Having worked through several different recessions since starting out in recruitment in 1989, our UK Country Director and Head of Contract Recruitment, Paul Martin, is well-placed to talk about the cause and effect of recessions.
Most importantly, recessions do end.
Cost of living crisis, affecting both employers and employees. The ‘cost of living crisis’ refers to the fall in ‘real’ disposable incomes (that is, adjusted for inflation and after taxes and benefits) that the UK has experienced since late 2021. It is being caused predominantly by high inflation outstripping wage and benefit increases, which has been further exacerbated by recent tax increases.
In early February of 2022, the government announced some measures to respond to high energy prices, a particular flashpoint of the crisis. At the spring statement, the former chancellor Rishi Sunak announced some more general policies to support squeezed household budgets.
A much larger package of household support for energy bills was announced by Sunak in late May. After accounting for these policies most lower income households will be more-or-less fully protected from the increase in inflation. But for many other households inflation is still expected to increase more quickly than post-tax and benefit incomes this year.
Inflation. Inflation is calculated as the average change in the price of typical goods and services purchased by UK households over 12 months. This is tracked using the Consumer Price Index (CPI), calculated by the Office for National Statistics using a sample of 180,000 prices of 700 common consumer goods and services. The latest data has the current CPI at 10.1% in the 12 months to July 2022. The Bank of England aims to keep the CPI rate of inflation at 2% plus or minus 1% (i.e. between 1% and 3%) and adjusts interest rates to achieve this.
However, CPI excludes the cost of housing. An alternative measure of inflation produced by the ONS, the Consumer Prices Index with Housing (CPIH), is in some ways a better measure of inflation as it includes owner occupiers’ housing costs. Current CPIH is currently a little lower than CPI, at 8.8%.
Talent shortage. A recession may prompt more people to return to work, but experts fear the labour crisis will continue regardless.
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 turn as the economy hurtles towards a recession?
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.
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.”
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.
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.
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.
Carberry of REC 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.
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.
The economic downturn is unlikely in the short term to eradicate the skills shortages felt by many industries that are still struggling to hire.
- Have a flexible and dynamic approach to recruiting, whilst, of course, taking a measured approach to expanding or contracting. Consider your mix of Temporary, Contingent/Contract and Permanent hiring solutions. Fact – during recessions, permanent recruitment is always reduced but replaced by temp and contract resource, whilst companies look to de-risk and cut back on the fixed costs that permanent employees bring.
- Take the opportunity to hire candidates that are on the market that generally wouldn’t be, perhaps from competitors making redundancies, down-sizing or re-skilling. Remember feeling “why can’t we fill position X” and fill it when you can. Those companies that think differently will win the war for talent in a highly competitive market.
- Audit and refresh your supply chain as they may be very different to what they were pre-recession. This could be an opportunity to off-board some and make way to bring in some new ones.
Finally, consult with your supply chain about the IR35 legislation. There are opportunities to hire the best talent if you understand the benefits of a role-by-role Status Determination. We created a free resource at https://allenrec.com/ir35faq/ to help clients.
Posted in: UK