We can mend the labour market, says HAMISH MCRAE

When the Governor of the Bank of England and the boss of JD Wetherspoon agree on something, we should all take note.

At the Bank, Andrew Bailey calls the surge in early retirement and long-term sickness relating to the pandemic, which has cut the size of the workforce, a ‘labour market shock’. He says that the UK is unique among the G7 economies in being hit in this way.

Pubs boss Tim Martin makes the same point, in somewhat more colourful language, on page 93, and a further spin came last week from Mel Stride, the current Work and Pensions Secretary.

He claimed that if the 650,000 people who have dropped out of the labour market went back to work, the economy would be 0.2 per cent larger and a fall in the borrowing requirement of £11billion would be enough for the Government to cut 2p off income tax.

We will get an update on Tuesday from the Office for National Statistics on what is happening to the labour market, and it is quite likely that, at last, the number of people either in work or looking for work will be back to pre-pandemic levels. But it will still be lower than it ought to have been, given the increasing size of our population.

While you can quarrel with the detail of Stride’s point – if the Government got an extra £11 billion in tax it would probably find something to spend it on – the fact remains the tight labour market is one of the reasons why the Bank of England is increasing interest rates. It is worried that rapidly rising wages will make inflation harder to get under control.

So the failure of those missing 650,000 helps explain, in part at least, the struggle the Government is having to get the budget deficit down and the struggle ordinary people are having to pay their mortgages.

In the long-term we have to boost productivity, for that is the path to increasing higher living standards and generating resources for public services. But in the short-term it would help mightily if we could get more people into work.

But how? Exhortation from central bankers, ministers, or even pub-owners isn’t going to move the dial. They may be right – indeed they are right – but that is not how economics works. What we need to do is to shift the incentives, a polite way of saying there needs to be carrots and sticks.

A word of caution about the sticks. We should not wish for a society where older people have to go on in jobs they hate because they cannot survive on their pension. Nor could anyone support a situation where people who are unwell are forced to try to keep working. If someone has done well, set aside savings, and now wants to retire to the sun, they have every right to do so.

But, actually, the sticks are already there in that some people who took early retirement during the pandemic need more income to fund the life they would like to sustain. The surge in inflation is a sort of stick too. The evidence is limited but it looks as though a trickle back to work has begun.

The positive question is how to create more carrots. Martin’s point that it is up to employers to make jobs more attractive rings true. UKHospitality, the trade association for the hotels, pubs and restaurants business, has an over-50s guide to help retain and recruit older workers.

But I suspect the biggest scope for boosting labour participation is in self-employment. Prior to the pandemic the numbers had been rising, reaching an all-time peak of five million at the end of 2019. Now we have many more employees than before the pandemic but far fewer self-employed.

That is partly because of the tax changes that forced companies to take people on to the payroll who were previously classed as self-employed, but it is also because a lot of the self-employed people have dropped out. Reversing that is an obvious first step.

Another step would be to increase the VAT threshold, stuck at £85,000 since 2017. According to the Bank of England inflation calculator that is equivalent to £106,000 now. A lot of small companies and self-employed people turn away business to save them from the palaver of registering and collecting VAT.

A more radical idea: If you really want to boost employment of the old, then stop employer national insurance contributions for people over state retirement age. Employees don’t pay them, so why should companies do so?

So, lots of ideas. One way or another we have to get that missing 650,000 back to work.