The trouble with inactivity

Elevated concerns over the consequences of recent rises in the UK economic inactivity rate for growth, wages and prices have prominently featured in recent public debate about the labour market and the economy. This paper documents the path of economic inactivity over time, disaggregated along several dimensions in an attempt to evaluate whether or not rising inactivity does indeed have consequences for growth and wages. First of all it is important to highlight that, over the longer run, inactivity is still quite a lot lower now than it has been for some time. This makes the recent rise in inactivity looks more like a cyclical blip, rather than a long-term trend. Second, spatial disparities in inactivity growth are not positively correlated with wage growth. If anything, rising inactivity is associated with lower wage growth. Thirdly, the inactivity rise has been partially offset by growth in employment of workers above statutory retirement age. Consequently, the elevated concern of sizable negative consequences of the recent rise in inactivity looks to be somewhat misplaced. Moreover, the inactivity shifts effects are unequally distributed, an important aspect which appears overlooked in the discussion, especially with regard to policy. Inactivity is strongly concentrated on certain groups of the population and is linked to both aggregate and local economic performance, falling in good times, and rising in bad. As such, policy going forward needs to try to avoid spending time on issues that may resolve themselves as the economy recovers. This means the prime focus should be on what has been an issue for quite some time now, namely the persistently low labour force participation among older, less skilled workers with illness in economically disadvantaged areas.