Real wages on the cusp of shrinking for fourth time since financial crisis 

The UK labour market entered the period of instability caused by the war in the Middle East in a weak place, with unemployment at 5 per cent, the volume of payrolled jobs falling and pay packets on the brink of shrinking in real terms again for the fourth time in less than two decades, the Resolution Foundation said today.

The latest ONS data shows February’s fall in unemployment was a blip. A sharp rise in March – to 5.5 per cent in the single-month data, the highest since 2015 – returned unemployment to 5 per cent over the first three months of the year. Early indications suggest further bad news in April, with payrolled employment falling by 100,000 on the month (although initial April estimates are always subject to large revisions).

The picture on pay packets is even bleaker. Wage growth has continued to weaken in cash terms and was only able to match – rather than outpace – inflation in March. With the war set to push up inflation over the coming months, pay packets are set to start shrinking in real terms for the fourth time in less than two decades.

The Foundation notes that this stuttering long-term pay performance post 2008 has left average weekly earnings £278 below their pre-financial crisis path.

The one silver lining is that the weak state of the labour market means that second-round effects from rising inflation are likely to be smaller than they were following Russia’s invasion of Ukraine, giving the Bank of England pause for thought before raising interest rates.

Julia Diniz, Economist at the Resolution Foundation, said:  

“The UK labour market entered the current period of economic turbulence in a weak place, with unemployment at five per cent and real wage growth falling to zero.

“With inflation set to increase over the coming months, the UK is on the cusp of its fourth period of falling real–wage growth in less than two decades. This stuttering performance goes a long way in explaining the political and economic discontent that surrounds modern Britain.

“The one silver lining to the UK’s weak labour market is that we are much less likely to see the kind of wage-price spirals that followed Russia’s invasion of Ukraine. This should give the Bank of England pause before raising interest rates.”