Rising sickness holds back return to pre-pandemic employment levels, but real wages enjoy a mini-revival

A record number of people who are economically inactive due to ill-health mean that Britain remains the only G7 economy yet to return to pre-pandemic employment levels, but fast falling inflation means that real wages are growing at their fastest rate outside the pandemic in nearly five years, the Resolution Foundation said today (Tuesday).

The latest ONS labour market statistics – including the return of the labour force survey after a four month absence – showed a cooling labour market, an-inflation driven boost to real pay packets, and rising long-term sickness continuing to hold back growth.

The labour market continues to cool slightly, with the number of job vacancies fell for the 19th consecutive month and nominal pay growth weakening, although employment also nudged up.

Private sector nominal regular pay rose only 2.5 per cent at an annualised rate in the three months to December – a rate the Bank of England will be comfortable with. But with inflation falling even faster than wage growth, real regular wages grew by 1.8 per cent in the three months to December – the strongest level of growth outside of the pandemic since October 2019.

However, the Foundation cautions that unless the UK begins to see productivity growth, this mini real wage revival is likely to prove short-lived.

The combination of a cooling labour market and rising inactivity mean that the employment rate is flatlining around 75 per cent – below its pre-pandemic rate of 76 per cent. Policy makers will be particularly concerned about long-term sickness rising to a record 2.8 million – a trend that, unless addressed, will put a brake on Britain’s jobs recovery, put pressure on the public finances and NHS, and limit people’s economic opportunities.

Finally, the latest figures confirmed that 2.7 million days were lost to strike action in 2023 – the highest level since 1989 (when 4.1 million days were lost). This record is unlikely to be beaten any time soon as cost of living pressures abate, says the Foundation.

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

“The return of full labour market statistics show that the labour market continued to cool slightly at the end of last year.

“Nominal pay growth is slowing – easing the pressure on interest rates – but inflation is falling faster, causing a welcome if short-lived recovery in real wage packets.

“Of greater concern is the record 2.8 million people who are long-term sick. This is holding back the economy, putting pressure on the public finances and the NHS, and limiting opportunities for too many people. Reversing this trend will be a priority for the current and next government.”