Spotlight on ... Employment Trends for 2023

In some ways, it’s an uncomfortable fact that the government will want, and indeed need, a recession to dampen economic demand, and to create slack in the job market countering demands for wage increases, thereby helping to alleviate inflation.

The latest annual inflation figure is 10.1% and to put that in perspective, inflation has been below 2.5% for most of the past 25 years. The last time it was over 10% was in 1982. The Bank of England’s remit is to keep inflation under 2% and its main tool is increasing interest rates to dampen demand. The rate is currently 4%, up from a low of 0.50% in February 2022. That's a big change for a lot of businesses and consumers: the rate's been below 1.00% since February 2009.

So, we're in a period of heightened economic volatility to say the least, which is likely to lead to a prolonged recession. The question is, how will that play out in the employment market?

Unemployment: will this time be different?

The Bank of England expects that the recession will cause unemployment to almost double from the historically low rate of 3.7% where it is now, to almost 6.5% by the end of 2025. The UK-wide insolvency specialists Begbies Traynor have said they expect the number of company insolvencies to be even higher than in the last financial crisis in 2009. At that time, unemployment rose to a peak of 8.5%. So why would this time be different?

One potential reason is a legacy of the pandemic, when more than half a million people left the labour force completely (neither in employment nor job-seeking). A recent House of Lords Economic Affairs Committee report said early retirement by people in their 50s and 60s was the main driver. However, there are early signs that this “economic inactivity", representing 21.4% of the workforce, is beginning to reverse – ONS surveys indicate that economically inactive over 50s are now returning to work because of the increasing cost of living.

The government has recently started signalling measures to accelerate this return by for example, easing tax restrictions on pension saving and cracking down on doctors issuing sick notes for the long-term sick. Expect more of this type of announcement: the alternative to cajoling people back to work is additional tightness in the job market, which will keep interest rates higher for longer, prolonging the recession. Something the government certainly doesn't want.

Different outlooks for different sectors.

It's perhaps a cruel co-incidence that some of the sectors most affected by the pandemic are also likely to be hit earliest and hardest by the forthcoming recession, the obvious examples being hospitality and high street retail. After spending the best part of two years shut down, many operators took on Covid loans just to stay afloat, and the repayments on those have now started. That's at a time when gas and electricity bills have sky-rocketed, and when the cost-of-living crisis is forcing many people to cut their discretionary spend. It's already been reported that 2022 was a record year for pub closures. Hospitality in particular has suffered from staff shortages in the recent past, but we may be approaching an inflection point in 2023 as recession begins to bite and the industry contracts.

The changed shape of the workplace itself.

The concept of the workplace has gone through a transformational change in the past few years, with many traditionally office-based workers now working from home, or on a hybrid basis, typically in the office three days a week. Many companies have consequently chosen to reduce their office footprint, a trend that is likely to accelerate in response to inflationary pressures on costs, together with recessionary pressures on the top line.

The average New York City worker is spending $4,661 a year less on meals, shopping, and entertainment near work, costing the city $12.4 billion a year.

The impact on the employment market will be interesting, potentially shielding "office workers" from the worst of the cost cuts, whilst transferring commercial pressures to property support services like cleaning, maintenance, catering, and local ancillary services. Bloomberg recently reported that as a direct result of hybrid working, the average New York City worker is spending $4,661 a year less on meals, shopping, and entertainment near work, costing the city $12.4 billion a year. It seems likely that this will be a key direction of travel in the distribution of job losses in this recession.

Thoughtful approaches to controlling staff costs.

Another factor likely to influence employers' approach to cost cutting this time around, is the uneven distribution of historic skills shortages across sectors. The downturn in business has quickly outweighed previous job market tightness in for example, the IT industry with huge numbers of redundancies at Google, Amazon, and Meta (Facebook). On the other hand, law firms have announced a more measured, and perhaps longer-term, approach of hiring freezes and pay restraint.

We're beginning to see, within our own client network, more nuanced approaches to balancing the control of costs with the retention of key talent. A software company has re-assessed its need for physical reception areas, meeting rooms, and the client facing staff who support them, in light of fewer on-site meetings, cutting costs whilst ring-fencing technical roles. A distribution business has put a hold on recruitment, planning to secure better candidates at a lower cost as the market softens. A more extreme sign of the times is a logistics company halting it's four-day working week trial and re-allocating the budget to free meals for workers in financial distress due to the cost of living crisis.

Public sector perspectives.

In his Autumn 2022 statement the Chancellor set out a 5-year plan to reduce national debt, which soared because of the pandemic response. The "pain" is to be split 50:50 between higher taxes and spending restraint and will mean real terms spending cuts. Northern Ireland faces more immediate issues. In the absence of an Executive and Assembly, Departments were without an agreed budget for 2022/23 and the public finances were left with what the Secretary of State called a "£660 million black hole". In November 2022 he legislated to set a budget directly, and inevitably this is also going to mean real terms cuts.

Again, within our own network, we're seeing a range of approaches develop. In local government we've seen the freezing of non-mandatory training, plans to sell off buildings by leveraging the move to hybrid working, and “vacancy management “procedures, where a business case must be made to refill any vacant role, whether going to the external market or recruiting internally.

Redeployment can risk compromising service provision if individuals don't have the required skills for the new roles.

In non-departmental bodies we've seen the leveraging of hybrid working and hot desking to reduce the office footprint, and redeployment of staff from redundant roles to vacant roles. This is an established approach, but one that can risk compromising service provision if individuals don't have the required skills for the new roles. Clearly that risk is exacerbated where there's a freeze on skills-based training.

There can also be constraints to restructuring, that are particular to the public sector. For example, roles with "lifetime pay protection" whereby salary levels are protected regardless of redundancy or redeployment. This can lead to cost cutting being re-focused based on contractual arrangements rather than business need, with all the tensions and anomalies you might imagine that would bring.

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