Biggest employment fall outside of a recession on record shows that rising interest rates are making their mark on the jobs market

The biggest employment fall (down 207,000) outside of a recession on record offers the clearest sign yet that rising interest rates are cooling the labour market, but the recent pay spike will cause a headache for the Government by increasing the cost of the Triple Lock, the Resolution Foundation said today (Tuesday).

The latest labour market data showed a big fall in employment and further falls in job vacancies (now below a million for the first time in two years) alongside rising unemployment (up 159,000 on the quarter) and economic inactivity (up 62,000). These are all signs that the labour market is cooling, which in turn should weaken wage growth in the months ahead and ease pressure on inflation.

But these signs of the jobs market cooling are largely yet to show in the pay data. Average weekly earnings in the three months to July grew at their highest annual rate on record (7.8 per cent for regular pay and 8.5 for total pay, the latter driven by one-off NHS bonuses). There are however signs of private sector pay growth starting to slow, with total pay falling between June and July.

As this earnings growth is likely to be significantly higher than CPI in inflation in September (the Bank of England’s forecast is 6.9 per cent), the state pension is set for another bumper rise next April as a result of the triple lock (which uses the higher of these two figures, or 2.5 per cent). But while Ministers have been keen to stress their commitment to the triple lock, however expensive it will be, they are reportedly considering a below inflation uprating for working-age benefits next year.

The Foundation warns that this would worsen the living standards pain for millions of low-and-middle income households, who are already set to see their incomes fall again next year. It would also further skew our social security system towards older generations, who have a seen a 14 per cent real-terms rise in the state pension since 2010, while working-age benefits like unemployment support have fallen by 9 per cent over the same period.

Hannah Slaughter, Senior Economist at the Resolution Foundation, said:

“Britain saw the biggest employment fall outside of a recession this summer. This is the clearest sign yet that the Bank of England’s rate rising cycle is starting to cool the jobs market.

“But while higher unemployment should lead to lower wage growth in the coming months, it certainly hasn’t had that effect yet, with earnings growing at a record pace.

“The short-term pay boost could end up benefiting pensioners more than workers as it is set to deliver a big permanent boost to the state pension next April. In this context it would be wholly unfair to hold down working-age benefits, especially as poorer households are already set to see their incomes fall next year.”