As the initial euphoria of the lockdown subsiding in the UK ends, the big question facing business is what next. The COVID Crisis is already causing unprecedented pressures on the labour market, where for as long as the virus remains uncontrolled, anyone hoping for a fast return to regular reality should think again.

Factor that the demographic groups most at risk of hospitalisation from Covid-19 are people with pre-existing conditions, overweight or aged 45 or over. The binary nature of this threat means that within this demographic, hospitalisation rates are above 20% currently and reaching 35%+ for pensioners specifically. This has many implications for the labour market:

  • In terms of wealth creation, the UK economy transitioned to being a knowledge and services based economy some time ago. The nature of knowledge is such is that it is gained over the course of a career, where the people who have the most expertise are most likely to be at risk. What this means is that for those at risk, a decision will need to be made as to whether to return to life as it was or adapt to the new reality and with that, reduce their workload and minimise interaction with non-core people. This behavioural change is likely to mean that more senior people refer less work and have fewer junior people around them. Already this is manifesting in recruitment activity, where whilst companies are now re-hiring, activity for junior positions is significantly less than the overall average.
  • Larger organisations normally operate on the basis of having tiers of expertise where the most junior learn from having mentors and also through osmosis. Given the fact that the Government can not provide any meaningful guarantee on safety in public transport, what this means is that for junior people employed, it is going to be harder for them to be trained up and to develop in the way they would have otherwise. While companies work through how to compensate for this, once again hiring is likely to be dampened, especially for junior people.
  • Thirdly, whilst the Government are determined to have schools re-open it is hard to imagine how this is viable at this time. For starters, within the UK it is estimated that 60%+ of teachers are aged 40 or over. Even if children aren’t at risk, the teachers are, therefore asking them to return back to schools while the virus is rampant is something the Unions will be correct to challenge. What this means is that for working parents, who would be at an age where they would typically be the managers and leaders of organisations, it will prove challenging for them to be based from offices far from home, even if they want to.

This has a direct knock-on effect for whole parts of the economy reliant on discretionary spending. From not needing to buy as many outfits to wear, since working from an office is not happening, to cutting back on eating out, not to mention reducing spend on other items such as travel, the impact is already being seen. So for example, in Q2 net personal debt levels dropped for the first time in decades, as people were paying off credit cards, overdrafts and loans naturally through the change in lifestyle.

Then also remember that while for now, lockdown has ended nationally, it is still in place in Leicester, whereas we move from summer, it is highly probable we see a resurgence of the virus, with regional lockdowns reoccurring regularly. As opportunities to congregate outdoors diminish with the weather, expecting people to not meet up at all is not realistic. Equally, vigilance is not high enough in the UK to sustain the R rate below 1. For example, on the first day of bars opening, people packed the streets making a mockery of social distancing. As the weather turns, people will congregate indoors and start to rationalise/normalise their behaviours. This will lead to infection rates rising were at the same time, the combination of the population density in the country along with underfunded services mean that as this happens, so hospitalisations will rise again. While at least this time it won’t be a surprise for people, what it does mean is that for those at risk, they will continue to be cautious throughout, meaning commuting and meeting in larger groups either for business or pleasure will be kept to a minimum. Hence until there is a viable treatment that works, people aged 40 or over are likely to continue as they are, working remotely where possible.

Therefore because this is not a temporary lull but an ongoing health emergency likely to last for at least another 12 months, across Consumer Goods & Services (which is the largest single industry in the UK and the biggest employer in terms of the low wage economy) as spending drops, so jobs will be cut, where we are already seeing this start to happen. Retail alone accounts for approximately 3 million jobs in the UK whereas new behavioural norms start to kick in, so this also has longer-term implications, especially we enter this new era of technology automation, robotics and artificial intelligence. Put another way, if the new equilibrium for companies to operate profitably and successfully requires them to reduce the number of employees and for certain functions to be mechanised, where-ever possible, to minimise the chances of having staff contracting the virus at work, with all the disruption that would bring, expect it to happen, where now thanks to the advances in technology, across the low wage economy, it is becoming increasingly viable. Unfortunately, once these jobs are gone, they aren’t returning either, as in many cases, the only factor that prevents it from happening now is the up-front capital expenditure requirement. Once that happens, employment levels will be adjusted accordingly.

Unfortunately, while all these super trends had been in process over the last few years, the impact of the Covid-19 crisis will be to act as a super accelerator, where businesses under pressure to adjust to this new equilibrium, move fast to do so where the immediate step of mass redundancies is already starting to happen. It is now estimated that unemployment will start surging to levels not seen in a generation. This then acts to shrink the economy further, as people who had been working, cut back on their own spending out of necessity. By definition, as this happens, so businesses impacted need less professional workers also, so we will see an impact on the hiring for HR, Marketing, Finance etc.

