We can mend the labour market, says HAMISH MCRAE

If the Governor of the Bank of England and the boss of JD Wetherspoon agree on something, we should all take note.

At the Bank, Andrew Bailey calls the increase in early retirements and long-term illness due to the pandemic, which has reduced the workforce, a “job market shock.” He says the UK is unique among the G7 economies in being affected in this way.

Pub boss Tim Martin makes the same point, in slightly more colorful language, on page 93, and last week another spin came from Mel Stride, the current Minister of Work and Pensions.

He claimed that if the 650,000 people who have left the labor market went back to work, the economy would be 0.2 per cent bigger and an £11bn reduction in borrowing needs would be enough for the government to pay 2p on income tax to lower. .

We’ll get an update from the Office for National Statistics on Tuesday on what’s happening with the labor market, and it’s very likely that the number of people in work or looking for work will finally be back to pre-pandemic levels levels. But it will still be lower than it should have been given the increasing size of our population.

While you can argue with the details of Stride’s point – if the government got an extra £11bn in tax it would probably find something to spend it on – the fact remains that the tight labor market is one of the reasons why the Bank of England rising interest rates. It is concerned that rapidly rising wages will make inflation more difficult to control.

So the failure of that missing 650,000 helps explain, at least in part, the government’s struggle to reduce the budget deficit and the struggle ordinary people have to pay their mortgages.

In the long run, we need to increase productivity because that is the way to a higher standard of living and generating resources for public services. But in the short term it would help enormously if we could get more people into work.

But how? Exhortations from central bankers, ministers or even cafe owners will not change the dial. They may be right – they are indeed right – but that’s not how the economy works. What we need to do is shift the incentives, a polite way of saying it takes carrots and sticks.

A word of warning about the sticks. We cannot wish for a society in which the elderly have to continue in jobs they hate because they cannot live on their retirement. Nor can anyone support a situation where people who are sick are forced to continue working. If someone has done well, put aside savings and now wants to retire to the sun, he has every right to do so.

But really, the problem is that some people who took early retirement during the pandemic need more income to finance the life they would like to sustain. The rise in inflation is also a kind of stick. The evidence is limited, but it seems there is another trickle at work.

The positive question is how to create more carrots. Martin’s comment that it is up to employers to make jobs more attractive is correct. UKHospitality, the industry association for the hospitality industry, has a guide for the over 50s to retain and recruit older workers.

But I suspect that the most opportunities for stimulating labor participation lie with the self-employed. Prior to the pandemic, the number had risen to a record high of five million by the end of 2019. Now we have a lot more employees than before the pandemic, but a lot less self-employed.

That’s partly because of tax changes that forced companies to put on the payroll people who were previously classed as self-employed, but also because many self-employed workers have dropped out. Reversing that is an obvious first step.

Another move would be to raise the VAT threshold, which has been stuck at £85,000 since 2017. According to the Bank of England’s inflation calculator, that now equates to £106,000. Many small businesses and the self-employed turn down business to save them from the hassle of registration and VAT collection.

A more radical idea: if you really want to stimulate the employment of the elderly, stop employer contributions before the state pension age. Employees don’t pay them, so why should companies?

So plenty of ideas. Somehow we have to get those missing 650,000 back to work.