High job vacancies in the UK: Is shrinking the only way out?

Job vacancies are high, but the Bank of England won't allow wages to rise

The British economy is currently facing a challenging dilemma: while job vacancies are high, wages are not rising.

This has become a significant problem holding back the economy, as more than 1 million advertised jobs remain unfilled. The obvious answer to this issue is to pay workers more, but industries’ bosses are hesitant to do so, fearing that increased overheads will lead to higher prices and customer loss.

Some of Britain’s largest industries, such as hospitality and manufacturing, need to shrink, and they need to start thinking about how to do it now. If the workers are needed, employers could offer flexible working arrangements, more exciting career prospects, and better pensions.

Still, these demands are deemed unacceptable by industry leaders, leaving the prospect of record vacancy rates for several years to come as companies delay projects and demand overtime from existing staff. If this isn't possible, businesses may have to shut down.

The Bank of England, which consistently raises interest rates to achieve its goal of “shrinking to fit” the UK economy, has become involved in this issue. A majority of the central bank’s monetary policy committee argues that a labour market with too few workers chasing too many jobs is a recipe for high inflation, which is unacceptable. Policymakers at the Bank of England are using the bluntest of instruments to make a difference, with a potential for another interest rate raise when the committee next meets later this month.

Employers could be urged to increase the supply of labour by training workers and providing the skills they need. However, training has proved difficult for most employers and the government, with the skills training budget only recently increasing to where it was a decade ago when adjusted for inflation.

The government’s apprenticeship levy has been a farce, and it is little used. Employers are wary and do not want to pay for training until the labour market is in balance again, as they fear the workers they train will leave for another employer that doesn’t train workers and can afford to pay higher wages.

A government could step in and impose stricter employment rules while subsidizing certain industries. These subsidies could allow factory owners to retrain redundant hotel, bar, and restaurant workers to join admin, IT, or marketing teams. The manufacturing sector is weighed down by rigid structures and union rules devised in the early 20th century. Professional institutes connected to manufacturing are much the same, which is why they cannot attract engineers. Stricter employment rules and subsidies could help address this issue.

Jeremy Hunt may try to alleviate the burden on businesses in his budget speech this week with proposals to attract parents and older workers back into the labour market while also relaxing quotas for foreign workers. It’s a “bit of everything” plan that allows the chancellor to avoid taking sides. However, it may allow zombie businesses – those that can just about make ends meet – to soldier on, and make the taxpayer fund broad, unfocused subsidies that do little more than counter the extra costs of borrowing imposed by the Bank of England.

According to Alan Manning, the former chair of the Migration Advisory Committee, labour shortages are almost always caused by poor pay and conditions. This is a message the chancellor should heed. If coffee shops can only stay in business by hiring foreign workers willing to accept wages below what their UK counterparts need for a decent standard of living, then perhaps we need to cope with fewer coffee shops. The same goes for hotels, gyms, and other non-essential parts of the economy.

Overall, the British economy is currently facing a critical challenge. Employers must find ways to fill vacancies while balancing the cost of overheads and increasing wages. The government may need to step in and provide subsidies to certain industries to retrain redundant workers, while also imposing stricter employment rules.

The Bank of England must continue to use its influence to control inflation while avoiding a severe economic slowdown. The success of the vaccination program and the easing of restrictions could potentially lead to a surge in economic activity, but it remains to be seen how quickly the economy can fully recover from the pandemic's impact. Ultimately, a combination of government intervention, private sector innovation, and consumer confidence will be necessary to ensure a sustained and robust recovery.

As the country navigates these uncertain times, it is important to keep in mind the lessons learned from past economic crises and to remain vigilant and adaptable in the face of changing circumstances.