Market Tightness by Industry Post-COVID

Why is it so hard to hire right now? Too few workers looking for jobs, or too many firms competing with each other?

In our first page we showed the basics of the UK economy post-pandemic. Many industries still have employment which has massively not recovered back to pre-Covid levels. At the same time, economic inactivity is high, and there are not enough unemployed workers available for these industries to hire back.

But this picture misses an important idea, which is that these industries which have shrunk might not want to hire workers back. Take Manufacturing, for example, which has been in decline for decades. Perhaps manufacturing firms do not want to return to their pre-pandemic size, in which case the 200,000+ worker empoyment deficit in that industry is not really a worker shortage at all.

Unfortunately, as we will see on this page, Manufacturing firms really do want to hire these workers back, and are just struggling to do so. But to understand why, we need to develop a true measure of how difficult it is to hire, and to do this we will use the concept of Market Tightness.

What is market tightness?

Market Tightness is an idea going back to decades of economic research. Put intuitively, market tightness just compares the number of people firms would like to hire to the number of workers looking for jobs. If there are many more firms looking to hire than there are workers looking for jobs, we say the market is tight. If there are many more workers looking for jobs than there are firms looking to hire we say the market is slack. When markets are tight this is bad for firms, because there are more firms competing for a give number of workers, making it harder for them to hire. Tight markets are also good for workers, by making it easier to find a job and potentially secure a higher wage.

Put more concretely, we measure market tightness as the ratio of the number of vacancies posted by firms to the number of workers looking for jobs. You might have seen market tightness for the whole economy measured as the ratio of vacancies to the number of unemployed workers for example:

Tightness = Vacancies ÷ Unemployment.

According to this simple measure, the economy as a whole is the tightest it has ever been, with more vacancies chasing fewer unemployed workers than ever before, as shown for example by Tony Wilson.

As for why the economy is tight, the answer is clear: firms are posting a huge number of vacancies right now, as we can see in the graph below:

The graph shows percentage change in total vacancies in the economy since the start of the pandemic. This is the percentage difference in the value in each quarter from the value in the fourth quarter of 2019. Data are from the ONS VACS02 survey, and are seasonally adjusted.

After collapsing by 60% during the pandemic, total vacancies are now actually 50% higher than they were before the pandemic, and at their highest were 60% higher. Since we saw that unemployment has barely changed since then, this translates into a 60% rise in market tightness by the traditional measure. With so many more vacancies chasing the same number of unemployed workers, it is no surprise that firms are finding it hard to hire right now.

Our Contribution: A Measure of Market Tightness By Industry

In our research we have gone even further, and developed a way to measure Market Tightness for each industry of the economy separately. This allows us to make the following graph, showing how market tightness has changed for each industry from pre-Covid up until the latest data:

The graph shows percentage change in market tightness in each industry since the start of the pandemic. This is the percentage difference in the value in the latest available quarter from the value in the fourth quarter of 2019. Market tightness by industry is defined in the text. Data are from the UK Labour Force Survey and ONS VACS02 survey, and are seasonally adjusted.

As you can see above, almost every single industry in the economy is now tighter than it was pre-Covid. This means that there are now more vacancies chasing fewer people looking for jobs in these industries than in 2019, making it harder for firms to hire.

We also see big differences across industries, with some industries seeing massive increases in tightness. The key idea is that the larger the increase in tightness for an industry, the worse the labour shortages are. By this measure, Manufacturing has the worst shortages right now, as market tightness has increased by over 300% in that industry. In Manufacturing, the 358% rise in tightness means that there are now 4.58 times more vacancies in Manufacturing per worker for a job in that industry than there were in 2019. Clearly, this is not a good time to be a manufacturing firm who is looking to hire.

On the other hand, some industries have much smaller increases in tightness. For example, the Arts and Leisure industry has seen only a 40% increase in tightness, so while firms in that industry are finding it harder to hire, the problems are no where near as severe as in Manufacturing. Only one industry is finding it easier to hire at the moment, and that is Public Administration, where market tightness has fallen since 2019.

Tightness is high due to low worker interest, not just high vacancies

Measuring tightness for each industry separately is not a simple exercise, and we developed a new method to do so which we outline in our new research. In this website, we promise to keep things simple and clearly explained, and those looking for the nitty-gritty details can read a brief explanation here, where you will also find a link to the academic paper.

