Research

Overcoming shortages - How to create a sustainable labour market

Labour shortages and workforce planning18th July 2022

Over the past two years, labour shortages have become front page news.

HGV driver shortages resulting in long queues at petrol station forecourts; a lack of fruit pickers and butchers leaving produce and livestock in the fields; NHS workers overburdened and burning out during a global pandemic and air travel disrupted.

In the recruitment sector, these are issues that many of us saw coming. At the REC, we have been talking about the issues the British labour market faces for many years. And as we have seen over recent months, they have the potential to significantly damage the UK economy, our ability to invest and grow in the future.

The critical thing here is that while the pandemic has thrown the situation into sharp relief by causing a moment of crisis – the underlying issue has been with us for years. A smaller labour force as “baby boomers” retire, the inefficiencies in our skills system, years of sub-optimal performance in business investment, and deployment of technology and productivity, were always going to make the 2020s a challenging decade.

Much of this challenge lies with us in business to address – but we also need an environment that helps us make the changes we need, working with partners in colleges, local areas and government. In an environment where only growth can ensure we are able to both fund public services and maintain competitive tax rates, this is an area for urgent action.

In this report, we show exactly how much damage could be done if we don’t step up. With a 10% surge in demand for staff across the economy, and the labour market restricted by shortages, we could see a 1.2% fall in expected GDP and productivity by 2027 – costing the economy anywhere between £30 billion and £39 billion every year. This figure is just short of the entire current defence budget, or two whole Elizabeth Lines.

This report is about finding solutions, not complaining. We turned to businesses across the UK for their views, as well as looking to Canada and Germany for things we could learn. In truth though, the biggest step is the most obvious one – both businesses and governments need to change behaviour and put people planning at the top of their list, not deal with it as a cost to be minimised.

Many businesses talk about staff as their most important asset and the thing that drives their success. That means raising workforce planning up the agenda at C-suite level, ensuring your skills pipeline is getting you the people you need, participating in local and sector planning, and hiring people with a long-term view, rather than dealing with hiring as a procurement function. In 2022, REC members across the country have been advising firms on this.

For government, a proper labour market strategy is vital. Skills is part of that, but not the only part – immigration, devolution and labour market activation all matter. From buses and childcare infrastructure to apprenticeships – the entire business environment influences the investment decisions that firms make. It’s vital some unity of thinking is brought to this across the government.

To create a sustainable labour market and stoke economic growth we need to put the “people stuff” first.

- Neil Carberry, Chief Executive

About the overcoming shortages report

There is structural change in the labour market like we haven’t seen in generations. The research in this report was carried out by CBI Economics to demonstrate:

The economic impact of labour and skills shortages in the UK.
How the UK labour market and government labour market policies compare to other G7 countries who also face labour market shortages.
The difficulties UK businesses face when hiring, and what businesses, government and other stakeholders can do to build a longer-term view for skills.

Business and government have a duty to overcome shortages. This report provides recomendations to support discussions between recruitment experts and their clients.

Download the overcoming shortages report

The economic impact of labour and skills shortages

Existing theoretical and empirical literature highlights the negative effect shortages have on productivity, inflation and investment. These are all real-time issues affecting the UK. There is also a clear link between the need to address labour and skills shortages and addressing regional inequalities.

CBI Economics forecasts for the next five years point to anaemic growth and stagnant productivity.

This chart summarises the trends expected over the period to 2027 (More details are available in the full report, see Figure 1).

Our modelling analysis demonstrates that any attempts to boost demand whilst there are labour shortages will likely impact the economy negatively.

For example, a temporary and hypothetical 10% increase in demand in the economy would need to be accommodated by 1.7 million new jobs. Without this employment increase, real UK GDP would fall by between £30 billion and £39 billion every year from 2024 through to the end of 2027, equivalent to 1.2% to 1.6% of GDP, or the size of the UK recruitment sector in 2019.

This chart summarises the potential impacts of a temporary 10% uplift in demand in 2023 with and without additional labour shortages compared to the baseline.

Modelling analysis also shows that a demand boost in the face of shortages leads to higher earnings and inflation, and an overall fall in real disposable income, which in turn means restricted growth in public sector receipts.

Download the full report for detailed analysis

Business and policy recommendations

Taken together, these findings show the significant economic impact of labour and skills shortages in the UK and highlight the need for urgent action to deal with the current staffing crisis.

If we don’t act now we won’t have a claim on the UK leading the charge as a powerhouse for growth, competitiveness, productivity and inclusion. Essentially we have to start putting people first. These interventions should be centred around plans to boost company performance, tackle labour shortages, raise skills levels and create better working environments for all.

Our recommendations are a first step towards achieving those goals.

We recommend the creation of a future workforce strategy, outlining the skills that the UK economy will need over the coming years. This means putting in place policies for skills, immigration, regional investment and labour market activation.
Businesses must also play their part by pushing workforce planning up the agenda at leadership and board level. Engaging in workforce planning in partnership with various stakeholders including educational institutions, government and recruiters can ensure businesses have the workers they need to grow and deal with changes in technology and commitments to reach net zero.

Recommendations for business Recommendations for governments

Recommendations for business

Businesses are the key actors in delivering growth. It is their leadership on investment, inclusion and productivity that government intervention should be aiming to drive – with each pound of public money designed to catalyse private sector investment. But we should be clear – as a business community we have tolerated too much short-termism on the “people stuff” for years. Firms must play their part on skills, and finally behave as if people are their greatest asset – not just say it.

