Labour market defies Omicron to continue its ‘great reset’ – but real pay squeeze deepens

The UK labour market continued its ‘great reset’ at the end of last year, as vacancies and job moves reached record highs, and pay pressure started to build. But the UK still is on course for the tightest real pay squeeze in generations this Spring, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The Foundation notes that the UK labour market defied the Omicron wave as the number of employee jobs grew (by 108,000 in December), job vacancies and job moves continued to hit fresh highs, and unemployment fell to 3.9 per cent in December.

There are early signs that the tight labour market is tempting people back into the labour force, with economic inactivity falling in the last month. This is encouraging, says the Foundation, given that labour market participation remains 1 percentage point down on pre-pandemic levels.

Recent signs on pay growth provide conflicting signals for inflation, but are dismal for living standards.

Nominal regular pay growth fell to 3.7 per cent in the three months to December. But annual pay growth did accelerate in the monthly data and in the more recent employee jobs data – with median pay rising 6.3 per cent in the year to January – suggesting pay pressures could be building. The rebound in vacancies in January – reaching 1.22 million (a high only surpassed by October 2021) – is consistent with rising pay pressure.

But despite signs of building pay pressure, the UK’s real pay squeeze continue to deepen, to -1.2 per cent in December. There remains a risk the squeeze could surpass that 2.7 per cent real pay fall experienced in 1991.

The big questions for policy makers are the extent to which pay pressure builds in early 2022, how much this drives rising inflation, and how much it can protect households from the UK’s huge living standards squeeze.

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

“The UK labour market has defied the Omicron wave and continued to tighten, with jobs, vacancies and job moves up, and unemployment continuing to fall.

“There are nascent signs that this welcome activity may be starting to feed through into stronger pay growth – though how much pay pressure remains unclear.

“While some policy makers are rightly worried about accelerating nominal wages boosting UK inflation, they should also be worried about Britain simultaneously experiencing the tightest real wage squeeze in generations. To square this circle, the UK needs faster productivity growth.”.