7 months ago
Why long-term illness is fueling wage inflation in the U.K. economy?
Investing.com -- The U.K. economy faces a unique challenge as record numbers of workers are sidelined by long-term illness, creating persistent wage inflation despite apparent labor market slack, according to a new BCA Research report.
A record 3 million Britons—one in twenty working-age adults—now claim long-term illness prevents them from working. For the first time in nearly two decades, those inactive due to illness outnumber those inactive because they’re students.
The problem extends beyond those completely outside the workforce. The number of people working part-time due to illness or disability has doubled in the past decade to almost half a million, while full-time workers on long-term sick leave has also surged.
Government data shows public sector workers on long-term sick leave increased by a fifth since the pandemic, with junior staff accounting for most absences. Mental illness is cited as the primary cause.
In London alone, 460,000 employed residents—one in ten workers—now have work-limiting health conditions, with mental health issues up 60% and young adults most affected.
This phenomenon explains why U.K. wage inflation remains high despite falling job vacancies and rising unemployment. BCA Research estimates the "total worker shortage rate" remains 1% above pre-pandemic levels when accounting for sick leave and work-limiting conditions.
Without a reduction in long-term sickness rates, job vacancies would need to fall another 1% to cool wage inflation to levels consistent with the Bank of England’s 2% target—likely requiring unemployment to rise above 5.5%, essentially triggering a recession.
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The situation creates difficult choices for policymakers. The BoE must either risk recession to meet its inflation mandate or abandon its price stability goals. Meanwhile, the U.K. government faces higher benefit costs despite attempts to reduce them through recent welfare legislation.
Despite these challenges, BCA Research recommends structurally overweighting pound/dollar and U.K. gilts versus US Treasury bonds, arguing the BoE will remain more politically independent than the Federal Reserve, and the U.K. government will be more fiscally cautious than the Trump administration.
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