Businesses should have a five-year workforce strategy and investment plan signed off and reviewed by the board annually. Detail should focus on developing management skills and innovation in work design.

Skills are an investment, not a cost

Increasing investment in skills isn’t effective unless it is targeted and integrated with the overall commercial growth plan. Any commercial long-term strategy should include a people plan which treats skills spending as investment rather than cost.

Increase investment in training and development for all staff, giving them opportunities to grow and progress in their careers as this will also boost firms’ productivity and revenue.
Get involved in local and sectoral skills co-ordination – 90% of what you need is also required by other local firms in your sector.

Equality, diversity and inclusion should be at the core of your people plan

Most businesses know that achieving an equal, diverse and inclusive workplace is essential for commercial and ethical reasons. And we increasingly have examples in recruitment of candidates refusing job offers for companies that don’t demonstrate their EDI credentials.

Recruiters can be great partners in delivering this, especially in a tight labour market that will leave you behind if you don’t act to recruit and retain the best talent from all demographic groups available.

Implement equality, diversity and inclusion (EDI) policies with your internal workforce. Address imbalances in the labour market by recruiting from more diverse talent pools and providing tailored support for employees.
Work closely with recruitment agencies and EDI specialists to regularly review your internal policies and ensure they are up to date and in line with best practice.
Be a champion for EDI, educate clients and other stakeholders.

Working conditions matter

There has been a huge shift in how people work due to the pandemic, and this has triggered a broader conversation amongst employees and employers around flexibility. Employers need to deploy good employment relations skills. This debate cannot be ignored and instead should be embraced with active listening by deploying a range of engagement tools and negotiation with employees.

Salaries have increased in this tight labour market, but this isn’t the only answer to enticing new staff in a market where shortages are rife.

Improve staff engagement when considering benefits and conditions. This could include introducing flexible working arrangements, mentoring programmes, and regular pay and benefits reviews. Implement an employee wellbeing programme so workers feel comfortable and safe in the workplace. This might include mental health support, or wellbeing days.

Recommendations for governments

Create a proper plan for how to support and develop our labour market, tackling the forest of unlinked interventions coming from at least five different departments. Success should be measured by outcomes, and by the private investment that has been encouraged.

Here we outline our recommendations including on skills, immigration, regional investment and labour market activation more specifically.

Commission, with immediate effect, a cohesive, long-term plan for how the UK will put people planning at the heart of its growth strategy, and the unified role government can play. This must go well beyond just skills.
Give this plan a home in the Cabinet Office or with an independent commission. Work closely with business and others on developing and monitoring progress. Commit to keeping the approach in place over many years.

Skills – ensure policies catalyse private sector investment

While the skills systems of the four nations differ, all four need to improve their responsiveness to local needs, while maintaining high quality. Governments’ role should be to ensure that supply is available for business needs locally, and that the quality of that supply is high.

Accept that the apprenticeship levy has failed in its ambitions, and work with business to redesign it in ways that encourage high-quality early-career apprenticeships, good retraining options and modular interventions that help move careers on quickly by addressing shortages and helping to level up through increased salaries for enhanced skills.
Give even more power over skills policy to devolved governments and local and regional mayors – along with control over the fiscal measures required to fund this. Consolidate this by ensuring that local businesses and recruiters are consulted on the skills needs in their area.
Expand Local Skills Improvement Plans (LSIPs) across England with a view to supporting the model across the entire UK, in ways which are appropriate for each devolved system.
Create a tax credit scheme for employers who invest in training, and specifically, a ‘green tax credit’ for businesses investing in green skills, and green jobs.

Immigration policies that go beyond politics to critical labour needs

We should have an 'immigration for growth' policy approach.

Extend work visas to at least five years – from the current two or three years.
Update the Shortage Occupations List (SOL) every six months.
Reduce the waiting time for asylum seekers to be eligible to work in the UK from 12 months to six months.
Establish an immigration route for entry-level skilled workers.

Most importantly, the UK urgently requires an immigration route for workers at skill levels 1 and 2. Critical sectors such as construction, logistics, retail and hospitality are experiencing a severe shortage of staff at these levels and this demand cannot be met by the domestic supply of labour.

Levelling Up – making local labour markets work

Further invest in local transport, involve local businesses in local transport plans, and reward businesses who operate private transport services for their workers.
Build on the success of the Gatsby Benchmarks to ensure every young person gets effective, locally-relevant careers advice.
Improve access to childcare for working families by reforming childcare benefits and improving funding for childcare providers.
Introduce statutory two-week leave for grandparents and require businesses to conduct a review with all staff over the age of 55 on flexible working arrangements.
Mandate ethnicity and disability pay gap reporting for large businesses to further diversify the labour market and retain talent.
Create the next iteration of the Kickstart Scheme, learning from past experience.

There are a number of opportunities that the government can provide to a wide range of marginalised groups who are currently excluded from the labour market. The government needs to review the current legislative and benefits framework, so they provide the right type of support to accommodate different people such as older workers, ethnic minorities, people with disabilities, young entrants to the jobs market and those with caring responsibilities.

Talking Recruitment podcast: Overcoming shortages

How to create a sustainable labour market

REC CEO Neil Carberry and Campaigns Director Shazia Ejaz discuss the key highlights from our report: Overcoming Shortages' in this special episode of our Talking Recruitment podcast.