Omicron threatens the nascent UK labour market recovery

Published by BTG Advisory on 2 December 2021

The emergence of Omicron, the latest Covid-19 variant, threatens the positive autumn momentum building in the UK labour market. Early indicators suggest only a tiny proportion of the 1.14 million furloughed workers were made redundant after the Coronavirus Job Retention Scheme (CJRS) expired. November’s data, published in mid-December, is also expected to show that positive employment trends continued. If true, this confounds fears of rising unemployment at the end of the CJRS. However, the latest pandemic curveball may blunt the positive momentum.

The Omicron variant, first detected in Botswana, has already spread to the UK. Preliminary evidence suggests existing vaccines are effective against severe disease and death. Still, there is an increased risk of infection among the vaccinated as well as reinfection. The latest Covid-19 pandemic has rattled governments, markets and scientists around the world. A World Health Organization report states: “The likelihood of potential further spread of Omicron at the global level is high.” However, the evidence remains limited.

Over the coming days and weeks, if significant empirical evidence confirms that the Omicron variant is highly transmissible and vaccine-resistant, there are obvious risks to the outlook for GDP and employment. In a severe scenario, the government may reintroduce lockdown restrictions and, consequently, government support for hard-hit sectors, including the furlough scheme (e.g. retail, leisure and hospitality). A new wave of infections and hospitalisations may also delay the much-anticipated increase in UK borrowing costs next month, but it is too early to fully understand how consequential the Omicron variant will be. The above severe scenario outcomes are not yet the base case for the market.

Omicron’s arrival is a reminder that the outlook for the economy depends upon the evolution of the pandemic – a truism often repeated by central banks around the world. It also underscores how sharply the pandemic has changed the structure of the labour market. Changes in demand and supply have reconfigured the size and organisational structure of different industries. The pandemic has influenced where people work, how much people work and the jobs they do.

The pandemic catalysed some of these shifts, while others predate Covid-19 – some will be temporary and others permanent. In this article, we assess the latest UK labour market trends in the context of the new challenges posed by the Omicron variant.

Q3 employment trends

The UK’s labour market showed early signs of strength since the closure of the furlough scheme at the end of September. Provisional data shows that 1.14 million jobs were supported by the CJRS on the final day of the scheme, down from 1.35 million jobs the month prior. The overwhelming majority (88%) of those furloughed in September were back in work in October, according to an Office of National Statistics (ONS) survey in mid-October, with the balance – corresponding to 136,000 people – out of work.

The third-quarter Labour Force Survey (LFS) shows a slight decrease in the UK unemployment rate, at 4.3%. According to ONS data, unemployment remains fractionally higher than pre-pandemic levels and 0.5 percentage points lower than the second quarter. Elsewhere, the claimant count decreased by 14,893 to 2.06 million, while UK payrolls added 160,000 new jobs in October. Overall, the early data shows a recovery in UK labour markets, and economists expect the trend to continue in the November LFS release.

These are encouraging signs for the UK labour market and validation of the success of the CJRS, which protected 11.7 million UK jobs from 1.3 million employers over 18 months at the cost of £70 billion to the taxpayer. All other things being equal, these data sets should support the Monetary Policy Committee’s anticipated increase in borrowing costs in mid-December. However, with the emergence of the Omicron variant, markets will now be much less certain of an imminent rate rise.

Other concerns linger within labour markets. For example, long-term unemployment continues to climb, caused by long Covid, fears of the virus, and poor mental health, according to a Resolution Foundation survey.

There are also highly uneven sectoral impacts of the pandemic in the labour market. Covid-19 waves have correlated with spikes in the unemployment rate and reduced economic activity as some workers leave the workforce creating labour shortages which have acted as inflationary pressures. The pandemic has reconfigured the size (i.e. workforce and economic activity) of various sectors – some of these trends will outlast the pandemic. For example, in hard-hit sectors (e.g. retail, hospitality and leisure), lockdowns and social distancing restrictions shrunk the workforce, which currently remains 146,000 below pre-pandemic levels, according to ONS data, despite a broader recovery across the labour market as a whole. These sectors may never return to previous levels.

The airline industry is similarly still in the discovery phase to determine where long-term demand will settle. The use of the furlough scheme was highest in locations near to most London airports at the end of September, indicative of the aviation industry’s demand collapse. Furlough take-up rates in those areas was double the UK average, according to ONS data. Initial optimism that the airline sector may be staging a recovery will be dashed by the emergence of Omicron, as governments rush to reimpose travel restrictions and force carriers to downsize international flight schedules.

Labour markets have been stress tested over the past almost two years and it is unlikely they would be in as resilient shape as they are now without the furlough scheme. Whether or not the government is forced into the revival of its flagship Covid policy will depend on how virulent Omicron proves to be.