Labour market is lukewarm not hot, with pay rises overstated and hours worked still at recession levels

Employees are coming off furlough at a rapid pace but the UK labour market is lukewarm rather than hot, as total hours worked remain well below pre-crisis levels and most vacancies are still relatively easy to fill despite the focus on shortages in some sectors, according to new Resolution Foundation research published today (Monday).

The Foundation’s research identifies encouraging signs for the UK labour market. Its latest online YouGov-commissioned survey of 8,000 workers finds that four-in-five employees who were furloughed during the first and second national lockdowns are now back working, while vacancy rates are now higher than pre-crisis levels.

Combined with anecdotal evidence of labour shortages in some sectors, this good news has led some to conclude that the UK now has a labour market running hot. In reality however, the Foundation says the true temperature of the UK labour market today is still lukewarm at best.

It notes that total hours worked in the economy remain around seven per cent below pre-crisis levels – a fall comparable to the height of the early 90s recession. Worryingly, it also finds that around 10 per cent of those who were self-employed before the crisis are no longer working.

Official data also hugely overstates the level of pay rises currently taking places, says the Foundation. Bumper growth in average weekly earnings of 5.6 per cent in the three months to April is being driven by compositional effects as lower-paid workers drop out of the workforce and the base effects of the deep economic shock last year, rather than a strong uptick in individual workers’ pay.

By analysing trends in typical wage growth over the past two-year period to partly remove these effects, the Foundation finds that underlying annual wage growth is just over 2 per cent – a third lower than it was pre-crisis.

The research also shows that the average time taken to fill job vacancies – with longer times a good indicator of labour shortages – remains shorter now than it was pre-crisis, despite the talk of unprecedented shortages, though it has been rising in recent months.

The Foundation says that while there clearly are genuine labour shortages in some parts of the economy they reflect the nature of the pandemic we’re still living through, rather than the state of the wider labour market, or the furlough scheme holding back people’s return to work as some have claimed.

It notes that the struggle to recruit in parts of the hospitality sector is likely to be due to the speed of its reopening from an almost complete standstill. The fact that the sector also recruits heavily from a young, and largely unvaccinated, population may also be playing a part with people under 25 far more likely to have worked in hospitality (31 per cent) than to have been jabbed (22 per cent).

Foundation analysis also shows that those who previously worked in the hardest hit sectors such as hospitality are 30 per cent more likely to have taken jobs elsewhere mid-crisis. And while they seem open to moving sectors again, that is disproportionately a wish to move to yet another sector rather than back into the likes of hospitality.

The Foundation says that with the UK still having a ‘Covid employment gap’ of over two million people, representing the fall in employment since the start of the crisis and people on furlough, it is clear that while the labour market is improving fast, it is doing so from an exceptionally weak starting point.

The report concludes that labour shortages in some sectors are part of the bumpy ride we should expect as we recover from the pandemic, rather than a total disaster for our economy or evidence of a new dawn of worker power.

Gregory Thwaites, Research Director at the Resolution Foundation, said:

“The UK economy is bouncing back rapidly after a deep and painful recession. It’s particularly welcome to see so many furloughed staff back working again.

“But these encouraging signs risk breeding dangerous complacency, as people over-play the health of the labour market, and under-play the risks that still lie ahead.

“A recovering labour market is not the same as a recovered one. Labour shortages in hospitality aren’t a huge problem, and there is no real evidence of a new pay boom. Instead these things are part of the bumpy ride that emerging from a pandemic inevitably involves.”

Notes to Editors

  • Some figures in this report are from YouGov plc. The survey wave had a total sample size of 8,030 adults aged 18+. Fieldwork was undertaken by YouGov from the 3rd – 8th June 2021. Results are weighted so as to be representative of the population of that age group. The figures presented from the online survey have been analysed independently by the Resolution Foundation. The views expressed here are not necessarily those of YouGov.
  • The survey was supported by the Health Foundation, although the views expressed here are not necessarily those of the Health Foundation.