Help (desperately) wanted: Labor shortages are putting a damper on U.K. recovery hopes

The labor shortages are affecting sectors as diverse as agriculture, food processing, retail, bars and restaurants, the construction industry, and care homes. A severe shortage of truck drivers—the industry says it needs another 100,000 drivers—has had the biggest knock-on impact, causing delivery delays and shortages.

Labor markets are troubled around the world, but the problem in the U.K. is more profound than most. Factors such as COVID and the changes in working patterns it has wrought, as well as Britain’s exit from the European Union, which has replaced free movement of workers between the 27 EU countries and the U.K. with tough immigration controls, have colluded to form a perfect storm. The question now is how long it will last.

Signs of stress in the U.K. economy are easy to see. One Waitrose supermarket in eastern England had gaps on the shelves for mineral water, diapers, and pet food this week with notices telling customers, “Because of countrywide supply issues, some of our products aren’t available right now.” A local poultry producer is so desperate for staff it is distributing leaflets to homes, saying: “We’re hiring!”

U.K. car output fell by 38% in July as manufacturers grappled with a global semiconductor shortage and the absences of workers told to self-isolate after being in contact with people with COVID. At one farm in Herefordshire, western England, ripe blueberries are rotting on bushes for lack of workers to pick them, the Guardian newspaper reported.

Job vacancies in July topped 1 million for the first time on record while stock levels in the retail and distribution sectors are at record lows.

GDP impact

Pantheon Macroeconomics, a U.K. consultancy, said in a report this week that labor and goods shortages should gradually ease over the next six months, but the labor supply would never return to the level it would have reached if the pandemic had not happened.

Because of this, Pantheon’s economists agree with a U.K. government advisory body that Britain’s GDP “will be about 3% below its pre-COVID trend path in the mid-2020s.”

Other economists see a smaller short-term impact on growth. The services-heavy U.K. economy was among those worst hit by the pandemic, with GDP slumping a record 10% in 2020. But it is roaring back now as businesses reopen. The IMF forecasts the U.K. will grow 7% this year—together with the U.S. the fastest-growing economy in the Group of Seven major economies—followed by 4.8% in 2022.

Thomas Pugh, U.K. economist at audit and tax firm RSM, says the labor shortages and supply strains will “probably hold back growth in the third quarter by a little bit, but we are talking about taking a foot off the accelerator rather than slamming on the brake.”

“Growth (in the third quarter) will still be pretty solid, 2% quarter on quarter, something like that, instead of 2.5% or 3%, so a bit of a hit,” he told Fortune. “The bigger point is whether these are temporary, pandemic reopening-related shortages or whether they are a bit more permanent.”

If the labor shortages turn out to be long-lasting, they could feed already rising wage and inflationary pressures, posing a threat to the recovery. However, Pugh believes they are likely to be temporary.

Labor pool

The U.K. economy still has a pool of workers to recruit from. Unemployment edged down to 4.7% in the second quarter, but around 800,000 fewer people have jobs than before the pandemic. Another million people, unable to work because of the pandemic, are still having part of their wages paid by the government under a scheme intended to avoid mass layoffs. When that scheme ends at the end of September, some of those people could still be laid off and looking for work.

Andrew Goodwin, chief U.K. economist at forecasting firm Oxford Economics, says the labor problems should not have too big an impact on the U.K.’s recovery as long as they remain confined to a relatively small number of sectors.

“The problem becomes if it becomes more widespread. At the moment, there’s no real sense that’s happening…The evidence suggests that we should be quite a long way from a situation where we have wages being driven up across the board,” he said.

Goodwin says labor and supply chain problems might knock a few tenths of a percentage point off U.K. economic growth, which Oxford Economics forecasts at 7.3% this year and 6.7% next.

Five million EU nationals who came to work in the U.K. before Brexit have been granted the right to stay in the country. But tens of thousands of EU citizens, including 25,000 truck drivers, are thought to have left the U.K. during the pandemic. Some may come back, but no one knows. Meanwhile, the government has implemented a new immigration policy that makes it much harder for new, unskilled migrants to enter the U.K.

On top of that, more young people have chosen to stay in school, rather than join the workforce, while many older workers who lost jobs during the pandemic opted for early retirement. Many people fled London and other cities during the pandemic in search of more space in towns and villages, and that has changed the pattern of demand and where labor is needed.

Silver lining

The labor shortages could have a silver lining.

For years, the U.K. economy has been plagued by low business investment and low productivity growth. Labor was plentiful, making it easier for businesses to hire more workers than to invest in expensive machinery. Many of the jobs created were low-paid or insecure.

The shortages could make businesses rethink the way they do things. Firms are already having to pay higher wages to attract staff to work as drivers or in restaurants, improving prospects for the low-paid.

Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research (CEBR) consultancy, said the labor shortage would increase the pace of technological change.

“It forces innovation and it shakes up the system a bit. Sometimes we weren’t meant to do things that way or be quite as labor intensive as we are,” he said.