The labour shortage crisis

As we all know, the UK is experiencing a shortage in labour. Latest statistics show that vacancies are at a 20 year high at 1.1m between July and September. If this is the case, are we seeing a short-term crisis or is there a fundamental structural problem?

A key requirement for the majority of businesses is the adequate supply of labour. For example, if a rural tourism business does not have enough staff, it cannot meet the level of demand. The same is true for agriculture: a dearth in the number of pickers will lead to produce being left in the fields, which will in turn reduce productive capacity and the financial returns to farmers.

It has often been said that increased automation can fill the void. While this is true to an extent, it often requires significant levels of investment. For certain types of business, it will not be a panacea to the problems being experienced. In addition, it will inevitably take time to work.

At the moment, we seem to have labour shortages in almost every sector of the country’s economy, whether that be in retail, food supply, tourism or haulage. If we look at the food supply chain, shortages in the haulage and abattoir sector have meant that at least 100,000 pigs that would have gone to slaughter and into the food chain are on-farm. This has raised serious animal welfare issues with a number of pig producers looking at on-farm culling. At a time when energy costs have gone through the roof and feed prices are increasing, culling with no government support and no compensation is the least attractive solution.

It does raise the question of why are we having these problems now? There is a strong argument that we are seeing the “perfect storm” – the combining effect of Brexit and the pandemic which is leading to significant imbalances between supply and demand. This could suggest a short-term challenge when, in fact, there are other longer-term factors in play.

The available evidence suggests that the labour shortage challenge is not, in fact, short-term. With the government’s imposition of a restrictive immigration regime, there will undoubtedly be an impact on rural sectors that have, in the past, tended to rely on a far more flexible flow of migrant labour.

It’s a combination of factors – UK immigration policy, ongoing challenges on exporting to the EU, increased energy costs, lack of affordable housing in rural areas and global economic conditions – that mean the labour supply position is very unlikely to improve until we can incentivise and increase domestic labour participation. This could take some time.

Indeed, the lack of skills represents an interconnected challenge. The food processing and abattoir sectors require skilled workers. It takes time to train staff and for them to begin to work productively. Businesses in the food supply chain need to have the capacity to train staff, but many simply do not. Elsewhere, there are difficulties for agricultural businesses to be IT literate at a time when digital awareness is crucial but digital connectivity is limited.

The situation is not helped by the definition of skilled and unskilled workers adopted by the government as part of the immigration system. For those in the abattoir industry, butchery is a skilled profession. However, the minimum wage levels for migrant workers will often prevent butchers from the EU entering the UK. This puts further pressure on businesses, without resolving the labour shortage problem.

Of course, there is the view that increasing wages incentivises current UK jobseekers and that we should not be too attached to a low wage economy. This seems to be the policy encouraged by the government to correct labour shortages. There is some merit in this, however the fundamental flaw is that increased wages will lead to higher prices for consumers. This inevitably leads to increased inflation and over time, rising interest rates. Bank of England forecasts inflation at 4% by the end of the year. This may indeed be optimistic given the ongoing rise in food prices.

Increasing costs in the food supply chain leads to pressures on food businesses such as farmers, abattoirs, or food processors. This reduces the profitability of the business and places additional pressure on sustainability. Therefore, in a situation where costs are increasing – energy, food, haulage and logistics – and where there are significant shortages in labour supply, it is inevitable that there will be consequences. A recognition of such consequences is needed to alleviate some of the impact on the food supply chain and the wider economy.

For an economy to flourish, supply must meet demand. When demand increases, but supply remains static or falls due to lack of labour supply, consumer price increases. This subsequently causes inflation.

If the current labour situation is actually only going to be a short term crisis rather than something more structural, there needs to be corrective action that underpins and enables a flexible and efficient labour supply.