For now, all you need to know is that tightness in any industry is the ratio of the number of vacancies posted by firms in that industry to the amount of search effort that workers give to that sector:

So an industry will be tight, meaning that it is hard for firms to hire, either if 1) firms post a lot of Vacancies in that industry and so create a lot of competition for workers, or 2) workers are not interested in applying for jobs in that industry, and direct their Search Effort to applying for jobs in other sectors.

In the graphs above we plot the change in these two measures since the start of the pandemic. The industries are ordered from left to right so that the industries on the left saw the largest increase in tightness (largest shortages) as in the graph from earlier. Two key things stand out:

Firstly, firms are posting more vacancies in all industries of the economy, as we can see in the left graph. Many industries now have at least 50% more open vacancies posted than in 2019 before the pandemic. This clearly is a problem for the whole economy, with high vacancies everywhere leading to generalised shortages. However…

Secondly, the reason the worst hit industries are facing shortages is due to low worker interest in those sectors, not just due to high vacancies. What we mean by this is that vacancies are high all over the economy, and so high vacancies cannot explain why tightness has risen by 350% in Manufacturing but only 95% in the high skilled service (IT/Professional) industries. Indeed, both of these sectors saw vacancies rise by over 50%, so there is little difference in the rise in their vacancies.

Instead, the reason the shortages are so much worse in Manufacturing is that workers simply are not looking for jobs in this industry right now. In the right graph we plot the change in worker Search Effort directed towards each industry. We estimate that there has been a 64% decline in the Search Effort that workers direct towards Manufacturing jobs, while there has been only a 22% in the Search Effort they direct towards IT / Professional jobs. This is why tightness has risen — and hence labour shortages are worse — so much more in Manufacturing.

The right graph also shows that there have been massive changes in where workers are searching for jobs since the pandemic. Search effort has redirected away from badly hit sectors like Manufacturing — where Search Effort has fallen — and towards other sectors like Public Administration — where Search Effort has risen. This finding of the increased unwillingness of workers to search for jobs in some shortage sectors is a key result of our analysis.

For each industry, the sum of the blue and red lines gives the percentage change in market tightness in the industry since the start of the pandemic. This is the percentage difference in the value in the latest available quarter from the value in the fourth quarter of 2019. The blue line is the amount of the change which is due to the change in vacancies posted in that industry. The red line is the amount of the change due to the change in search effort. We calculate the contribution of vacancies and search effort as their log change relative to the log change in tightness. Data are from the UK Labour Force Survey and ONS VACS02 survey, and are seasonally adjusted.

To investigate this more systematically, in the plot above we decompose the change in tightness in each industry into the amount caused by the change in Vacancies posted in the industry versus the amount caused by the change in Search Effort directed towards the industry.

For each industry, the blue and red lines add up to give the total change in tightness since the pandemic. The blue line gives the part of the change in Tightness due to the change in Vacancies, and the red line the part due to the change in Search Effort. The dominant role of Search Effort in explaining why tightness is high in the worst hit industries is clear, with the red line explaining the bulk of the tightness increase for key industries such as Manufacturing and Construction.

The industries which have seen smaller rises in tightness — and hence fewer shortage problems — have still seen rises in Vacancies posted by firms. The reason this does not translate into shortages for these sectors is that workers are happy to search for and accept jobs in those industries, so Search Effort towards those industries has risen or fallen less to offset some of the rise in Vacancies.

Low search effort is a big problem in aggregate

The discussion above shows that low search effort is a big problem for some key industries. How big a problem is it for the aggregate economy?

In the plot below we plot the change in economywide market tightness — total vacancies divided by total search effort — since 2019Q4. We see that total tightness has risen by around 100% in the two years since the pandemic. How much of this is due to rising vacancies, and how much is due to falling search effort? During this time, vacancies rose by 50% and total search effort fell by 30%, so both play a role.

The graph shows percentage change in market tightness, total vacancies, and total search effort in the economy since the start of the pandemic. This is the percentage difference in the value in each quarter from the value in the fourth quarter of 2019. Data are from the LFS and ONS VACS02 survey, and are seasonally adjusted.

