The UK's Office for National Statistics has allegedly distorted recent labour market developments, overestimating levels of economic inactivity and underestimating employment growth by 930,000 workers since 2019, according to a Resolution Foundation investigation.

The report "Get Britain's Stats Working" warns that unreliable data is impeding efforts to meet ambitious targets, leaving policymakers unsure of the true state of the UK labour market as the new government gets ready to release a white paper reaffirming its ambition of an 80% employment rate.

“Importantly, this uncertainty also hits our understanding of trends in labour productivity, makes it harder for the Bank of England to do its job of managing inflation, and for the OBR (Office for Budget Responsibility) to set its fiscal forecasts,” the thinktank stated in a press release.

The research noted that as the ONS and Office for Statistics Regulation know, the Labour Force Survey (LFS) has been beset by problems since the pandemic, including a collapse in response rates (from 39 to 13% between 2019 and 2023). This has opened the door to response biases, with workers potentially now disproportionately less likely to respond. Furthermore, the survey may have also struggled to reflect the growing importance of workers from beyond the EU.

With official data unable to provide an accurate picture of the labour market, the Foundation said it had created an alternative estimate of the employment rate, built up from HM Revenue and Customs payroll and self-employment data as well as the latest ONS population data.

This new employment index closely tracks the official employment rate up to 2020 before sharply diverging. The official LFS series suggests that the employment rate is currently lower than in 2019, a pattern at odds with the high vacancy rates and strong wage growth that usually implies a tight labour market. But, the new index suggests that the rate returned to its pre-pandemic peak in 2023 before dropping off slightly in 2024 to reach broadly the same level as in 2019.

The Foundation’s analysis also suggests that there could be 930,000 more people in employment than the latest official figures suggest. The current 16-64 employment rate could be around 76% (as it was pre-pandemic) rather than its official rate of around 75%.

According to the report, an inaccuracy in the LFS’s estimate of the employment rate would have implications for the level of unemployment and economic inactivity in the UK, which must be lower than estimated by the LFS if the true employment rate is higher.

‘Get Britain’s Stats Working Again’ says that, while the unemployment rate is likely lower than official figures suggest, this cannot fully account for the LFS’ ‘lost’ 930,000 workers. Therefore, the overall economic inactivity rate must also be lower and possibly close to the pre-pandemic rate (rather than being considerably higher, as shown in official figures).

The Foundation says that this likely lower level of overall economic inactivity could still be consistent with a significant rise in the number of people inactive because of long-term sickness due to offsetting factors such as a fall in the number of people who are inactive due to looking after their family or home, as well as simple population growth. Rising levels of long-term sickness are supported by independent – although not at all straightforward – benefit caseload data, it added.

Adam Corlett, Principal Economist at the Resolution Foundation, said in a press release, “Official statistics have misrepresented what has happened in the UK labour market since the pandemic and left policymakers in the dark by painting an overly pessimistic picture of our labour market.”

“The ONS Labour Force Survey appears to have ‘lost’ almost a million workers over the past few years compared to better sources,” Corlett continued. “This has led to official data under-estimating people’s chances of having a job, over-stating the scale of Britain’s economic inactivity challenge, and likely over-estimating productivity growth.”

“The government faces a significant challenge in aiming to raise employment, even if the rate is higher than previously thought. But crafting good policy is made harder still if the UK does not have reliable employment statistics,” Corlett said.

The Foundation said it welcomes the reforms planned by the ONS to improve the existing LFS and introduce a ‘Transformed’ LFS. However, it said the ONS should do more to reconcile the different data sources as soon as possible, given how fundamental these statistics are to our knowledge of the economy’s health.

A spokesperson for the ONS told the Guardian that it is aware that other measures of employment may be giving “a more accurate picture” than the LFS but insisted it is working to improve the figures.

“Our ongoing work to improve the LFS estimates by increasing the sample, reintroducing face-to-face interviews, increasing incentives for those taking part and re-weighting the data using the latest population information will all help to improve the quality of the survey,” they said.

The spokesperson added that the ONS is cooperating with outside experts to see if more action needs to be taken.

The Bank of England governor, Andrew Bailey, told MPs on the cross-party treasury select committee, “The sample is now so small that it is not a statistically representative sample, that’s the problem – so we don’t know how much faith we can put into it.”

“It’s an important issue: it’s very important, and it’s not just important for us, it’s important for other aspects of public policy as well,” Bailey added. The Bank’s understanding of how much slack there is in the labour market is a key factor in setting interest rate policy.