Record lows in unemployment and record highs in long-term sickness poses huge challenge for policy makers

A tight labour market has seen pay growth strengthen and unemployment fall to a near-50-year-low. But the workforce continues to shrink, driven by economic inactivity due to long-term ill-health rising to a record 2.49 million, highlighting the dilemma facing policy makers, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The latest labour market data described a tight labour market, with unemployment falling to its lowest level since February 1974, and nominal regular pay growth strengthening to 5.4 per cent (6.2 per cent in the private sector) – the strongest level of wage growth outside of the pandemic period since records began in 2000.

However, with inflation remaining close to a 40-year high, real pay packets continued to shrink, and are expected to keep shrinking until the second half of next year, by which time typical real pay will have fallen back to its 2003 level.

And while unemployment is falling, so too is employment, as the workforce continues to shrink. Economic inactivity rose to 21.7 per cent in the three months to August, driven by older workers exiting the labour market (workers aged 50+ accounted for 74 per cent of rising inactivity since January 2020) and by rising long-term ill-health among those aged 16-64, which has hit a record high of 2.49 million.

These trends of strengthening pay growth and high inactivity present a challenging climate for fiscal and monetary policy makers, says the Foundation.

High levels of economic inactivity pose a challenge to the Government’s growth agenda, given that growth in the 2010s was driven in large part by rising employment.

Strengthening pay growth in the private sector relative to the public sector – the gap is at its highest level since records began, outside of the pandemic period – will also pose a challenge for the Treasury as it seeks to hold down public sector spending as it seeks to part-fund its tax cuts.

Strengthening pay growth also forms part of the already huge pressure on the Bank of England to raise interest rates as it seeks to tackle entrenched inflation.

Louise Murphy, Economist at the Resolution Foundation, said:

“A tight labour market is delivering stronger pay growth and reducing unemployment to a near 50-year low. But at the same time, more older workers in particular are leaving the jobs market altogether as inactivity due to long-term ill-health reaches a record high of 2.49 million.

“High inactivity and strengthening pay growth present huge challenges for monetary and fiscal policy makers as they seek to cool inflation, boost growth and put the public finances on a sustainable footing.”

Notes to Editors

For more information contact Rob Holdsworth on 07921 236 972.