Labour market statistics released by the ONS this morning show:
- Pay growth is high but falling well behind inflation
- Vacancies fall back but are still near record levels
- Some good news for the Chancellor as economic inactivity falls
Laith Khalaf, head of investment analysis, AJ Bell:
“Pay may be rising at near record rates, but inflation is taking all the fizz out of a pop in salaries. Regular pay grew at 6.7% in the last quarter of 2022, the strongest growth rate seen outside the pandemic period, which can largely be discounted seeing as furlough being switched on and off caused a high degree of statistical interference. But even a 6.7% rise in regular pay translates into a fall of 3.6% when taking into account the eye-watering level of CPI inflation, one of the biggest falls in real wages since records began in 2001.
“Everyone is now expecting inflation to fall back this year, driven by lower energy costs, but the question remains to what extent employers and employees will agree lower pay awards in the face of disinflation, especially on the back of a year when workers’ pay has failed to keep pace with price rises, leaving them in deficit in real terms. A continuation of generous nominal pay rises in 2023, especially in the private sector, could be seen as businesses helping their staff cope with inflation, but also spreading the financial strain for themselves across two years rather than just one. However, more robust pay growth this year would definitely cause concern at the Bank of England that domestic inflationary pressures were taking over from external ones.
“The context of the labour market also provides a less altruistic reason why pay may be rising in nominal terms, and might continue to do so. Job vacancies are falling, but are still close to record highs, and sit around 40% higher than before the pandemic. Businesses need to do all they can to retain staff, lest they find themselves at the mercy of a competitive recruitment market, with all the costs that involves. The list of job openings is thinning down a bit though, with vacancies falling most heavily in construction and real estate, reflecting a slowdown in activity in these sectors.
“On the face of it there was also some good news for Jeremy Hunt, who wants to get Britain back to work. The economic inactivity rate came in at 21.4% in the last quarter of 2022, 0.3% lower than the previous three month period. While heading in the right direction, this is still 1.2% higher than before the pandemic, and around three quarters of those emerging from economic slumber found themselves unemployed, suggesting they have started looking for work, but haven’t found it yet.
“That seems a bit odd when you consider that the number of job vacancies in the economy pretty much exactly matches the number of unemployed people. But, unfortunately, it’s not that simple because location and skillset required to fil vacancies will not neatly map over onto those looking for work. Unemployment itself ticked up a touch to 3.7%, but this is still very low by historical standards. Indeed the headline employment rates paint a picture of a labour market and an economy in rude health, but the devil is in the detail, which reveals substantial pressures on businesses and workers.”
