Labour and skills shortages risk significant damage to the UK economy, reducing the country's productivity and ability to invest, grow and raise wages sustainably, according to new research by the Recruitment & Employment Confederation.

Its economic modelling found that with a 10% spike in demand in the economy, and the labour market restricted by shortages, the UK economy would shrink by between 1.2% and 1.6% by 2027, relative to where it would be without these shortages. This could cost the economy anywhere between £30bn and £39bn every year.

The REC’s report, Overcoming shortages: how to create a sustainable labour market, provides a number of recommendations for both business and government on what can be done, and it says will be vital for both firms and politicians to put workforce at the heart of their thinking.

Neil Carberry, chief executive of the REC, said: “We haven’t had to look far for evidence that labour shortages have the power to bring segments of the UK economy to their knees recently. From chaos at airports to driver shortages and NHS waiting lists growing – the underlying issue of labour shortages has burst out into the open. The modelling we are launching today show the damage that could be done if we don’t solve these shortages – more than £30bn in lost potential every year, as well as lower productivity, lower wage growth and rising inflation.

“Only growth can create the environment to maintain public services and a low tax rate. But neither government nor business can do this alone. It’s time for both to get the 'people stuff’ right and get serious about long-term workforce thinking. For companies, that means prioritising workforce planning at the highest level, investing in a skills pipeline – co-operating with other firms and local education providers to do it – and treating recruitment with the importance it deserves.

“For its part, government needs to create the environment for businesses to be able to invest and thrive – with a long-term workforce strategy that includes skills, immigration, good local transport links and robust support for people who aren’t currently working.”

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