The UK labour market continued on its recent trajectory over January 2022 with unemployment falling and vacancies rising. Paradoxically, however, there was also a further fall in “real” wages for many workers.
The latest information from the ONS shows the unemployment rate continuing to trend down, decreasing by 20bp over the quarter to 3.9%. The rate has now hit the lowest level since December 2019, illustrating the strength of the labour market recovery over the latter half of the year.
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Job vacancies across the UK economy continue the rise, over 1.3 million, a record. With unemployment at such low levels, the pool of workers to fill these vacancies will need to come from those defined as economically inactive*. This figure remains high at 21.3% of 16–64-year-olds, up nearly 1% on pre-pandemic levels.
Of those individuals defined as economically inactive the ONS tracks individuals who are discouraged; workers who have stopped looking for work because they are unable to find anything suitable. In December 2020, this figure hit a record low of 0.2%. This suggests that those who want work can find it. It is therefore unlikely that high number of economically inactive people are looking to move back into the workplace.
The pressure employers are under to fill vacancies, is increasing the value of work. The average weekly wage is rising, up 4.8% over the year to January 2022. However, adjusting for the impact of RPI inflation, the increased value of work disappears altogether. Overall, workers are 2.7% worse off than a year ago.
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The scale of the fall in living standards and clear structural weaknesses across the economy, will provide serious concerns to policymakers at the Treasury, just days before the Spring Statement.
Since January, the war in Ukraine and subsequent energy price rises have dramatically increased inflation expectations over the year. The Resolution Foundation is now forecasting that CPI will hit over 8% in April and may peak at over 10% in Autumn. The RPI, the broadest measure of household costs will likely peak at even higher levels.
It is very unlikely that wage rises will be able to match this pace. Last month, the Bank of England warned that the UK should be prepared for the biggest fall in living standards since records began. This is primarily driven by structural issues** within the UK economy. Future inflation expectations have significantly exacerbated the living standards fear, driving welfare concerns for the most vulnerable households.
Furthermore, this data illustrates significant structural weaknesses across the UK labour market, weaknesses that unlikely to be solved in the short term. The number of non-UK workers employed in the UK has fallen by 250,000 since the start of the UK’s new relationship with the EU. Given that defining the relationship with the EU and controlling low skilled migration is a key Government policy, it is unlikely that there will be considerable policy shifts in this area.
In addition, considerable numbers of workers left the workforce over the pandemic, especially those aged between 50 and 65. This societal impact we expect to linger in the long term. Businesses should be prepared for a highly competitive labour market in the medium term.
* Economic inactivity is defined by ONS as “people who are not in work, who have not sought work in the last 4 weeks and / or are unable to start work in the next 2 weeks”.
** In this context, “structural issues” refers to economic problems that are driven by government policy, business limitations or individual preferences, rather than “market issues”.
Unhelpful bureaucracy, lack of skills or unwillingness to move to seek work are all examples of “structural issues”.
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