Britain has entered Omicron phase with low unemployment but shrinking real pay packets

The UK has entered the tough new Omicron phase of the Covid crisis with a healthy rather than overheating labour market, but with shrinking real pay packets, the Resolution Foundation said today (Thursday) in response to the latest ONS labour market statistics.

The labour market experienced a brief, and healthy, period of normality during October and November – between furlough and Omicron – with payrolled employment rising (by 257,000), overall unemployment falling close to pre-pandemic levels (to 4.2 per cent) and job vacancies reaching a record high (of 1,219,000).

However, with total hours worked stabilising and still 2.2 per cent below pre-crisis levels, and labour force participation still down 1.1 percentage points over the crisis, the Foundation say the labour market is far from fully recovered.

Moreover, evidence from single-month data suggest that the jobs market in October and November may have seen a flattening off, with unemployment rising, and vacancies falling.

While the jobs market is healthy, workers have not seen the pay surge that some – including the Prime Minister – had envisaged, as wage growth has ground to a halt.

Nominal wage growth (excluding bonuses) fell from 4.1 per in September to 3.8 per cent in October as the measurement effects of the pandemic receded and the hiring surge ended. Median nominal pay was flat in the two months to November, suggesting there has been limited pressure to raise pay to fill vacancies.

As a result, real wage growth was flat in October (with CPIH inflation at 3.8 per cent), and is likely to have fallen significantly in November.

With inflation forecast to peak next May, and no evidence yet of pay rises responding to higher prices, the UK’s third real wage squeeze in just a decade is likely to last for at least the first half of 2022, says the Foundation.

Nye Cominetti, Senior Economist at the Resolution Foundation, said:

“The UK has entered a tough new phase of the crisis with plentiful jobs but shrinking pay packets.

“Talk of surging pay off the back of an over-heating labour market has been way off the mark. Workers are already experiencing a third real wage squeeze in a decade, which is likely to last until the second half of 2022.

“Having enjoyed a brief and healthy return to normality, the labour market is now entering a tough new phase as Omicron spreads, which will require further policy support.”