UK Labor Market Is Evolving As Inflation Crushes Real Income

Workforce has reduced amid rising long-term illness and it seems unemployment is rising again

Jeremy Hunt was blunt in his response to the most recent official figures for the state of the UK labor market. Surging inflation, the chancellor said, was eating into the value of pay cheques. People’s wages were not extending as far as they should.

Hunt attempted to assign the blame for a surging cost of living on Vladimir Putin, but while Russia’s war in Ukraine has definitely given inflation an unwanted boost since early in 2022 the picture is more complicated than that.

In the decade after the end of the global financial crisis of 2007-09, the percentage of the population employed grew steadily and the percentage of economically inactive dropped. Employers faced no difficulty filling slots and so had the upper hand in wage negotiations. Annual earnings growth remained limited even as unemployment dropped to levels not seen since the mid-1970s.

Then the pandemic came along. Inactivity began to increase again and, while still lower compared to how it was ten years ago, it is up 1.4% on the level in the period before Covid-19 first emerged in the UK in early 2020. The employment rate has moved backward, falling by 1.1 points.

A rise in the amount of people long-term ill seems to be the major reason for the drop in the supply of labor. In the past, the trend has been most observed among workers aged over 50, but the Office for National Statistics said younger age groups were largely to blame for the 0.2-point rise in inactivity in the third quarter. The shadow chancellor, Rachel Reeves, says longer NHS waiting lists – above 7 million – are partly responsible.

A contracting workforce meant companies grappled to fill the slots that became available as lockdown restrictions were eased. Unions were able to negotiate increased pay because their bargaining power rose. However, although growth in total pay – which includes bonuses – is increasing at an annual rate of 6%, wages are still falling to keep pace with prices. That is especially true in the public sector, where pay has grown by only just over 2% year on year.

Employers and workers have reacted to the state of the labor market in different ways. Falling real pay has caused a rise in industrial disputes, with the number of days lost to industrial actions at its highest in over a decade. Meanwhile, employers’ groups have been advising the government to relax migration rules to increase the labor supply.

The moment for that may well be slipping by because the latest ONS data shows the labor market is changing. Job openings, while still high historically, and have fallen for the fourth quarter in a row; employment dropped by over 50,000 in the third quarter, and the jobless rate jumped slightly.

Those trends are expected to persist over winter as policy tightening by both the Bank of England and the Treasury combines with surging energy bills and falling real incomes to dampen the economy significantly.