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The Resolution Foundation Earnings Outlook

A look beyond the headline data on the forces behind current developments in pay, how the fruits are shared, and the short- and longer-term drivers of earnings growth

Spotlight: What has happened to the inactive population over time?

Stephen Clarke, Resolution Foundation

We tend to think of people entering work as coming from the ranks of the unemployed. However outside of recessions most people move into work from a period of inactivity; last year around 80,000 more entered work from inactivity than unemployment. Given this, discussion about the level of slack in the labour market needs to pay more attention to the inactive. The evidence is that there are large variations in the probability that different people within the inactive group will enter work, but over time changes in the composition of the inactive population appears to have made it more ‘active’. Given this it is possible that there is more effective slack in the UK labour market than the headline employment and unemployment figures suggest.

 There are three sources of increased employment: people who are out of work, looking for a job and available to begin one (the unemployed); people who are out of work and not looking for one or unavailable to start one (the inactive); and people who move to the UK for work (migrants). Figure 4 shows how each of these three sources have contributed to employment entries over time. In Q2 2017 around 450,000 unemployed people moved into work, along with 540,000 inactive people and around 50,000 migrants. At present the inactive are the most important source of new entrants. This is perhaps unsurprising as there are over six times (8.7 million compared to 1.4 million) as many inactive than unemployed people. However, they are far less likely to enter work.

It is difficult to speak of the inactive population as a whole. Some tend to resemble the unemployed in their prospects of finding work, while many are more disconnected from the labour market.

 Figure 4: Who’s moving into work?

Notes and sources: RF analysis of 2 Quarter longitudinal Labour Force Survey

For example around 37 per cent of the inactive population have a disability, and – controlling for a range of other personal and economic characteristics – compared to someone without a disability they are 90 per cent less likely to find work. On the other hand – again controlling for a range of characteristics – someone who has a degree has a much better chance of entering work, but only 16 per cent of the inactive population has a university education.

Failing to take these differences into account can mean that policy makers can over or underestimate the role of the inactive population in determining the UK’s effective labour supply. Using information about the relative probabilities of different groups entering work we can produce a ‘weighted’ estimate of the size of the inactive population.[1] Because these weights are fixed over time this estimate shows what impact the changing composition of the inactive population has had on effective labour market slack. Figure 5 presents an index of the inactive population and compares this to the weighted estimate. Over time the groups that tend to have a better chance of moving into work have become a larger part of the inactive population. For example in 2013 13 per cent of the inactive population had a degree, this figure is now 16 per cent. Four years ago 90 per cent of the inactive population had been out of work for more than a year, this figure is now 88 per cent. Perhaps most importantly the average age of the inactive population has fallen, which could suggest that the large increase in inactivity that occurred in the early 1980s is starting to unwind. Such compositional changes are distinct from a general improvement in the chance of an inactive person moving into work, with the overall job entry-rate of the inactive population no higher than it was in the mid-2000s.

Figure 5: The inactive population has remained constant since 2013 once the changing composition is taken into account

 

Notes and sources: RF analysis of 2 Quarter longitudinal Labour Force Survey. 4 quarter rolling averages. See footnote for full details.

Figure 5 shows that the weighted measure has remained stable while the raw measure has fallen. What can be learnt from this? First, policy makers need to be aware of the differences that the ‘inactive’ label masks. A better understanding of who makes up this group – and how it may have changed over time – can help guide active labour market policy. In particular, although there has been a decline in the share of people spending a long time out of the labour market, the share of the inactive population with a disability has remained constant at around 37 per cent. Pushing the employment rate higher will require better support for this latter group. Second the fact that our weighted measure of inactivity has remained constant in recent years suggests that there may be more effective slack in the labour market than declines in the headline inactivity measure indicates. This may be one reason why pay growth has been sluggish.

[1] To do this we split the inactive population into eight groups and look at the probability (assessed over period 2002 to 2017) that people within each group enter work each quarter. We then apply these probabilities to the inactive population. As the probabilities remain constant the only thing driving changes in the weighted population are the sizes of the various groups and the size of the inactive population as a whole.

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Spotlight

What has happened to the inactive population over time?

We tend to think of people entering work as coming from the ranks of the unemployed. However outside of recessions most people move into work from a period of inactivity

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