Are employment/inactivity rates near records? Paul Bivand looks at the figures a little more closely

15th September 2014

Last month’s employment rate at 73.0% is slightly lower than July’s record, and the inactivity rate at 21.9% is slightly higher than July as well.

But, these figures are not the highest published working age figure – that would be 75.9% in Summer-Autumn 1974. Even leading up to the 2008 recession, the employment rate peaked at 74.9%.

So, the latest ‘records’ are about two percentage points below those before the recession.

Why are employment rate records being claimed? The answer is that what is meant by ‘working age’ changed in 2010 when women’s state pension age started being raised towards 65 – a process that will not be complete until 2018 – after which pension ages will rise for both men and women.

Before the recession, employment rates were calculated on the state pension age that was current at the time – 60 for women and 65 for men. Since 2010, figures have been published on the basis that retirement is at 65 – so is automatically lowered because women’s state pension age is not 65 yet.

Chart 1: Employment rates on age definition used up to 2010 and currently

We estimate that around 1 percentage point of the recent employment and inactivity rate rise is due to state pension reform, not any other part of welfare reform. There is another 1 percentage point rise in employment rates, and fall in inactivity rates, ‘baked in’ due to further pension reforms.

In 1995, legislation was passed to equalise state pension ages at 65 between 2010 and 2020. This process started on time, and was in train before the 2010 election. The Coalition Government legislated to speed up the change so that pension ages will be equalised at 65 in 2018, and then pension ages will start to rise to 66 in 2020.

This means that we are half way through the process of equalising pensions at 65 by 2018.

The ONS produces figures for employment, inactivity and unemployment rates on both working age definitions (old and new) and also based on the current state pension age as it has moved.

Chart 2 shows the gap in employment rates between the 16-64 working age measure and the current pension age measure. Before the implementation of pension reform, employment rates on a 16-64 base average 2 percentage points below those on a current pension age (then 59/64) basis. As pension reform has come into force, the employment rate gap fell to 1 percentage point.

Chart 2: Gap between 16-64 and 16-current State Pension Age employment rates

Chart 3 shows the position for economic inactivity (retired people are included as economically inactive). It shows the other side of the coin to that for employment rates. We can conclude that 1 percentage point of the fall in 16-64 inactivity rates is due to pension reform, and there is another 1 percentage point to come when pension equalisation is completed in 2018.

Chart 3: Gap between 16-64 and 16-current State Pension Age inactivity rates

So, is it fair for the Government to claim employment rate and inactivity rate records? It is clear that the previous Government’s record should be judged against the working age measure then in force, including the start of implementing pension reform, while this Government’s record should be judged against the (moving) current state pension age.

Therefore, we haven’t yet achieved record employment rates. We are not far off, but not there yet. If Pension Reform (implemented by Labour and accelerated by the Coalition) is part of welfare reform, then these changes are due to welfare reform, but this isn’t the message given by the media – it’s about being tough on all working age claimants.