The UK labour market has transformed

The labour market has changed dramatically…

The EY ITEM Club special report on the UK labour market sets out in detail the scale of the transformation since the onset of the financial crisis. The number of people looking for work has increased by over 1mn since the start of 2010, there is a record of 30.8mm people in employment and yet real wages fell by 8% between 2008 and 2014. This is a very different market from the one that prevailed for the last two decades when rises in employment typically translated into rises in real wages.

EY ITEM Club expect these broad trends to continue in the medium-term. The labour supply is forecast to grow by 1.2mn over the next 4 years, at a 0.9% faster annual rate than between 2010 and 2014, and although real wages will rise, the rate will be moderate for the level of employment, averaging only around 1.5% per year.

…with wide-ranging implications for business…

The new labour market will clearly have a significant impact on the way that companies seek to manage their human capital but the changes in the UK labour market are so significant that they will have implications beyond the strategic and operational issues in the human capital domain. Businesses now need to incorporate this new labour market outlook into their strategy and planning.

…impacting both demand…

Although EY ITEM Club believe that much of the change in the labour market is due to the changes in the level and structure of the labour supply, there will be a major impact on the level and structure of demand that businesses face. This is because not only has the labour market changed in aggregate over the last few years, but it has also transformed at a disaggregate level with shifts between segments and sectors. It is the combined effect that will impact the demand for goods and services. One of the most striking changes is the fact that the growth in aggregate consumption has been driven more by changes in total employment and hence total income than by real wage rises for the existing workforce. When we also take into account distributional effects – the growth in real wages has been concentrated amongst workers earning £25,000 or less and the number of workers earning over £45, 000 has fallen by around one seventh, the picture becomes clearer. Businesses selling in the consumer market will have to continue to ensure their offers are value based and priced appropriately for a market in which there is less real income growth than before the financial crisis. Life for sellers of luxury and high end goods is likely to remain challenging even as the economy recovers.

Another likely consequence of the developments in the labour market that EY ITEM Club predicts is for an increasing share of labour income to go to older workers. By contrast, younger workers may find it harder to replicate the acceleration in incomes that previous generations achieved. The analysis of income distributions suggests that the value of qualifications is being squeezed in this labour market. For businesses, it will be important to review the balance of their sales and marketing efforts across age groups. The consumers of the immediate future are likely to be older and with lower income growth prospects on average than would have been the norm in previous periods.

The increase in the number and share of self-employed workers in the labour force will also impact the consumer market. These workers are likely to be less secure in their employment and may well find it harder to raise debt and especially mortgages. This lack of security may well translate into different purchasing patterns and a demand for new product and service offers, particularly for financial services. Businesses need to begin to work through how the changing labour market may impact their product and service portfolios and propositions.

..and operating models…

The dynamics in the market serve as further reinforcement of how much the labour market has changed and how significant this could be for businesses. It is likely that corporates have deployed relatively cheap labour to help maintain margins and to minimise capital investment in what has been a difficult economic environment. With the expected developments in the labour market, is now the time to consider a new approach? It is true that the broad trends in the labour market that have supported significant hiring are going to continue. However EY ITEM Club do envisage real wage growth and although this is in an economy that is expected to grow faster, margins could come under more pressure. In addition, there is the risk of skill shortages and battles for talent in certain parts of the labour market. There are clear areas for analysis in the operating model:

  • When we look across occupations we can see an increase in professional and managerial roles but a decline in the number of back office roles and almost no growth in sales and customer service employment. It does appear that technology may be impacting certain roles and companies need to make sure they are operating at the optimal mix of labour and capital, especially as labour becomes more expensive.
  • IT continues to grow in importance and the increase in the number of people employed in professional and IT services supports this view. There is clearly a risk of skill shortages which could in turn lead into higher wage demands. Now is the time to review the IT strategy and especially assumptions on the level and mix of labour required to deliver the plan successfully.
  • The labour market analysis provides a direct insight into how dynamic the economy is. The decline in the numbers employed in the Retail sector is almost matched by the increase in Warehousing &. Transport roles. It seems reasonable to assume this may reflect the shift to online shopping. Certain retailers have clearly been caught out by this trend, it is important businesses look at their business model and how it might change to avoid being similarly caught. These are interesting times. The transformation of the UK labour market has been a key factor in the UK’s recovery to date. While the broad trends are expected to continue, developments at both the macro and micro level mean that now is the time to ensure that the dynamics of the labour market are fully reflected in business and operating strategies and plans.

Key labour market forecasts table

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