Labour market offers glimmers of hope for the Chancellor and the Bank


Today’s labour market statistics show employment has been holding up well in the face of the higher interest rates and the cost of living crisis. Meanwhile, there were encouraging early signs that labour market activity is improving and pay growth generating less inflation – a bit of good news for the Chancellor ahead of Wednesday’s Budget. There’s less good news for workers, as the real wage squeeze continues.

Labour demand looks to have stabilised

Recent months of data had pointed to a turning point in demand for workers, with vacancies falling and redundancies creeping up. But with unemployment unchanged again (still low at 3.7 per cent) and employment rising (slowly), it now looks like demand has stabilised. Vacancies are coming down as they get filled, but only in the private sector, and remain high at 1.1 million – about one-third above pre-pandemic levels.

Good news for the Chancellor: labour supply is picking up

Tomorrow’s Budget is expected to see a big focus on labour force participation, which has suffered badly in the UK – and not many other places – since the pandemic (see my recent report basically written by coauthored with Louise Murphy for more details). In this context, it’s encouraging to see that inactivity is down 77,000 on the quarter among people aged 16-64. However, much of this came from a fall in the number of students – not obviously a good thing –  and there’s a long way to go (inactivity remains 488,000 up on pre-pandemic levels). Look out for our budget reaction for more on this, and bone up in advance with our preview.

Good news for the Bank of England: cash pay growth is falling

This combination of steady labour demand and increasing labour supply, along with a very partial abatement of cost of living pressures, has stabilised wage inflation. Headline pay growth has stopped rising – growth in regular pay was 6.5 per cent in the three months to January, down slightly on the 6.7 per cent figure in the three months to December. This is clearer when looking at higher frequency pay measures: in the private sector, annualised pay growth on a three month measure has been falling since last Summer – from 8.7 per cent in July to 5.7 per cent in January. With MPC deciding its next move on interest rates a week on Thursday, we’ll be taking a closer look at pay trends early next week.

This will be good news for the Bank of England, who have been worried that fast nominal pay growth, generated by a tight labour market and workers trying to keep pace with inflation, would lead to a ‘wage-price spiral’. Falling pay inflation means that they won’t need to raise interest rates – and unemployment – by as much to get inflation back to the 2 per cent target.

Bad news for workers: real pay is still falling fast

However hard workers have been trying to keep pace with inflation, they have failed to do so: real pay is still falling at close to record rates of 2.5 per cent per year. This is the key driver of the living standards disaster we are all living through today.

While some of the factors driving real wages – world food and energy prices – lie a long way beyond the Government’s control, other factors – the main one being growth in productivity – do not. RF’s Economy 2030 Inquiry, which has diagnosed these problems in detail, will conclude this year by developing a new strategy to boost growth and living standards for ordinary people. Watch this space.