Thought of the Week
Why are businesses hoarding labour amid rising insolvencies?
May 2, 2024 3 Minute Read
The challenging economic backdrop with high borrowing and labour costs has led to steadily rising levels of insolvencies over the past three years. Over the past year, bankruptcies have averaged 6,290 a quarter, up 50% compared with 2019. This is similar to levels seen in the aftermath of the Global Financial Crisis. The high number of insolvencies is not surprising. During the recent protracted period of low interest rates, businesses were able to easily access secure low-cost financing, even without exhibiting remarkable growth, which creates an environment favourable for zombie firms. This has been coupled with government support during COVID. As interest rates have increased and the environment has become less favourable, there has been a delayed shake out of unproductive firms from the market.
Despite the rise in insolvencies, the level of redundancies has remained below average, suggesting that some firms are ‘labour hoarding’. This partly reflects the labour shedding that occurred during COVID. In the second half of 2020, around 673,000 employees were let go, the highest level of redundancies in any six-month period since our data starts (1995). While some businesses ‘rightsized’ over this period, many made excessive cuts, leading to a significant need for rehiring, which is still ongoing in some cases. Consequently, many businesses are retaining their labour to avoid a similar scenario.
As a result, the level of vacancies remains high. And despite businesses enduring a sustained period of low growth, along with the additional burden of high wage and debt costs, unemployment remains below the long-term average.
A further factor contributing to the low unemployment rate is inactivity. The number of people who are inactive due to long-term illness has increased by 30% since 2020 to 2.8 million people, or 6.6% of the working-age population. As well as long-term illness, Brexit, and the UK’s points-based immigration system have limited immigration, leaving the UK with a shortfall of 330,000 workers, mostly in the low-skilled economy, limiting labour supply.
Considering the constraints on labour supply, we expect unemployment to remain low in the near-term. While this may benefit individuals who remain employed, it could lead to stubborn wage inflation. Moreover, in the long-term, it could hinder economic growth as the productive capacity is limited by the lack of labour, potentially creating future wage inflation pressure if not addressed.
Figure 1: Redundancies and insolvencies, UK
Source: ONS
