A slowing economy is starting to feed through into the labour market


We’re starting to see signs that the slowing economy may now be feeding through to the labour market. Even as GDP growth has faltered in recent months, and with Brexit uncertainty ramped up and productivity stagnant, the labour market had remained strong. The employment rate had reached a record high, with pay growth improving.

And at first glance, the headline statistics out today show a strong labour market continuing to defy economic uncertainty, with employment remaining high and unemployment and inactivity rates stable. But there are signs that the jobs market is catching up with the wider economic trends. Today’s data shows the highest quarterly fall in employment since May 2015. Jobs growth is tailing off, and pay growth is weakening.

Female employment, which has been the driver of the UK’s job boom in recent years, fell by a record 93,000 in the latest data. Jobs growth has been weakest in areas which already have below-average employment rates, such as Wales and Yorkshire and the Humber, widening the worrying employment gaps between regions.

Meanwhile, pay growth is stalling. Real regular pay grow by 1.7 per cent in the three months to August, down from 1.9 per cent the previous month. Our Earnings Outlook published last week set out a return to peak pay before the end of the year, However, a combination of a downward revision to last month’s growth rate, and wages going up more slowly in this month’s data, suggests that this peak may well take a little longer to arrive. That’s a concern given that Britain’s pay downturn reached its 12-year anniversary in this month’s data (real pay peaked in August 2007).

Public sector workers are bearing the brunt of the pay growth slowdown. Their wages are growing at just 1.4 per cent in real terms, compared to 1.7 per cent in the private sector. And while pay grew in most sectors, workers in the Transport & Storage and Arts, Entertainment & Recreation industries are experiencing falling wages.

This weakening doesn’t come as a huge surprise. The warning signs have been there for some time, not least in a sustained decline in the number of vacancies, and more recently rises in the youth unemployment rate and in self-employment.

It’s not all doom and gloom – earnings are still growing and employment is still high. The number of people in work reached a record high earlier this year, and wage growth of 1.7 per cent feels robust by recent standards (though below the pre-crisis average of around 2 per cent).

The key takeaway from today’s data however is that we can’t take a strong labour market for granted. While it’s possible for the labour market to outperform broader economic indicators like GDP and productivity for a fair while, especially after a downturn when workers are regaining some lost ground, today’s numbers suggest that this phase may now be ending. The next government needs to be prepared to navigate a rockier jobs market in the coming months and years.