The UK’s labour market is cooling down, slowly. Although unemployment rose from 3.7 per cent to 3.8 per cent, figures published by the Office for National Statistics this morning show that job vacancies have fallen for the ninth consecutive period. They’re now down 47,000 but still stand at over a million. The number of people out of work and not seeking it (economically inactive) fell too, as students started hunting for work.
The most startling figures, however, were those for wage growth. They showed that average pay rose 6.6 per cent in the three months to February. Hefty pay raises in normal times – but adjusted for inflation, that’s a real terms fall of 3 per cent: one of the largest falls in wages since comparable records began in 2001. So wage pressures – which the Bank of England feared was fuelling inflation rather than chasing it – seem to be easing. This increases the chances that interest rates are held at 4.25 per cent when the committee meets next month. But if we don’t see inflation figures budge (the next update is out tomorrow) another rise to 4.5 per cent can’t be ruled out.
The gap between public and private sector pay continued to narrow, too. Wages grew 5.3 per cent in the public sector: this is the largest growth experienced outside of the pandemic for nearly 20 years. Meanwhile, wages grew 6.1 per cent in the private sector, with the fastest growth recorded in financial services (8.3 per cent) and construction (6.2 per cent).
These real-term pay cuts will quietly give the Bank of England some relief: its governor Andrew Bailey has warned numerous times against inflation-based pay raises, which he fears might bake price hikes into the system. They will cause a much bigger headache for the chancellor, however: while the government has been holding out on inflation-based raises for the public sector, Jeremy Hunt will be acutely aware of how these pay hits are fuelling the cost-of-living crisis, making people feel much worse-off.
Meanwhile, there was a noticeable fall in the inactivity rate. In December 2022 to February this year, 153,000 entered the labour market, bringing the inactivity rate down to 21.1 per cent. However, there are still some 422,000 workers missing from the job market since the beginning of the pandemic. In 2020, rising inactivity (which traditionally falls over time) was driven by 16-24 year olds before 50 to 64 year-olds commenced ‘the great retirement’. But the most recent fall was driven again by that 16-24 year old group as students began to look for work.
Of course if Sunak and Hunt want to speed up filling those vacancies to reduce inactivity further, there is an obvious untapped pool of workers. An estimated 5,000 workers are signed onto sickness benefits every day, while nearly 800,000 sick notes were issued for mental health and behavioural reasons last year alone. Those out of work due to long-term sickness rose to another record high: of 2.5 million. Accelerating plans to get these people treatment, and back into the workforce, should be paramount for jumpstarting the economy.
Inactivity matters because Hunt left himself the smallest ‘headroom’ in his Budget since the establishment of the Office for Budget Responsibility 13 years ago. A large part of that £6.5 billion Hunt held back is based on unlikely assumptions about fuel duty: that he will unfreeze it next year and roll back the 5p cut. But the labour market plays a big part in that calculation too. The OBR said that a labour market ‘downside scenario’ would completely wipe that headroom out.
With an election possibly just a year away Sunak and Hunt will be looking for some kind of giveaway, with senior Tories calling for a cut in the basic rate of income tax. The chancellor’s headroom gives him very little chance to do this – but he certainly won’t be able to if the labour market figures don’t keep heading in the right direction.
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