3. Labour market flows

Previous analysis examined the data on labour market flows in order to provide better understanding of the movements that underlie headline labour market statistics. This section of the commentary revisits the labour market flows analysis using the most recent published data (July to September 2017). The analysis in this section is motivated largely by the need to better understand more recent decreases in employment level as well as increases in inactivity. Hence, the latest quarterly changes in gross flows between the three economic statuses covered in this section show the underlying movements that sit behind the recent fall in both employment and unemployment as well as the increase in inactivity.

In the three months to September 2017, the UK employment level decreased (by 14,000) for the first time since August to October 2016 and in the three months to October it decreased further by 56,000. Prior to this, both the employment level and rate had been following an upward trend; reaching the highest level and rate (32.1 million and 75.3% respectively) in the three months to July 2017, since comparable records began. A similar trend applies to economic inactivity indicators. The inactivity rate followed a downward trend reaching a record low (21.2%) in the three months to July but it increased to 21.5% in the latest period (August to October 2017). Hence, these recent changes have prompted further analysis of labour market flows.

Figure 3 illustrates the quarterly change in flows obtained from two-quarter longitudinal data. Gross flows represent the total number of people moving from one stock to another, for example, from employment to unemployment, employment to inactivity and the other way around. Figure 3 shows that in the three months to September 2017 (the latest available period), the number of people who moved from employment to unemployment increased by 49,000 when compared with the three months to June 2017. This was the largest increase compared with all other gross flows during the same period.

The number of people who moved in the opposite direction (from unemployment to employment), fell by 28,000 to 411,000. This indicates that more workers became unemployed, while fewer unemployed people found employment during the latest period (July to September 2017) when compared with the previous quarter. This trend coincides with the quarterly decrease in employment in the three months to September 2017, the first since August to October 2016.

Figure 3: Quarterly change in gross flows for UK labour market UK, seasonally adjusted, April to June 2017 to July to September 2017 Source: Office for National Statistics, Labour Force Survey Download this chart Figure 3: Quarterly change in gross flows for UK labour market Image .csv .xls

Furthermore, the number of people who moved from inactivity to employment decreased by 22,000 to 518,000 in the three months to September 2017 compared with the previous quarter, whereas the gross flow from inactivity to unemployment fell by 41,000 to 356,000. The latest labour market flows data indicate that the number of people joining the labour force from inactivity decreased (this applies to movements from inactivity to both employment and unemployment) as shown in Figure 3. Meanwhile, the number of people leaving the labour force (movements from employment and unemployment to inactivity) increased (by 38,000 and 23,000 respectively).

Figure 4 depicts the net outflows from employment. The total net outflow from employment is calculated by subtracting the total inflow to employment (from unemployment and inactivity) from the total outflow from employment (to unemployment and inactivity). Hence, if the net outflow from employment is positive this means that more people are leaving the employment pool compared with those joining this pool. Similarly, comparatively larger negative values for the total net outflow show that more people are joining the employment pool compared with those leaving this pool.

The net outflow from employment is generally negative and follows a procyclical trend indicating that inflows to employment are generally greater than outflows from employment, except during economic downturns when the reverse trend is expected. Figure 4 shows that the net outflow from employment reached a peak of 272,000 during April to June 2009, following the economic downturn, but it has remained negative since October to December 2011.

Figure 4: Net outflows from employment, to unemployment and inactivity UK, seasonally adjusted July to September 2007 to July to September 2017 Source: Office for National Statistics, Labour Force Survey Download this chart Figure 4: Net outflows from employment, to unemployment and inactivity Image .csv .xls

However, during the latest available period, the net outflow from employment increased considerably, (by 137,000), compared with the previous quarter. This was due partly to a net outflow from employment to inactivity (of 54,000), which increased by 60,000 and turned positive in the three months to September 2017 from negative (6,000), in the three months to June 2017.

During the latest available period, the net outflow from employment to unemployment increased by 77,000 (to a negative 99,000) compared with the previous quarter. It should be noted that the average net outflow between 2010 and 2017 from employment to unemployment was negative (164,000). This implies that a rise in net outflow from employment to unemployment during the latest available quarter was the main driver of the overall increase in the net outflow from employment.

Notably, the net outflow from employment (negative 44,000), during July to September 2017 represents the largest net outflow from employment since July to September 2011. In line with this, during the latest available period (July to September 2017) the hazard rate for remaining in employment declined by 0.4 percentage points from 97.3% to 96.9%. Hazard rates represent the relative likelihood of someone changing their status or remaining in the same category.

An important distinguishing feature of the UK labour market (when compared with the US labour market, for example) over the past few years has been significant growth in the number of self-employed people. The number of self-employed reached a record high-level of 4.86 million in the three months to August 2017. Figure 5 shows net inflows to self-employment.

Since Quarter 1 (January to March) 2010, the average quarterly net inflow to self-employment from employment was 26,000. The net inflow to self-employment has been positive since Quarter 1 2013, indicating that more people were consistently joining the self-employed pool compared with those leaving this pool. This may serve as an indication that workers were choosing this form of employment over being an employee.

Figure 5: Net inflows to self-employment from employment, unemployment and inactivity UK seasonally adjusted, Quarter 3 (July to September) 2005 to Quarter 3 (July to September) 2017 Source: Office for National Statistics, Labour Force Survey Download this chart Figure 5: Net inflows to self-employment from employment, unemployment and inactivity Image .csv .xls

However, Figure 5 also shows that during the latest available period (July to September 2017), the net inflow to self-employment fell to 37,000 from 41,000 in the previous quarter. This fall coincides with the first decrease in the total self-employment level since January to March 2017. In the three months to September 2017, the net inflow to self-employment from unemployment was positive (30,000), whereas the net inflow to self-employment from inactivity was negative (16,000). The net inflow to self-employment from unemployment decreased slightly compared with the previous quarter (from 31,000 to 30,000), whereas the net inflow to self-employment from inactivity increased by 12,000 on the previous quarter. This indicates that more people are joining the labour force as self-employed from inactivity than those who move in the opposite direction (from self-employment to inactivity).

If a higher share of self-employed people would prefer to work for an employer, this would suggest excess slack in the labour market. If an increase in self-employment was driven by people choosing self-employment over not working, this would cause higher participation with no real effect on the labour market slack. During the most recent period, it is the decrease in the net inflow from employment to self-employment (by 13,000) that has led to a slight fall in the overall net inflow to self-employment. However, a general trend shows continued, positive flow from employment to self-employment (Figure 5), which suggests that many workers are choosing self-employment over being an employee.