The labour market is cooling but pay growth remains strong

New ONS labour market statistics show the biggest employment fall on record outside of a recession


This morning’s labour market statistics show that the labour market is starting to cool, with the biggest employment fall on record outside of a recession. But this is not yet feeding through into wages, which grew at record high rates. And while wage growth impacts both workers and (indirectly) the wider economy, this month’s pay data will also have a direct impact on pensioners: under the Government’s ‘triple lock’ policy, today’s earnings figures mean that the state pension is set to rise by 8.5 per cent next April.

The labour market is cooling

Almost all the main labour market indicators are showing signs of a cooling jobs market. Employment fell by 207,000 people between Feb-Apr and May-Jul 2023 – the biggest fall on record outside of a recession. The unemployment rate continues to creep up, reaching 4.3 per cent in May-July. And economic inactivity has started to rise again, after falling for the past few months – largely driven by inactivity due to long-term health conditions, which today reached a fresh record high.

The single-month data underlying these headline statistics has been fairly jumpy recently – but this slowdown can be seen in other labour market indicators, too. Job vacancies, for example, have continued to fall (although they remain above 2019 levels), and dropped below 1 million for the first time in two years. Overall, demand for workers – employment plus job vacancies – has fallen back to its January 2020 level for the first time since the start of 2022, suggesting that the post-Covid jobs boom may be over. (The supply of workers – i.e. the total workforce, including jobseekers – has also fallen in recent months, but not as quickly.)

But pay growth remains strong

In part, this cooling has been driven by the Bank of England’s interest rate rises, which have aimed to slow the economy to lessen the risk of prolonged high inflation. In theory, this should then weaken wage growth in the months ahead and so ease pressure on inflation. But the cooling labour market has not yet had the desired effect on pay growth: both regular pay (excluding bonuses) and total pay grew at their fastest annual rates on record (aside from the pandemic), at 7.8 per cent and 8.5 per cent respectively. (The particularly-strong growth in total pay was partly driven by one-off NHS bonuses.)

There are, however, some early signs that pay growth could be slowing down in the private sector, which has been the big area of concern for the Bank. Growth has slowed down substantially in the past two months – and in the latest month of data, total pay actually fell (although we should be wary of drawing firm conclusions based on a month or two of data).

Risks of prolonged inflation aside, this strong pay growth is delivering a small glimmer of good news for workers: pay is growing again in real terms. Over the year to May-July 2023, real earnings grew by 0.6 per cent, the second month of growth following 18 consecutive months of year-on-year pay falls. It’s important to put this into context, though. Real wages have only just surpassed their 2008 level – and earnings are still £230 a week below where they’d be if they had continued growing in line with their pre-financial crisis trend.

Pensioners look set to benefit from today’s high wage growth

Finally, this month’s total pay growth figure is particularly important because it will feed into next April’s state pension uprating. The ‘triple lock’, which has been in place since 2010, means that the state pension rises each year by the highest of CPI inflation (measured the previous September), earnings growth (in the previous May-July period), or 2.5 per cent.

With CPI inflation at 6.4 per cent in July, and expected to be around 6.5 per cent in September, today’s 8.5 per cent earnings growth figure will almost certainly be the default uprating factor for the state pension in 2024. This bumper uprating would follow an increase in the state pension of 10.1 per cent this year, based on the inflation rate in September 2022.

Another big rise in pension spending would, of course, be costly for the public purse. But while the Government remains committed to going ahead with the triple lock uprating next year, there have been reports that Ministers are considering a below-inflation uprating for working-age benefits instead. Doing so would deepen the living standards squeeze that low-to-middle income households continue to face due to the cost of living crisis. And it would further skew our social security system towards older generations: since 2010, the state pension has seen a real-terms rise of 14 per cent, while working-age benefits like unemployment support have fallen by 9 per cent.


The latest labour market data brought news of the biggest employment fall outside of a recession – but this cooling is not yet feeding into slower wage growth, with pay growing at record high rates. The pay boost, however, is likely to benefit pensioners more than workers, thanks to its role in delivering a permanent bumper rise to the state pension. In this context, it is essential that the Government does not follow through with its reported plans to uprate working-age benefits by less than inflation – to protect living standards as well as ensure fairness.