The U.K. labor market was in good shape coming out of the pandemic. With vacancies high, recruiters were struggling to fill positions and employers competed fiercely for workers. Alas, the outlook has changed quite dramatically since then.
While the unemployment rate has remained relatively low, labor demand has plummeted. Job postings are now well below 2019 levels, especially for white-collar jobs, and worker churn has fallen significantly. It’s not a great time to be a jobseeker!
As the labor market has soured, Britain is experiencing a crisis of “hidden unemployment.” More and more people are leaving the labor force and being classified as inactive. And since they are not active jobseekers, they do not show up in the unemployment numbers. As a reminder, a person must have been looking for work within the past four weeks to be technically unemployed.
This blog post will dig deeper into the trend of rising economic inactivity in the U.K. and explain the factors that are potentially causing this crisis.
Underemployment is increasing
Even as the unemployment rate has increased by more than 0.6 percentage points since 2022, the current rate of 4.3% is historically low. However, unemployment is not the best measure of labor market slack or tightness anymore. Some of these alternative indicators suggest that the U.K. labor market is weaker than what the headline unemployment rate suggests.
Let’s consider the underemployed. These are workers only working part-time for economic reasons, meaning that they would like to work longer hours, but struggle to find a job that gives them the opportunity. Underemployment has increased by more than one percentage point compared to a year ago. It is also higher than it was in the early 2000s. More workers would therefore like to work longer hours but cannot find the right job.
Zero-hours contracts and why they are a challenge for workers
The phenomenon of zero-hours contracts took off in the early 2010s and might have contributed to rising underemployment. These are flexible employment contracts that do not guarantee workers a minimum number of working hours.
The challenge for employees is that they become vulnerable to unpredictable schedules and unstable income. This insecurity makes it difficult to plan finances, secure housing, or manage childcare, contributing to heightened stress and financial hardship.
Despite these challenges, many companies increasingly rely on zero-hours contracts to maintain workforce flexibility, particularly in sectors like retail, hospitality, and healthcare. They allow businesses to quickly adjust to fluctuating demand without the financial commitment of guaranteed hours, ultimately shifting economic risk away from the employer and onto the worker. While this model offers adaptability for employers, it is criticized because it comes at the cost of employee wellbeing and job security.
Long-term health issues and bad incentives created by the welfare state
Another concern that is negatively affecting the labor market is the disparity between welfare provisions for unemployed individuals and those claiming health-related benefits.
Unemployment benefits provide relatively modest support—currently £90.50 per week for a single adult over 25—which often falls short of covering essential living costs. In fact, U.K. unemployment benefits are among the least generous across advanced economies, both in terms of the amount provided and the duration of support.
In contrast, a person unable to work due to health reasons might be entitled to Universal Credit as well as incapacity and disability benefits (Personal Independence Payments). Altogether, claimants can receive a total compensation of £1,384 or more per month as those benefits can be staggered.
This notable gap has likely influenced some individuals to move from unemployment support onto long-term sickness claims, particularly when struggling with conditions that make returning to stable employment difficult. The pandemic has likely exacerbated this trend. The emergence of long-COVID has left many previously healthy individuals unable to maintain regular work. Simultaneously, the pandemic’s impact on workers’ mental health has been profound, with rising cases of mental conditions contributing to a growing number of incapacity claims.
For those already facing economic hardship, the combination of inadequate unemployment support and a more stable financial safety net through sickness benefits has created a strong incentive to transition toward the latter. While many claims are legitimate, this trend highlights a broader issue in the U.K.’s welfare system that has pushed workers out of the labor force and into hidden unemployment. This is exactly why the Labour government recently announced to make changes to welfare entitlements to address the rapidly rising health-related benefit claims.
NEET (not in employment, education or training) is rising amongst young workers
Younger people are disproportionately affected by the cooling of the labor market, which has led to a steep decline in job openings over the last two years. As job opportunities have dried up, especially for many white-collar occupations, more people in the age group 18 to 24 years old are classified as “NEET”: not in employment, education or training. The percentage of people who are NEET has risen from a low of about 10% in 2021 to more than 13% today, an increase of almost 300,000.
That is obviously an extremely concerning trend. It means that young workers are not only unable to find employment opportunities, but they also are not pursuing education or training opportunities that may help them later in their careers.
This will lead to a growing skills gap over time, which will end up costing those young people dearly in the long run in terms of future employment prospects.
Labor underutilization is higher than before the pandemic
This large pool of inactive people means that labor market slack in the U.K. is significantly higher than what the unemployment rate suggests.
The OECD measure of labor underutilization not only includes the unemployed but also underemployed and marginally attached workers (persons who are inactive job seekers but wish and are available to work).
Labor underutilization currently stands at close to 14%, which is about four percentage points higher than during the years preceding the pandemic. The labor market right now therefore rather resembles the weaker labor market of 2012 when the economy was still recovering from the Great Recession.
What does that mean for recruiters?
The U.K. has a crisis of hidden unemployment, as millions of working-age people who are inactive. While many of them suffer from health-related issues, the bigger obstacle seems to be a lack of decent employment opportunities. Bad incentives created by the welfare system are aggravating the problem.
To effectively engage passive jobseekers—individuals who are not actively looking for work but would consider the right opportunity—recruiters should adopt proactive strategies. Building relationships through networking events, industry-specific forums, and social media can help uncover talent that isn’t actively applying.
Personalized outreach is key: Crafting tailored messages that highlight career growth, flexibility, or unique benefits can resonate with these individuals. Additionally, showcasing positive workplace culture and success stories can encourage passive jobseekers to consider new opportunities.
For employers seeking to create opportunities for individuals with disabilities or poor health, adopting inclusive hiring practices is essential. This can include offering flexible work arrangements, investing in assistive technologies, and providing tailored support to help employees succeed. Training managers to understand the needs of these workers and fostering a culture of inclusion can make a significant difference. By actively promoting accessibility and adapting roles to fit individual strengths, employers can unlock valuable skills and expand their talent pool.
Cautionary note: Many of these charts rely on data based on the UK Labour Force Survey. The ONS has noted that due to the low and falling response rate to its survey, many of these measures have become more inaccurate since the pandemic. Nevertheless, the ONS chief has also remarked that the inactivity crisis in the U.K. is genuine and not a data fluke.
