As we emerge from the pandemic, economists are trying to understand how COVID-19 has changed the labour market.

Over one million workers were still on furlough in the UK in the autumn of 2021, leading to concern that the end of the scheme would bring high unemployment. That hasn’t happened. As labour demand picked-up over the last year, unemployment rates in London and the UK have declined significantly, falling back close to pre-pandemic levels in the first quarter of 2022. 

Concern has shifted towards increases in the rate of economic inactivity, particularly among people aged 50 and over. Our analysis for London finds that:

• London’s economic inactivity rate declined for most age groups during the initial stages of the pandemic, with the exception of the rate among young people.
• Londoners aged 50-70 years who lost their jobs during the pandemic were more likely to return to paid employment than in other regions.
• Recent Labour Force Survey (LFS) estimates suggest that economic inactivity has increased over recent months, led by a rise in inactivity among Londoners aged 50-64.

Box: what is labour force participation and why does it matter?

Labour force participation is a measure of the number of available or economically active workers in the labour market. A related term is the economic inactivity rate, which refers to the share of those aged 16 to 64 who are not in employment and are not seeking work and/or are unable to start work within the next two weeks. It includes people who have retired, people with caring responsibilities, students, and the long-term sick.

A rise in inactivity could be a concern for individuals, who face ‘scarring’ effects that impact on future earnings if they later move back into the labour market. Apart from the effect on individuals (who might choose to become inactive), rising economic inactivity also has broader effects such as by reducing what economists call ‘human capital’ – accumulated knowledge, skills and experience – in the economy. This effect will be particularly strong when older workers leave the labour force. A fall in the size of the available workforce also has wider implications for employers given recruitment difficulties.

Context

Labour force participation has increased strongly in the UK and London over the past decade. But since the onset of the pandemic the inactivity rate has risen sharply in the UK (Figure A1).[1] In initial stages of the pandemic, this trend was less clear at the London level. However, more recent estimates from the ONS Labour Force Survey show a rise in the share of Londoners aged 16-64 who are economically inactive over the last year. There has been a particular increase over the last quarter, although this should be interpreted with caution.[2]

Figure A1:

Changes in economic inactivity vary widely between different age groups. Figure A2 focuses on the change in economic inactivity by age group between 2019 and 2021 based on ONS Annual Population Survey (APS) estimates. It shows that the UK-wide rise in inactivity was most pronounced for people aged 16-24 years (up 2.4 percentage points) and 50-64 years (up 1.2 percentage points). However, among working age Londoners only the 16-24 age group saw a rise in inactivity during this time (up 1.0 percentage point) as more young people opted to start or stay in education rather than enter the labour market.

Figure A2:

A relatively high proportion of Londoners aged 50-70 who lost their job during the pandemic had returned to work

One potential reason for the less pronounced change in inactivity among older people in London is because of workers returning to the labour market. In February 2022 the ONS conducted a survey to understand the experiences of adults aged 50 to 70 years who were out of work at some point in 2021.[3] The results showed that among those who had left or lost their jobs since the start of the pandemic, 23% had returned to work in London. While over three-quarters of this group had not yet moved back into paid employment, this was a higher rate of return than in other regions of England (18% on average, see Figure A3).

Figure A3:

A combination of push and pull factors seem to explain this trend

Why were Londoners aged 50-70 years returning to the labour market at a higher rate? Figure A4 draws further on the ONS’s Over 50s Lifestyle Study. It highlights two sets of factors which were of particular importance to older Londoners who did return to employment.

First, many older workers were returning to the labour market for financial reasons. Almost four in 10 (39%) Londoners aged 50-70 who returned to paid work said they ‘needed the money’, while around a quarter said they ‘could not afford to retire’ (27%) or cited increases in the cost of living (24%). These findings are supported by wider evidence. DWP analysis shows that median household incomes for pensioners living in London are relatively low after housing costs are taken into account.

The second, more positive reason mentioned by Londoners is enjoyment of work. According to the ONS survey, nearly half (46%) of Londoners aged 50-70 years who returned to work said they ‘enjoy the work or the social company’. A high share of London returners also said they had found a job with ‘better flexible working conditions’ (27%), which may reflect an increased ability to work remotely.

Figure A4:

But more recent data suggests a rise in inactivity among Londoners aged 50-64

Yet, as pointed out earlier, the latest LFS-based estimates – which cover the three months to March 2022 (more timely than the data shown in Figure A2) – have shown an increase in London’s 16-64 inactivity rate over recent months. As indicated in Figure A5, this increase has been led by rising inactivity among Londoners aged 50-64 years over the last year.

Extra caution is needed when interpreting these trends, which are based on non-seasonally adjusted data.[4] Notwithstanding these caveats, the latest LFS estimates suggest that the 50–64-year-old age group now has the largest percentage point change in inactivity over the pandemic. Having dropped between Jan-Mar 2020 and Jan-Mar 2021, the inactivity rate for 50–64-year-old Londoners increased by 5.0 percentage points over the last year.

Figure A5:

London’s headline inactivity rate remains below the UK average (Figure A1), but there are now signs that inactivity may be on the rise, particularly among Londoners aged 50-64. There is considerable uncertainty around these short-term trends, however. Continued tracking of inactivity rates across different groups of Londoners will be important as the capital emerges from the pandemic, particularly as the cost-of-living crisis intensifies.

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[1] According to the ONS Labour Force Survey (LFS), the UK participation rate was 79.6% in Jan 2020-Mar 2020 and 78.6% in Jan 2022-Mar 2022. For London, the equivalent figures were 80.2% and 79.0% respectively.

[2] LFS and Annual Population Survey (APS) are subject to sampling variability. While the LFS is the main source for headline labour market indicators at a London level, the larger sample size of the APS provides a less timely, but more reliable indication of changes in the labour market.

[3] See: ONS (2022) Early insights from the Over 50s Lifestyle Study, Great Britain: 1 March 2022

[4] LFS estimates are particularly volatile when analysing breakdowns by age. When comparing non seasonally adjusted data over time it is best practice to compare the same 3-month period for different years.