resumed work ahead of the end of the lockdown.

The main concern is a rise in unemployment, as the furlough scheme unwinds over the next months. By 5 July there were 9.4 million workers furloughed through the Job Retention Scheme. The majority of these workers are in the wholesale and retail trade, as well as accommodation and food services. At the same time, redundancy announcements in the press between 19 April and 9 July reported that over 100,000 jobs have been lost already. These job losses are concentrated in manufacturing and transport industries, as well as retail and hospitality (Chart 1).

Chart 1: Daily redundancy announcements and furloughed staff in the UK
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Source: Various news sources, ONS, KPMG analysis.

For most sectors, average furlough claims have come in far lower than the equivalent average wages. Businesses have tended to furlough more junior staff and some workers were brought back to work in May. The exception to this rule is accommodation and food services, where the maximum 80 percent of average earnings over this period tracks the level of claims very closely (Chart 2). The heavy impact of the pandemic on this sector meant that more than 76 percent of workers were furloughed, with many potentially staying on furlough even after hospitality businesses started to reopen on 4 July.

Chart 2: Furlough payments and sector average wages
batch-11-chart

Source: ONS, KPMG analysis

Low-skilled workers need training to move to high-skilled roles

Looking ahead, the Government will have to intervene further to stem the rise in unemployment and facilitate the move to new employment for those who have lost their jobs.

We considered three unemployment scenarios: a ‘low’ scenario with two million unemployed by the end of the year; a ‘mid’ scenario with 3.5 million out of work; and a ‘high’ scenario with the number of unemployed reaching five million by the end of the year. Using the sectoral make-up of the furlough scheme and the skill make-up of each sector, the high unemployment scenario could see as many as 536,000 low-skilled workers made redundant this year. If recovery in their current sector is weak, they may find it difficult to get another job elsewhere without additional training.

Historically there has been a low level of mobility between skill levels as workers have tended to remain in occupations of a similar skill level. ONS data for 2018 shows that only 4.5% of workers in mid- and high-skilled occupations had a low-skilled occupation the year before. This implies that in normal circumstances, it could take nearly 12 years for half of the additional half a million low-skilled unemployed to transition to a higher-skilled occupation. 

Chart 3: What can the UK Government do to support the unemployed into new jobs due to the pandemic
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Source: ONS, KPMG analysis

A large number of the roles at the mid-skilled level in distribution (consisting mainly of jobs in retail), as well as in the hotels and restaurants sectors are under threat (Chart 3).

Accelerated structural changes mean the nature of demand in these sectors has permanently changed and old jobs are unlikely to return, even after the pandemic has passed. Overall, we could see between 200,000 to 1.1 million of low- and mid-skilled workers from these sectors needing to find a job elsewhere. That will require the Government to take concrete actions to retrain workers across the country.  

This is both a challenge and an opportunity for the Government. Now is a chance to create training and skills programmes to help workers transition to higher-skilled jobs. Longer-term developments, such as automation and AI technologies, are likely to erode the incomes of low-skilled workers in the future, therefore upskilling now is worthwhile from both an economic and social perspective. It is therefore essential that a co-ordinated national skills and training programme forms part of the Government’s response to the pandemic. 

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