The jobs market recovery stalls


Today’s labour market data from the ONS suggest that both labour demand and labour supply are heading South. The only silver lining is that, for those that do have a job, real pay has been rising fast.

Labour supply is falling fast

Economic inactivity rate has risen to its highest rate since 2015 among those aged 16-64 (Chart 1). The 1.7 percentage point fall since the pandemic is equivalent to 700k fewer people in work or looking for it.

The latest rise in inactivity was broad based – the inactivity rate is up (and the employment rate down) for all age groups except those aged 35-49. And there are some stark regional differences to rising economic inactivity. Over the last year the rise has been greatest in Wales and the North East of England (Chart 2) If we look at the 3-month change, inactivity is up in all English regions outside London and the SE. Inactivity has been rising fastest where it was already high to begin with, worsening regional divides.

What’s behind the rise in inactivity? The short answer is ill health. The number of people inactive because of ill health has hit a new record high of 2.8 million. In fact, inactivity due to ill health has now been rising for five years – this is the longest sustained rise since the 1990s. Consistent with this, there has been a worrying increase in the number of inactive people who don’t want a job. See my colleague Louise Murphy’s recent note for much more on health and the labour market. 

Labour demand is falling faster

The 16-64 employment rate has fallen sharply in recent months – down by 0.5pp in just 3 months to 74.5% in the three months to February (Chart 1). The rate has fallen by a cool 1 percentage point since its recent peak just 9 months ago. Employment hasn’t fallen this quickly – outside the pandemic – since the Great Recession. The UK stands as the only G7 economy yet to return to its pre-pandemic employment rate. 

More timely PAYE data show that the number of employees fell in March too. And vacancies fell again for the 21st month in a row. Taken together, employment plus vacancies – which we can think of as labour demand has fallen by over half a million in the 10 months to February 2024 (Chart 3).

With labour demand falling faster than supply, the unemployment rate is continuing to edge up. At 4.2 per cent, the rate is back up close to last year’s mini-peak of 4.3 per cent. The latest forecasts from the Bank and the OBR foresee further rises in unemployment in coming months.

Although – if you have a job – real pay is rising fast

Nominal pay has picked up in the last few months, probably at a level slightly above where the Bank of England would like it to be to hit the inflation target: the annualised growth rate of private sector regular in the three months to February has picked up to 4.4 per cent. Combined with falling price inflation – for now – real pay growth is running at 2 per cent per year, a rate that would have been respectable back in the good old pre-2008 days (Chart 4).

Look out for a piece from us in a couple of weeks about how, with productivity growing so slowly, the economy is managing to afford real pay increases.