Robert Nutter and Barry Harrison
Economic inactivity: how bad is it?
First, a clarification – someone of working age who is economically inactive is not classified as unemployed. When measuring unemployment in the UK, there are two well established methods of calculation. There is the Labour Force Survey (LFS), which essentially captures people who are currently not working but are available for work. Secondly, there is the actual number of people claiming unemployment benefits (mainly Jobseeker’s Allowance (JSA)), known as the ‘claimant count’.
The LFS tends to produce a higher figure than the claimant count, as there are significant numbers of people who are seeking work but are ineligible for JSA. Unemployed people, according to the LFS measure, are defined as those ‘without a job, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks, or are out of work, have found a job and are waiting to start it in the next two weeks’.
The LFS is a random household survey of approximately 50,000 households in the UK every quarter, including 2,500 households in Wales. The unemployment rate is calculated by expressing the number unemployed as a percentage of the economically active population. The economically active are those in work or are genuinely seeking work (registered as unemployed).
What then is meant by someone who is economically inactive?
A person is economically inactive if they are between the ages of 16 and 64, are not seeking work or are not available to start a job. In the UK, there are about 9.3 million people who are economically inactive, which represents 21.8% of this age group and is a large proportion of the potential labour force. The data below in Figure 1 show a fall in the inactivity rate from 2011, as employment levels rose in the economy. That changed with the start of the COVID-19 pandemic in 2020.
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inactivity rate
Figure
The number of economically inactive people in the UK, measured between June and August 2024, was over 600,000 higher than pre-pandemic levels between January and March 2020. This increase in inactivity meant that the UK’s employment rate remained below its pre-pandemic level in 2024 (April to June). The UK is the only G7 country where this is the case, although economic inactivity in the UK is still below the average of countries in the Organisation for Economic Co-operation and Development (OECD), the G7 and the European Union (Figure 2).
In the early 2000s, and almost up to the pandemic, the rate of economic inactivity consistently fell. There were a variety of reasons for this, including:
• the rise in self-employment (via the growth of the gig economy)
• the creation and rise of the National Living Wage
• the expansion of government-funded childcare
• falling incomes from private pension plans (due in part to very low interest rates).
These factors attracted people of working age into the labour market or persuaded them to stay in it for longer.
UK’s inactivity increase stands out Change in economic inactivity rate (percentage points)
Change from Dec 2019 to Dec 2023
Source: Office for National Statistics data on the leading advanced economies of the G7 countries
Figure 2
Long-term sickness (2.7 million) and being a full-time student (2.56 million) were the leading reasons for economic inactivity in data gathered in August 2024, with 30% of economically inactive people saying that their inactivity was due to long-term illness and 27% saying it was because they were a student. The number of economically inactive people with a long-term illness in the UK has now reached its highest recorded level since the ONS began gathering this data in 1993. This is illustrated in Figures 3 and 4.
Inactivity due to long-term sickness has been rising since the summer of 2019. The rise in long-term sickness is linked to:
• mental health problems, especially among younger workers
• long COVID
• the significant number of people on NHS waiting lists.
In the UK, the increase in people claiming health-related benefits since COVID now accounts for around 30% of total benefit claims. This is contrary to the situation in other developed economies.
Figure 3
Health-related benefits forecast to rise
Spending on people aged 16 to 64 as a proportion of GDP in Great Britain, year ending March
Source: Institute for Fiscal Studies
There are other reasons for economic inactivity. Some 1.73 million people are in caring roles, or do not work because either their partner earns a salary high enough to remove financial pressure from the household or the cost of going to work is too high compared to the wage that can be earned. Certainly, the cost and availability of childcare is a major factor for many families. It is also worth remembering that among the economically inactive there are 1.1 million people below the age of 64 who have retired on their occupational pension. Teachers, civil servants, police officers and doctors, among others, are able to retire on full pension before reaching the age of 64.
The effect of large numbers of people on sickness-related benefits is a massive drain on the economy. Faisal Islam, the BBC’s Economics editor, said recently:
‘The UK is sick. It’s much sicker than other similar countries, and the situation is getting worse, snowballing into a health, social, medical, economic, and potential budgetary crisis’1.
The burden on the public finances is significant, with government spending on health-related sickness benefits rising from £36 billion before the pandemic to £48 billion now. Estimates suggest that the figure could rise to £63 billion by the end of the current Parliament. The economic inactivity problem is also costing the economy a significant amount in lost GDP and lower tax revenues.
The problem of so many younger people being economically inactive due to mental health issues is that they become detached from the labour market – a problem called hysteresis. There are 900,000 young people in Britain aged between 18 and 24 who are not in employment, education or training. The clear implication is that those in employment have to contribute more and more to support those members of the population who are inactive.
The government is facing the daunting challenge of reducing this waste of talent, as the cost of welfare dependency puts more pressure on already weakened public finances. As the new Prime Minister, Kier Starmer, has said, there is something wrong when foreign workers are needed to fill gaps caused by sickness and a shortage of apprenticeships. A result of high levels of economic inactivity is labour market shortages, which partially explains net legal migration to the UK of 685,000 in 2023.
Getting the long-term sick back to good health and into work will require any or all of the following:
• increased flexibility by employers
• a significant reduction in NHS waiting lists
• much better mental health support
• possible reform to the tax and benefit system.
Increased availability of training in areas of skill shortages is also a priority, for example in the construction and building trades. An Employment White Paper being worked on by the Work and Pensions Secretary will merge the National Careers Service with job centres. The point of this is to make work and jobs their primary function, rather than acting primarily as the means of proving entitlement to benefits. Like many supply-side reforms, the measures outlined above are costly and, even if enacted in their entirety, will take some time before any significant benefits materialise.
There is a positive side to the labour market though. There are 32 million people in employment in the UK, which is 75% of the 16 to 64 age group. Significantly, there are also many older workers remaining in employment, full-time or part-time, into their late 60s and beyond. Among other things, this is important because the state pension age will rise from 66 to 67 in 2028. From a government finance perspective, the UK state pension age would need to be 70 or 71 by 2040, compared with 66 now, to maintain the status quo of the constant number of workers per state pensioner2. Whether people will want to work longer and longer is another matter!
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Sources and acknowledgements
Cover image: Photography taken by Mario Gutiérrez / Moment / Getty Images
Figure 1: Data Source / ONS.gov.uk / Open Government Licence v3.0
Figure 2: Data Source / ONS.gov.uk / Open Government Licence v3.0
Figure 3: Data Source / ONS.go.uk / Open Government Licence v3.0
Figure 4: Data Source / ifs.org.uk / Institute for Fiscal Studies
The House of Commons Library Labour Market Statistics 15/10/24
BBC article ‘The work sickness timebomb that risks a lost generation of workers’ 21 October, 2024 https://www.bbc.co.uk/news/articles/c99vz4kz5vzo