UK average earnings start to fall despite labour shortage

The UK’s labour shortage worsened at the end of 2021, with vacancies climbing to a record high, but average earnings began to fall as inflation overtook pay growth.

Official data published on Tuesday showed that unemployment fell to 4.1 per cent in the three months to November, 0.1 percentage points above its pre-pandemic rate. The employment rate rose to 75.5 per cent, but remained 1.1 percentage points below its pre-crisis rate, due to a rise in inactivity that the Office for National Statistics said was driven by older workers dropping out of the labour force.

With employers struggling to recruit, the number of vacancies rose to a record 1.247m in the three months to December, equivalent to four in every 100 employee jobs in the economy, with a quarter of a million posts unfilled in health and social care alone. This left the ratio of unemployed people to vacancies at a record low of just 1.1 — meaning that, in theory, there is a job open for almost every person out of work.

Rishi Sunak, UK chancellor, said the figures showed the jobs market was “thriving”, and economists said the data strengthened the case for higher interest rates to stop the economy overheating.

Yael Selfin, chief economist at KPMG, said that if remaining coronavirus restrictions were lifted next week, “the labour market could become even hotter, vindicating the Bank of England’s hawkish stance before Christmas”.

Chart showing the number of unemployed people per job vacancy

However, there were signs that the surge in hiring seen since the economy began to reopen last spring was slackening. Paul Dales, at the consultancy Capital Economics, noted that single month data showed vacancies falling in November and December, and could be “a very early sign that recruitment difficulties are easing”.

There was little sign of any hit to jobs in the early stages of the Omicron coronavirus variant outbreak, with real-time data for December showing the number of payroll employees rising by 184,000.

But the gains in employment, largely due to growth in part-time work, took place at the start of the September to November period. Single-month data showed that employment fell by 337,000 during October and November, following the end of the furlough scheme. This was despite a further drop in the redundancy rate, now at a record low, and was due instead to older people leaving the workforce because of long-term sickness.

Chart showing the cumulative rise in inactivity since Sep-Nov 2019, by age group

Tony Wilson, director of the Institute for Employment Studies, said the figures were “disappointing”, with inactivity rising despite unprecedented demand for staff. “With nearly as many vacancies as there are unemployed people, employers are facing the tightest labour market in at least 50 years, with labour shortages now holding back our recovery,” he said.

Kitty Ussher, chief economist at the Institute of Directors, said: “The good news is that the unemployment rate is back to within a whisker of its pre-pandemic level, but the same cannot be said for the number of people actually employed.”

She added: “The legacy of the pandemic appears to be this rise in economic inactivity.”

Helen Barnard, policy director at the charity Pro Bono Economics, said there would be “no quick fix” to the rise in economic inactivity because it was driven by growing numbers leaving the workforce with long-term health problems, and called for “sustained and tailored support” to reverse the trend.

Chart showing average earnings are falling in real terms

While staff scarcity has driven faster wage growth in some sectors, the ONS said average earnings were now falling in real terms, with inflation outpacing pay gains.

Its headline measure of growth in average weekly earnings, excluding bonuses, was 3.8 per cent for the three months to November, with the highest growth seen in finance and business services, and workers across the private sector now faring much better than their public sector counterparts.

While stronger than pre-pandemic rates, this is not enough to keep pace with inflation, adding pressure on finances as people contend with an escalating cost of living crisis driven by higher energy costs, rising taxes and supply chain disruption.

The ONS said that, in real terms, average earnings had been flat year-on-year in the three-month period to November, while in the single month of November they were 1 per cent lower than a year earlier — equivalent to a pay cut of at least £5 a week for the average worker.

Figures on pay settlements, published on Wednesday by the research group XpertHR, paint a similar picture of hiring pressures driving up wages — but not far enough to match inflation.

XpertHR said early figures for January, one of the busiest months for pay bargaining, showed the median pay award had jumped to 3 per cent, up from 2 per cent in the final quarter of 2021. Pay awards for the lowest quartile averaged 2.5 per cent, with the upper quartile at 4 per cent; and four-fifths of settlements were higher than the same group of employees had received the previous year.

However, James Smith, economist at ING, argued that growth in both employment and wages would slow over the coming months, after a period in which both employers and employees had been “playing catch-up”, and that the Bank of England would not raise interest rates as much as markets were currently expecting.

Hannah Slaughter, senior economist at the Resolution Foundation think-tank, said that, while the jobs market was healthy, falling wages would worsen a cost-of-living crunch, adding: “The big picture is that Britain will emerge from the pandemic with pay packets shrinking, and over a half a million fewer people in the labour market.”

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