Bank of England policymakers have also speculated that low labour participation could be hindering the UK’s economy from reaching its target 2% inflation rate.
Bank of England (BoE) Governor Andrew Bailey has cautioned that the UK’s economy was facing an ‘acute challenge’ due to dampened economic growth and significant labour shortages, especially since the pandemic. Britain is grappling with an ageing population, with an increasing cluster of the workforce being labelled as ‘long-term sick’ and a sizeable reduction in young people in work.
At the Jackson Hole Symposium held in Wyoming, Bailey explained that this problem requires increased efforts to boost productivity. He added that by 2040, 40% of Britain’s population will be older than the age of 64. “Ageing is not going to turn around in the foreseeable future”, said Bailey, explaining the Bank of England’s decision to focus on understanding labour force participation rather than studying long-term trends in unemployment.
According to official data, the percentage of 16-64-year-olds in the UK labour market has dropped below pandemic levels, although this is not the case in other advanced economies. Mental health has been identified as one of the main reasons for this inactive workforce, which Bailey described as a ‘concerning development.’
While low response rates have been the limitation to analysing this data, the BoE Governor is convinced that the reality of the shrinking labour crisis remains unchanged. Prime Minister Keir Starmer’s government has pledged to boost workforce expansion and economic growth. Mindful of the UK’s financial situation, the government wished to pass a welfare reform bill, which was rejected by over 100 Labour MPs who opposed the changes proposed to the benefits system.
In June, these MPs signed an amendment which allowed them to vote on a proposal to reject the welfare reform bill in its entirety. The bill suggested that disability and sickness-related benefits payments were cut to save £5bn a year by 2030. Known as the Universal Credit and Personal Independence Payment Bill, this bill would deprive disabled people with less severe conditions from claiming Personal Independence Payment (PIP).
The government believes these cuts could save the government millions every year, and some analysts have attributed these welfare benefits to the low morale of the British people to remain employed. According to the data from the second quarter of 2025, 21% of Britons aged 16-64 were neither employed nor actively seeking employment. This number has reduced from last year’s 22.2% but remains higher than the 20.3% recorded before the pandemic.
Bank of England policymakers have also speculated that low labour participation could be hindering the UK’s economy from reaching its target 2% inflation rate. Data published last week showed that higher food prices and travel costs pushed July’s inflation to 3.8%, the highest in any G7 country.
However, the latest official data revealed that the UK’s economy grew faster than expected during the second quarter, despite uncertainty triggered by Trump’s trade war and a slowdown at the beginning of this year due to pressures from tax increases.
Market analysts have suggested that while it was less likely that the Central Bank would cut interest rates, it was not entirely out of the realm of possibility. Research by the National Institute of Economic and Social Research (NIESR) suggests that inflation could decline in the second half of the year and could reach the Bank’s target of 2% by the end of 2026.
The BoE could cut interest rates in November of this year due to an economic slowdown as a result of rising unemployment rates and shrinking job vacancies. Although the inflation rates over the next few months could sway this decision either way.
The BoE monetary policy committee cut interest rates to 4% earlier this month, as inflation was forecast to fall over the next two years. However, the committee members have voted to maintain these interest rates until inflationary trends become clearer and more stable.