Talent war: could the UK beat its skills shortages during a recession?

A recession may prompt more people to return to work but experts fear the labour crisis will continue regardless
Jobs board advertises open positions outside an office

When job vacancies soared to record levels after lockdown, many employers were taken by surprise. Companies needed more staff as the economy roared back to life, but they found many older workers had retired, younger people were flocking back to higher education and thousands with long-term sickness had opted out of the labour force. 

Even the highest pay rises in a decade weren’t enough to tackle the worsening skills shortages. But could the tables be about to turn as the economy hurtles towards a likely recession later this year? 

So far, the signs aren’t great. Vacancies have come down a bit and experts believe the post-pandemic jobs boom may have peaked. Yet the UK labour market is still as tight as a drum, with UK unemployment falling to just 3.6% in the three months to the end of July – its lowest since 1974. 

“I think the labour market will remain tight for the next decade and businesses need to prepare themselves for a very difficult recruiting environment,” says Neil Carberry, head of the Recruitment and Employment Confederation (REC).

“Demand will of course wax and wane with the economy but there are some big and underlying long-term issues putting pressure on the market.”

If Carberry is right, firms must adjust. According to the Federation of Small Businesses (FSB), more than three-quarters of small UK businesses have struggled to recruit in the past 12 months, with 82% blaming a lack of candidates with the right experience, and 60% citing a low number of applicants generally.

An aging workforce

One of the most challenging long-term issues facing the labour market is demographics, says Carberry. “They don’t call it the baby-boom generation for nothing,” he says. “There were 50% more babies born in 1964 than in 1977 and they have stayed in work longer. The pandemic was the moment many decided to step back, and they will have to be replaced by a much smaller group of younger workers in the coming decade.” 

On top of that, years of underinvestment in the UK’s training system have led to a shortage of homegrown skills in key industries, and more recent efforts to tackle this are yet to remedy the situation. Employers also report finding it much harder to source talent from abroad since freedom of movement for EU workers was ended and rules for foreign workers coming to the UK got tougher. 

The FSB says the government must do more. Tina McKenzie, the FSB’s policy and advocacy chair, says she wants to see tax breaks that encourage the self-employed and small businesses to conduct more training. The government must also do more to encourage workers back into work who might have taken early retirement during Covid or opted out on health grounds. 

She adds: “We would like to see the creation of skills boot camps to help older workers learn new or improved skills, the introduction of a permanent, full statutory sick pay rebate for small firms, and a review of the mid-life MOT – an online tool for workers in their 40s and 50s that helps them take stock of their finances – so it’s accessible for small firms to use.”

The pandemic was the moment many baby boomers decided to step back, and they will have to be replaced by a much smaller group of younger workers in the coming decade

On immigration, the trade group is calling for a review of the shortage occupation list, so eligibility criteria for work visas is relaxed in more professions. It also wants business immigration fees to be cut. 

“Nearly half of small businesses cannot afford to employ an individual on a skilled worker visa (previously tier 2) and a quarter can only afford under £1,000 in sponsorship costs,” says McKenzie.

It is unclear how new Prime Minister Liz Truss will respond to these issues. Raconteur has asked the government to comment. Yet, experts say there are measures businesses can take themselves to improve the situation. 

The REC says firms should start to diversify their recruitment and do more to encourage applicants from underrepresented groups such as the disabled or those from minority ethnic backgrounds.

Investing in people

Recruitment firm Reed Employment says employers should rethink the benefits and perks they offer workers at a time of rising inflation. Securing a salary increase is the top priority for 65% of workers that have recently applied or considered applying for a new job, according to its data.

Chairman James Reed says: “Runaway inflation will also be challenging for the majority of employers to keep up with. As such, it’s likely we will see workers and employers alike prioritise additional benefits and supports beyond the purely financial. For instance, enhanced flexible working options and a positive and supportive work environment.”

Carberry says firms need to use some “good old-fashioned employee relations” to avoid pay negotiations turning into disputes. He believes that firms that want to recruit absolutely can – if they have the right strategy. “They need to see what employees want, redesign their offers and work with a recruiter who understands their business.” He gives the example of two neighbouring warehouses on an industrial estate just off the M1 motorway near Rugby. One pays less than the other but has a canteen and better managers. Its turnover is consequently much lower. 

Demand will wax and wane with the economy, but there are some big and underlying long-term issues putting pressure on the market

Businesses should also invest more in technology and processes that boost productivity, he says, so they can afford to pay wages that keep up with the rising cost of living. That means embracing trends such as automation and robotics.

McKenzie says it’s too soon to predict how the changing economic picture will affect recruitment, given the multitude of factors. But she believes a recession may discourage people from changing jobs and prompt some to reenter the workforce.

But Reed says a recession is unlikely to lead to high unemployment, noting that the company saw a 9% month-on-month growth in vacancies between July and August. 

“This highlights the current stability within the UK jobs market in the short- to mid-term,” he says. “The predicted economic downturn is unlikely in the short term to eradicate the skills shortages felt by many industries that are still struggling to hire.”