David Eiser, FAI
One of the more concerning developments in Scotland’s labour market figures recently – and as discussed in detail in last month’s Labour Market Trends Report – has been the marked uptick in the rate of inactivity among those aged 16-64 (Chart 1).
Granted, the increase in the inactivity rate has only been slightly over one percentage point – equivalent to an increase of around 35,000 people – and the rate remains low in the context of the recent past. But what underlies the recent increase in inactivity, and to what extent should we be concerned by it?
Chart 1: 16-64 inactivity rate, Scotland and UK
In a labour market sense, the ‘inactive’ category is used as a bit of a catch-all term to describe anyone who is neither in work nor actively seeking or immediately available for work. So there are a number of explanations as to why any one person might be inactive; some of these might be a concern for society, others less so.
The ‘inactive’ can include people who are not available or seeking work because they are studying; because they are sick or injured, because they have caring responsibilities, because they have retired. The category also includes people who simply don’t want to work, or don’t want to look.
Chart 2 shows how the numbers in each of these categories have evolved in Scotland on a quarterly basis since 2006. A few points emerge:
- The number of those aged 16-64 who are retired has been falling in recent years, largely reflecting increases in the State Pension age for women;
- The numbers who are inactive because they are either ‘looking after the family home’ or ‘temporarily sick or injured’ has remained broadly unchanged;
- The number of those inactive because they are studying is highly seasonal (demonstrating why statisticians tell us to compare a given month or quarter with the same month or quarter the preceding year, rather than comparing consecutive months/quarters). But the general trend indicates no major change since 2010.
In terms of the increase in inactivity, this appears to have been driven by two categories:
- After having reached a historic low in early 2015, the number of those aged 16-64 who are inactive because they are long-term sick or disabled increased gradually throughout 2015, and then increased rapidly during the first three quarters of 2016. By the third quarter of 2016 there were 234,000 in this category, compared to 197,000 the same quarter in 2015.
- The number in the ‘other’ category increased by around 30,000 between Q1 2015 and Q1 2016, and has remained broadly unchanged since then. Unfortunately the data itself doesn’t reveal too much more about why this increase occurred – there is some evidence of an increase in the number who say they do not need or want employment, but there has also been an increase in the number who give no specific reason for their labour market status.
Chart 2: Inactivity by reason
Chart 3 compares the numbers in each category during the past year specifically, Q3 2016 with Q3 in 2015. Small falls in the number of retirees and the number who are temporarily sick are small in comparison to a large increase in the number of people who are inactive because they are long-term sick or disabled.
Chart 3: Inactivity change in last year
What about changes in activity by age? These are shown in chart 4. This suggests that most of the increase in inactivity in 2016 has been concentrated among those aged under 40.
Chart 4: Inactivity by age
For those aged 18-29, inactivity was around 30,000 higher in both Q1 and Q2 2016 than in the same quarter the year previously. (Comparing the third quarter of 2016 with the same quarter in 2015 would give the bleak result that inactivity among this group is around 56,000 higher now than a year ago, although the 2015 number does look a bit of an outlier in the context of the recent past).
Why has inactivity increased among those aged 18-29 between 2015 and 2016? The data suggests that there are a number of explanations. Of perhaps greatest concern is that there has been a clear increase in the number of 18-29 year olds who cite long-term health issues in explaining their labour market status. The number of 18-29 year olds in this category (i.e. inactive because of a long-term sickness or disability) has increased in five consecutive quarters since Q2 2015, peaking at 29,000 by Q3 2016. This is the largest number of 18-29 year olds in this category for the period we are looking at.
It is no consolation, but the rise in the number of young people in Scotland who are long-term sick mirrors a broader trend in the UK as a whole. In its latest Welfare Trends Report, the Office for Budget Responsibility notes that ‘the rising prevalence of mental health conditions and learning difficulties, particularly at younger ages, has been an important driver of the rising disability benefits caseload’.
The Scottish Government will in a few years have responsibility for designing and delivering the system of disability benefits in Scotland. But the broader set of social security benefits for working age people in Scotland – including benefits for those who are temporarily ill such as Employment and Support Allowance (ESA) – and the conditionality and sanctions associated with those benefits, will remain reserved to Westminster.
Recent increases in the number of those aged 16-64 who are economically inactive because they are long-term sick or disabled is clearly a cause for concern. Its not yet known whether it is a trend that will continue, stabilise or reverse in the coming months. But it is an issue that needs to be monitored closely, alongside the standard reporting of headline employment and unemployment statistics.
The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.