It turns out that in the latest data, 2022Q2, around half of the rise in market tightness is due to falling search effort, and the other half from rising vacancies. Vacancies have only risen by 50%, so the remaining 100 – 50 = 50 percentage points of the rise in tightness is due to the fall in search effort. So low interest in work is a big problem right now. We will get more into the reasons for this low search effort in later pages.

Industries which shrunk during COVID are now facing shortages

This page has focused on the hiring difficulties faced by firms, as measured by market tightness. In our first page we instead looked at employment gaps, measured as how much employment had shrank in each industry since before the pandemic. An interesting question is then whether the industries which lost the most employment during Covid are now the ones struggling to back their workers.

The first graph shows the percentage change in the total number people employed in each industry since the start of the pandemic (horizontal axis) and the percentage change in market tightness in each industry (vertical axis). Clicking the arrows shows graphs for vacancies and search effort separately. These are percentage changes from the latest available quarter relative to the fourth quarter of 2019. The size of the bubble represents the size of each industry, and the line is the line of best fit. Data are from the UK Labour Force Survey, and are seasonally adjusted. Vacancies data are from the ONS VACS02 dataset.

This indeed seems to be the case, as shown in the graph above. Here we plot the percentage change in employment for each industry since the pandemic against their change in tightness since the pandemic. The colour of the bubble tells you the name of the industry, and the size of the bubble represents how large the industry is. For example, Manufacturing (blue bubble) saw a roughly 10% fall in employment and 350% rise in tightness since the pandemic.

We see a clear downwards sloping pattern in the graph. This means that the industries which lost the most employment during Covid are now suffering the worst shortages. To see this clearly, compare Manufacturing (blue bubble, 10% employment fall and 350% rise in tightness) with Public Administration (orange bubble, 25% employment rise and 30% rise in tightness).

This means that the industries that shrunk the most are now struggling to hire workers. This could be because those industries are now posting lots of vacancies, and hence firms are crowding each other out and competing for the same workers. Or it could be because workers have reallocated their search away from industries which were badly hit during Covid.

To see how this breaks down into vacancies and search effort, click the arrows to the side of the picture to scroll to two more figures.

Click on the arrows to the side of the graph to scroll through and see the correlation between the employment change and vacancies and search effort separately. You can see that the industries which shrunk the most also have seen a decline in search effort directed towards their jobs. Some of these industries are also now posting the most vacancies, as we discussed in our first page, but the effect is even more striking for search effort.

This finding provides an important new perspective on the labour shortages: Labour shortages are not just because firms are posting lots of jobs, or because more workers have become economically Inactive. There is a huge misallocation problem as well, which is a scar from the Covid crisis. The industries that were hit the hardest during Covid lost many jobs, and now would like to hire people back. But workers, most likely in response to these industries’ struggles, have abandoned the industries and are now searching for jobs elsewhere.

Solving the labour shortages will therefore not only require convincing Inactive workers to return to work. Businesses and the government must also convince workers to start searching in industries suffering the worst shortages, which workers have (perhaps understandably) abandoned since the crisis.

Summary and interactive exploration

So, what have we learned?

• Using our new methods, we show that these shortages are driven not just by firms posting historically high numbers of vacancies. There is also a massive labour supply problem, with workers less interested in applying for jobs than they were before the crisis.
• Labour shortages, as measured by market tightness, have gotten worse in many sectors of the economy. But they are especially bad in some sectors, such as Manufacturing.
• A big issue for these shortage industries is that workers simply do not want to look for jobs in these industries any more. Yes, firms are posting more vacancies, but to make things worse workers are not applying for their jobs. A big part of this is probably because the shortage sectors are also those which were hit hardest during Covid, so you can understand why workers might be skeptical about going back to work there.

So, we have learned that the UK has a labour supply problem which is massively exacerbating the shortages, especially in some sectors. Then the crucial question is why. Which workers are no longer willing to search and apply for jobs? And have workers changed what kinds of jobs they are applying for?

To answer these questions, we now turn to the interactive part of our journey. Click through to the next page to find out how employed, unemployed, and inactive workers are all applying for jobs less and contributing to the shortages.

Next page: Who Is Driving the Decline in Search Effort?