All of this is happening at a time when the UK is heading towards a no-deal Brexit, which counter-intuitively, could turn out to be for the best for the British economy after all. The requirement for the UK to be bound by policies consistent with those in the single market is more insidious than it seems. Consider the following:

As outlined above in detail, what we are seeing within the UK is a recession triggered by a collapse in consumption initially caused by COVID, yet sustained through the changes this crisis has caused in lifestyle and approach to work. Remember that for EU states, VAT levels are mandated and have to be within a range of 15-25%. There are many reasons for this, but in principle, if a country wanted to reduce its VAT to say 5% normally, it would not be able to. The fact the UK has done so now in hospitality is more to do with a combination of the country leaving the EU already than anything else. Equally, VAT is a tax on consumption so if the UK Government want to kick start the economy again, the best way to do so is to reduce consumption taxes, of which VAT is the biggest. In principle, as a function of leaving the EU, there is nothing to prevent the UK from reducing VAT to 5% across all areas. This would take the biggest reshaping of taxation in a generation, as VAT accounts for a third of all tax receipts, equally given the structural imbalances in the economy, this may well be the right thing to do, for the Conservative Government to take on the rentiers head-on and rebalance taxation.

Secondly, remember that the issues facing the UK are likely to impact the entire EU, where across the continent, unemployment is set to rise. As mentioned previously, young people especially are at risk of being made redundant and not finding new jobs, where the nature of freedom of movement means that there is likely to be a surge in migratory flows from poorer countries to richer ones in search of jobs. Normally the UK would be one of the first ports of call, from January the Government can put limits on this and ensure that where skills are needed, companies can source those people, but it is done so in a controlled way.

Thirdly, already the EU is preparing a COVID Budget where the UK would have been expected to pay in tens of billions at a time when tax receipts are collapsing. The UK was only able to sell its last bond issuance because the Bank of England stepped in as a buyer of last resort. If it hadn’t the Government would have either seen access to capital markets be limited, or it would have had to do so by offering higher interest, which would have had a knock-on effect across the economy. Put another way, can the UK afford to be so generous when the Government can barely raise funds to cover subsidy programmes and essential tax cuts to stimulate the economy? While it is true that the UK would have been able to claim funding back from the programme, but the history of the EU has shown that proportionately, more is sent, than sent back.

It may be that the way the UK needs to operate to move out of this recession is by organising state subsidy. For example, the Government have announced that Huawei is going to be extricated from the 5G rollout. Realistically the reason they were in pole position in this technological race is that Huawei has benefited from extensive Chinese state aid. Maybe for the UK, what needs to happen is for the Government to introduce a state aid program for BT, to enable it to be able to operate at the level required? According to EU regulations, however, that would be not permissible. I can give many other examples of where targeted state aid would be of great benefit to the UK. For people opposed, reflect that of the constituent members of the FTSE 100, many of the largest members, were previously state-owned businesses. Sometimes the only way to get the size and scale needed to operate at a global level is through active state involvement. This is something the Chinese understand and recognise, where the failure of Europeans to play by the same rule book, is leading to a sinoisation of the Continent, which is leading to extreme geopolitical risks.

While it is true that the immediate disruption brought on by Brexit is likely to cause economic turbulence, the impact of Covid-19 and the recession caused by that is of orders of magnitude larger, where the UK by being out of the EU will have the freedom to apply policy tools to repair the economic damage done faster. The economic competency of the Government will become increasingly important through this period, where so far it seems, Rishi Sunak has not made a step wrong.

As a final thought, maybe the way forward is to have an approach more akin to the Netherlands. When it comes time for there to be an independent commission on Covid-19 they will be one of the countries that will be studied the closest, as despite having a higher population density than the UK (nearly double), fewer hospital beds per capita and not having a lockdown at all, they ended up having a death rate per capita of over 50% lower. Interestingly, with the Netherlands, despite having fewer hospital beds per capita, the emphasis on education, primary care and preventative medicinal practices, has meant that it has outperformed the UK in this first phase and is well placed to continue to do so through this period. For the UK to adopt this approach would require overall state healthcare spending to increase significantly, but perhaps that is a price to pay for operating a functioning market economy in this new COVID era.

James Chaplin – Chief Executive Officer

For more insights on labour market trends in the UK and internationally, visit our research hub here: https://vacancysoft.com/recruitment-industry-insights/

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